By Stephen Innes
The markets are looking much more constructive to end the week than they did to start, and with trade war fears still lingering, that is saying a lot. Mind you, the Italian rumpus - and the ensuing blow-off - was incredibly intense, so investors will be keen to put politics on the back burner, at least for the next 12 hours, and give their undivided attention to the US Non-Farm Payrolls release later tonight.
With the impressive rebound in eurozone inflation, and with Italy well on the way to forging a new government, the appeal of trading EUR from the long side is undoubtedly tempting. But looking at the bewildering cocktail of risk, which has traders going cross-eyed every minute to two, does paint a different picture. The risk-reward ahead of tonight's AHE, which is bound to be a significant US dollar sentiment shifter, has traders more guarded than usual.
But let's see what Asia brings to the table after New York put in an epic session which began with an intense focus on trade wars, only to go one better on Italy.
And despite all the doom and gloom prophesies, the Italian political mind-bender ended up being little more than a tempest in an espresso cup!
Despite the EIA reporting a larger-than-expected inventory draw, there doesn't appear to be a great deal of interest in pursuing the market higher, given that no one wants to be caught long and wrong if OPEC does boost output significantly. Not to mention, the market is confused by OPEC crosscurrents, as not all members are in favour of raising production. But frankly, there is nothing more unappealing than trading oil amid OPEC rumours and innuendos, which has sidelined a lot of spot oil traders.
But more focus is being centred on the WTI-BCO spread, as WTI bulls are a bit concerned by both the lack of significant draws in Cushing along with pipeline bottlenecks which are compounded by ports unable to handle the large 2 million-barrel supertankers. So, despite the bountiful bounty, bottlenecks befuddle.
The conciliatory political tone in Italy has slightly tarnished gold's appeal as the eurozone geopolitical risk premium deflates. But with more than enough geopolitical risk premium to go around, it's highly unlikely gold prices will wonder too far south. Spain will likely see a new PM, Trump-Kim remains a significant work in progress, while risk is little more than a tariff and trade headline from falling off the cliff.
The bright China PMI prints provided some local relief from Italy, but with US equity markets turning sour as trade war fears reignite, the region's very tight correlation to risk sentiment suggests the market will spend the better part of today's session backpedalling.
There was an encouraging relief rally on the Malaysian bond market yesterday that helped the beleaguered ringgit halt its recent losing streak. But it came off local demand with barely a trickle of the foreign interest. And given that the MYR is trading very sensitive to global risk sentiment, we should expect USDMYR dips to be supported at least during the Asia session.
While traders are mindful of the government's pledge to meet deficit targets, it will come down to the proof is in the pudding as far as foreign interest is concerned, as actions will speak louder than words.