The Morning After

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by: Dean Popplewell

By Stephen Innes

The US equity market has wholly shrugged off yesterday's back and forth on US-China trade, as the robust US economy continues to sway investors. However, when we look back at the 2018 stock market run, a lot of ink will be spilt about the benefits of US repatriation flows that are keeping balance sheet flush which could lead to higher levels of capital spending, and in a low rate environment, should continue to support a more robust corporate earnings narrative.

While there's a whole lot that can go upside down in US trade negotiations with China, Europe or Canada, and despite the market taking the bluster in its stride, history tells us that tariffs are detrimental for global trade and commerce. As such, the current levels of market buoyancy belie the possible groundswell that could overrun risk.

The bottom line as to why the market didn't react negatively yesterday was the lack of shock and awe given the tariffs were so well-telegraphed.

Oil Markets

Oil prices remain supported despite a larger-than-expected build in the API US crude inventories report, but stocks at the Cushing, Oklahoma, delivery point declined 1.6 million barrels, according to the API.

Traders are ignoring today's API data, while focusing on news from the Middle East. Prices firmed when Russia pointed the finger at Israel when one of their reconnaissance planes was shot down, although it was later determined to be a Syrian defence missile. Nonetheless, any type of escalation in the Middle East provides a fillip for oil prices.

But it was comments from Saudi oil officials that continue to resonate. It was only two weeks ago that traders were assuming that OPEC was prepared to keep Brent trading between $70 and $80 per barrel. However, overnight chatter suggests that the Saudis are more than happy with a Brent price above $80, or that OPEC, more generally, is not considering raising output.

The September 23 OPEC+ meeting in Algiers is turning into a significant affair with 20+ nation set to attend. It appears Saudis are putting their cards on the table ahead of the meeting and it is currently being viewed through a bullish lens.

Gold Markets

Continues to be driven by the USD, given the lack of clear direction overnight. The market continues to teeter-totter around the critical $1200 levels.

Currency Markets

JPY was the worst-performing currency over the past 24 hours due to higher US yields and a more buoyant risk market, and of course, the Nikkei benefits through the weaker yen better for exports feedback loop.

Some focus on the BoJ meeting today. It is expected to toe the line, but forward guidance is the key after the BoJ was discussing throughout the summer about tapering.

CAD was among the best-performing currencies globally on broader sentiment. Investors are waiting for the NAFTA discussion to restart. While traders took the following in a very positive light, House Majority Whip Steve Scalise stated, "While we would all like to see Canada remain part of this three-country coalition, there is not an unlimited amount of time for it to be part of this new agreement."

AUD: The return of global risk appetite has the Aussie bulls coming out of the woodwork. But with the AUD the main G-10 proxy to express China risk, I think the top side will be limited given the sheer volumes of headline risk.

MYR: Higher oil prices and a favourable risk environment should see the ringgit trade more favourably, but the surge in US yields will temper traders' expectations.