By Stephen Innes
Global investors were encouraged by a breakthrough on the European political landscape when reports suggested the European Union chief Brexit negotiator Barnier has been given enormous latitude to get Brexit signed and even stated he expects a deal to happen within weeks.
The US equity market continues to climb that trade war wall of worry, as US economic fundamentals and the prospect of higher corporate earnings are just too juicy to ignore. Despite last week's selloff, which was arguably driven by emerging market tantrum, we're still sitting near all-time highs as the S&P remains robust stable and seriously sturdy. So, global cross-asset rotation out of riskier emerging market into the bullish S&P could continue given the optimistic overtones. Traders have thrown just about everything, including the kitchen sink at US stocks, and a week in week out the indexes come roaring back for more.
Not expecting too much of a reprieve in Asia markets today, as risk sentiment in the region remains on unsure footing. I suspect local investors continue to view the US equities markets' safe harbour appeal in a positive light.
Supply-side disruptions continued to offer some temporary support for oil. Prices moved higher after Libya's National Oil Corp. headquarters in the capital of Tripoli was subject to a terrorist attack, but prices then reversed as after the company head Mustafa Sanallah assured that production had been unaffected. Brent had also remained gingerly supported by the delayed restart of the Buzzard field in the North Sea due to poor weather conditions.
Speaking of weather, US hurricane season does raise the odds that eventually, a storm could take aim at Gulf Coast rigs and refiners as intense weather patterns continue to form in the Atlantic Ocean. With that in mind, the industry is focusing on Hurricane Florence, and while there are no refineries in the path of the storm, the Colonial Pipeline is prepping for possible power disruptions given the wind could reach Category 5 intensity. It could lead to pressure at the pump in the northeast.
This week's US crude inventory data will be a big factor in traders' near-term trading decisions, so the market has been trading very rangy ahead of the data. But concerns about rising Cushing inventories and some pre-inventory analysts' surveys suggesting US inventories could build are holding back markets.
After last week's bearish outside week, oil bulls are having a tough time getting back in the saddle, and in the absence of any significant positive, drivers are prepared to sit on support bids near current levels. But the markets have not lost confidence and are expecting substantial price pressure as Iran sanctions loom.
Gold prices caught a tentative bounce on a slightly weaker USD. But the prospects of rising US interest will ultimately tame this rally. If this week US economic data is hawkish Fed supportive, it could provide the catalyst to move gold through $1190 support, as the US dollar could surge.
Why isn't the dollar higher?
The substantial US NFP payroll print suggests the Feds will remain on Dot Plot autopilot, but with the plethora of Fedspeak this week, there remains a level of uncertainty that trade slowdown and tariff worries that hit the commodity and emerging markets could provide the Feds cause for pause. But I think the lingering effect of Chair Powell's Jackson Hole comments, which were interpreted as dovish by many market participants, are too fresh in some traders' minds for the same reasons mentioned above.
Euro and British Pound
Barnier's optimism helped trigger a sterling relief rally as the markets were buying back volumes of short sterling position.
This positive shift could have a significant central bank effect over the medium term, as it's thought that a Brexit deal is a big piece of the EU puzzle that has been keeping both Bank of England and the European Central Bank on a defensive back. As such, the US dollar was unnerved by the EU headlines, with the euro retracting from below 1.1530 and eventually hitting 1.1615 before sellers emerging, and sterling rocketed 100 pips to register intraday highs above 1.3050.
But the euro- and Brexit-sceptic in me suggests fading these moves, as the divorce bill has yet to be announced. But I will become a believer if Cable trades +1.3130 on the follow-through.
President Trump has throttled risk and has all but handcuffed USDJPY. And despite favourable differentials supporting the USD higher, risk hedgers remain sellers at 111.25, which is capping moves higher.
It should be a smooth move to .70, but trust me, nothing ever comes easy in forex trading - and pushing through.7100 AUDUSD will be far from a walk in the park but should be in the offing. Overnight, there was a reluctance to chase the market lower today, as there is perhaps some cause for pause in the absence of any definitive trade war rhetoric ratcheting up. It still feels bid at .71 despite AUDUSD precariously perched just above. This suggests on a break on .7100, we could see a significant move lower as near-term stops trigger.
The move higher in US yields post-NFP spilt over into the region and negatively impacted the higher yielder. The rupee was being preyed on by speculators due to current account deficit widening, and despite headlines about intervention, the effectiveness of intervention by central banks in a rising USD environment is, in one word, "ineffective" and does little more than provide better levels to short the currency. The prospect of higher US interest rates and higher oil prices on Iran sanctions is indeed a toxic elixir for the rupee.
Another quiet session in the ringgit. It remains pressured higher US interest rates but counterbalanced by robust oil prices.
A second summit in the cards? I'm following this positive regional development but awaiting further clarity.