By Stephen Innes
Markets continue to roil as the September 6 deadline for public comments on the next slice of Section 301 of China tariffs approaches. But it has been a very mixed bag across global equity markets, and while there's a seller bias, investors are surprisingly far from losing the plot. Of course, bull markets never run forever, but the US market's resilience in the face of a possible escalation of trade war is mighty impressive.
Miners are feeling the pain as concern about weaker global growth is pressuring base metals, but more so in China which is at the epicentre of the trade war saga. Indeed, the Shanghai Futures exchange could see more speculative selling of base metals, anticipating an economic downswing in China due to the tariffs effects.
But Amazon (NASDAQ:AMZN) was to the rescue once again, which is the latest tech heavyweight to burst through $1 trillion in market value that resoundingly supported investors today, given how widely held the stock is.
In summation, some US stocks fell, Treasuries were in fashion, and the US dollar continued to find reserve currency haven appeal as emerging market currencies, along with the weaker links in the G-10 currency chain on escalating trade tensions, AUD-CAD and NZD, remain on that slippery slope. "Heigh ho, Heigh-ho it's off to work we go" as G-10 traders keep it simple.
Oil markets orchestrated an upswing with Brent testing May levels after Tropical Storm Gordon hit the Gulf of Mexico. But prices pulled back considerably, as the magnitude of the storm suggests production losses will be limited.
The other critical piece of the supply disrupting quandary, Libyan oil production, moved above 1.0 million barrels per day level despite the recent bellicose upheaval in Tripoli. Given this was one highlight reel and a keen focus for oil traders, it makes for a compelling argument to reduce speculative longs.
With oil market short-term specs caught long and wrong over the past 24 hours due to Tropical Storm buying frenzy, the decline could have been amplified as weaker longs headed for the exits as stops triggered on a break of CL1: WTI 69.80.
According to the BSEE, less than 10% of Gulf production was affected.
However, with the anticipation up to 1.5 million barrels per day will be affected by the US sanctions on Iran, one would expect prices to move higher in the weeks ahead as hedge funds start to re-engage long position. After all, it is unlikely that OPEC, with the assistance of Russia or even the US for that matter, will be able to offset this considerable decline.
A bit of an exciting day is shaping on the cusp of Section 301 tariffs. Commodities, in general, are under pressure, but the ease with which oil markets have recovered since mid-August suggests we're in further gains despite the USTR tariffs announcement.
On the backdrop of a stronger US dollar, as capital outflows continued to weigh on emerging market currencies, gold failed to hold the critical $1200 support levels and then fell like a stone touching below $1190.00 before finding some tentative support. Indeed, provided the USD remains the oasis of calm amidst a toxic combination of trade tensions exacerbated by emerging market currency turmoil, short gold positions will be rewarded. The stream stellar US economic data, as supported by the weighty ISM manufacturing beat, coming in 61.3 vs. 57.6 expected, while recording a 14-year high, reinforces the market view the Federal Reserve Board will remain on autopilot throughout 2018 and contributing the bullish dollar narrative.
The Australian Dollar
On the back of the RBA being little changed, there remains disappointment from those expecting a more dovish delivery.
The deep dive to .7160 overnight was as much a function as USD turning bid throughout London, as it was an expression of Aussie weakness.
Is there cause to be bullish in this market? With the RBA sticking to their status quo rate policy, I think it comes down to China and how useful the countercyclical measure is.
So, if you can make a case for a weaker yuan you most certainly can for the Aussie.
There's an abundance of noise to decipher near term, but buy on dip strategy is back in vogue after yesterday's fixing-induced dip. But if I'm to maintain my pragmatic view despite the PBoC countercyclical effect, if the wrath of Trump lays down $200 billion at 25% tariff, letting the yuan exchange rate weaken might be the easiest go-to decision for mainland authorities over the short term. As such, being long USD should continue to be the favoured position.
It's always tough trading the loonie on a "wing, and a prayer" as Foreign Affairs Minister Chrystia Freeland is heading to Washington, yet again, on veiled hopes of signing a NAFTA agreement. But with the Liberal Caucus puppet masters pulling strings, PM Trudeau has raised US-CAD NAFTA barrier by suggesting a high level of inflexibility when it comes to the terms. After the euphoria of breaking through 1.3000, traders are now facing the prospects of another agonising test of 1.3200. Let us hope for cooler heads to prevail!
"Hit the bid" has been a common theme across the MGS curve as the market has little choice than to cut risk and short bonds in anticipation of offshore selling. The global EM tumult is showing few signs of abating ahead of the US tariff day of reckoning. Traders are placing long dollar hedges and wait calmly for better days with the USDMYR tracking toward 4.15.
The focus will be today's MPC, but it's unlikely that Governor Datuk Nor Shamsiah Mohd Yunus will rock the boat, and I'm expecting an RBA type glass-half-full approach to the economic outlook as well as BNM monetary policy.