By Stephen Innes
Almost everything played out on a script with US equity markets' high-reaching ambitions led by the auto sector. And while the great dinner of the decade debate will likely rage on for the next 90 days, the bar remains high for a sweeping trade deal, but the markets must also rise to the occasion due to a high level of uncertainty around Fed policy as ushered in by shifting Fed narratives while enveloped by soggy global growth developments.
If there was one surprising discrepancy in the playbook, it was the fact that US Treasury yields moved lower and even failed to bounce after a solid US ISM manufacturing report. The price action is reflecting the market's outlook on Fed policy and the incalculable risk uptake on future trade developments.
What looked like a massive week for oil markets ended up being a colossal day instead.
While the rally in equity markets and a weaker US dollar off the trade war détente provided a fillip for a range of commodities, crude oil traders are impartially more focused on the prospects for production cuts that would rebalance the market for 2019.
While taking bullish cues from an unprecedented Canadian mandated 325,000 bpd reduction in oil sands production beginning in January, the more prominent and pressing issue is the state of negotiation of Saudi Arabia and Russia regarding OPEC+ production plans was the big catalyst. Traders warmed up quickly to Putin who subsequently announced that both countries agreed to extend their deal to manage oil markets via output cuts into 2019. The Russian President went on to tell reporters over the weekend that "there is no final decision on volumes, but together with Saudi Arabia we [Russia] will do it."
Besides the apparent relief from the trade truce, it was a combination of multiple bullish signals that sent oil prices surging.
USD and yields also kept a close eye on Fedspeak, but one comment the market latched on to was from Clarida's Bloomberg interview. He said that the Fed's inflation target is symmetric, and the Fed is using incoming data to estimate r* - further highlighting the Fed's move away from calendar guidance to complete data dependency.
Given that EM risky currencies have priced a substantial risk premium related to trade risks but with a more significant risk premium in Asia and commodity FX, USD Asia FX traded lower on hedge unwind that took a cue from the equity rally and $RMB to rebase lower.
While global growth currencies like the AUD and CAD have been the direct beneficiary of the higher commodity prices bouncing higher with the Loonie benefiting from the outsized move on Oil prices overnight.
However, the headline roulette wheel will be on full spin. Traders are buckling as Brexit debates on PM May's deal begin in Commons. What will unfold is anyone's guess as virtually every report has fallen well short of providing any definitive timeline for detailing any or all contingencies leading up to the crucial December 11 vote. GBP markets traded calmly in the New York session but like they say it's most likely the calm before the storm.
EUR looks increasingly challenged from a string of weak economic data over the short term. And while the French riots have not elicited any significant market response, it should be a stark reminder that populism is alive and kicking in Europe suggesting the established EU political hierarchy remains under threat.
CNH, any thought of a move to the mystical 7-level by year-end took a shot right to the heart as the 90-day moratorium guarantees the PBOC will keep the Yuan trading in the US administration comfort zone which is probably stable to stronger. However, in addition to the unwind of a colossal trade risk premium, there is a slightly positive turn on Asia barring any U-turn on this truce.
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