Asia Wrap: Fade or Trade
|MSCI rebalancing
The MSCI rebalancing happens tomorrow, with the bulk of Asia ex-China experiencing a net negative flow of ~$5 bn. It not massive stress as the volumes are spread over eight countries, but it comes at a horrible time as local inflows are running meek, and markets are under duress. Also, the flows will also add more weight to the USD demand that is going through today due to the escalation of US-China trade tensions over the weekend.
Fade or Trade
With traders looking for excuses to fade Friday's move, two things have stood out.
Pboc messaging by setting a stronger Fix suggest they are trying to instil a sense of calm. However, when quickly followed up by Vice Premier Liu He taking to the airwaves claiming he wants peaceful dialogue with the US and with the equally market tranquilising effects, it suggests "where there's a will there's a way", and both sides will likely carry on with trade discussions. Good news or bad, investors continue to wear trade war emotions on their sleeves.
The problem, however, is that the lack of retracement suggests there remains a high level of caution that both sides will come to any meaningful terms anytime soon. Investors need to see Trump walk down some bluster as well as more significant buying volumes over the next 24 hours to make a believer out of most The market remains extremely cautious of further trade war escalation in an otherwise quiet week. London is closed, but the market will be back on full alert when New York opens.
Despite the magnitude of the moves, there's no sense of panic in the market today which best can be illustrated on USDJPY that after plumbing the 104.35 depths has rebounding convincingly and is currently resting safely above 105.25 as Europe walks in. However, it's going to take a more convincing move above 105.75 to alter the tide as risk remains presently skewed to the downside.
However, markets traded nowhere near as maniacal as they looked at 4:30 AM today after the panic paying at the open.
Gold
Vice Premier Liu He calming tone has sent gold lower as fast money remains the primary driver of actions today.
In this testy trade and currency war infused environment, the golden brick road to $ 1600 is looking much better defined by the hour.
Oil
Oil has lifted off the mat but remains well entrenched in the danger zone. While trade uncertainties persist, it will be challenging to make a convincing bullish argument this week given the omnipresent threat to global demand, even given the evidence of a tightening market as a result of planned and unplanned production curtailment and rising geopolitical risk.
The tight market conditions could provide a base but not necessarily a springboard for prices.
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