Seeking Alpha

When The (Equity) Walls Come Tumbling Down

Dean Popplewell
Currencies, macro, fixed income

By Stephen Innes

What started as an innocent equities correction in Asia spilled over into the NY session as classic risk-off unfolded as US yields dipped with oil and gold prices rocketed higher. Risk sentiment is on the back foot this morning, with global equities and commodities weaker. The catalysts are nothing new and are a toxic geopolitical cocktail of nagging concerns: (i) Chinese growth levels (despite their recent stimulus), (ii) lack of progress on Brexit (despite reports that a deal is near), (iii) the Italian budget issues and (iv) the Khashoggi investigation. But significant for global equity investors, the US equities' Teflon persona was seriously questioned as price action suggested there is one asset class investors fear: equities. And like migratory birds heading south for winter, the icy chill enveloping global stock markets has sent investors flocking to safe haven assets.

The writing was on the wall when equities traded weaker across the board after Monday's intervention-induced rally in Chinese stocks had little effect on global sentiment and reversed sharply lower in yesterday's Asia session.

But for me, it was the Bloomberg headlines which suggested the PBoC plans to give CNY10 billion to bond guarantee firm China Bond Insurance to provide credit support for debt issuances by private firms that sent off alarm bells rather than support equity markets. Often, these types of interventions suggest much deeper-rooted economic issues, and as we saw from yesterday, action can trigger a negative backlash.

With the S&P now drawn into the global equity maelstrom, gold and bonds are the safe havens, not king dollar, which is trading slightly weaker, if anything, from yesterday with USDJPY leading back towards 112 and EURUSD failing to break through 1.1430. A move lower in US equities does create safe haven flows and gives the greenback very mixed feelings about it. But with so many cross-currents swirling, Italy and Saudi fears, when combined with US domestic concerns over what has suddenly become a collapse in the housing-related asset, has made for a toxic combination, sending equity investors packing who are now expecting a much bigger fire sale before re-engaging, as risk aversion feels like it has much further to run.

Still, with no key US economic data for markets to tether themselves to, buckle up, as there is a plethora of potential potholes to navigate on Wednesday in the form of an expected Bank of Canada rate hike, PMI prints for EUR, while USD sees Fedspeak and a fresh Beige Book. A hawkish Fed lean will add more fuel to the already raging market fires.

And finally, if you don't think China-US hopes are fading, with both sides now looking set to dig in for the long haul, markets could get much worse before they get better. Asian investors had better hold on to their hats, as markets are about to get extremely blustery.

Oil Markets

The long oil contract unwinds continued, with front-month WTI and Brent plunging more than 4% in heavy selling on the combination of macro weakness and more headlines from Saudi Arabia about their ability and willingness to increase production being the primary catalysts. Indeed, the petroleum complex extended their slide after Saudi Energy Minister Khalid Al-Falih stated that OPEC's current policy was to "produce as much as you can" to reassure customers that they are ready to meet "any demand that materialises."

Let's not make any illusions about this shift in Saudi policy; this is about oversupplying markets short-term needs, not just adding barrels to meet Iran and Venezuela's shortfall, and this nascent shift in Saudi policy could translate into a much more significant impact for energy markets.

US weekly petroleum inventory data did little to stem the tide after the American Petroleum Institute (API) reported a massive build of 9.88 million barrels of United States crude oil inventories for the week ending October 19, compared to analyst expectations that this week would see a hefty build in crude oil inventories of 3.694 million barrels, threatening a deeper free fall, as whatever bullish remnants remain are heading for the exits.

Gold Markets

Gold is following the yen and US Treasuries. Of course, risk aversion is in play. But frankly, we've been dealing with this for months - the difference this time around is that the US dollar does not have a go-to haven appeal it had from escalating trade war tension. The latest gold rush is a direct result of tensions between the US and Saudi Arabia and increasing nervousness about risk assets. Increased US-Saudi strain has Middle East geopolitical embers burning and gives rise to the notion that regional sparring partners will compete for influence, which could ignite a Middle East powder keg.

While the gold market still fears the Feds, on a broader and more pronounced equity rout, this will bring the Fed December rate hike into question. Gold prices were unable to hold gains after testing above 1234-36, but traders remain on watch given US equity markets' weaker complexion.

Currency Markets

Despite all the market hoopla, G-10 moves were very pedestrian - suggesting, as we have thought all along, that currency markets are suffering a bad case of trader fatigue.

Malaysian Ringgit: It's hard to find a silver lining in the market with global risk sentiment going into the tank and oil prices following suit. With the upcoming budget looming ominously, it suggests the ringgit will continue to trade with a defensive posture.

Pound is entering that mode again where no position is a good position, as the negative headlines continue to compound extremely negative sentiment.

Yen rallies on safe haven demand, but tremendous support remains at 112, which should keep USDJPY downside in check, at least until the traders have then next negative equity mood swing.