Boris batters British Pound

Financial markets were quiet overnight, thanks to holidays in the US and Canada. Over in Europe though, summer holidays appear to be ending abruptly as Brexit re-emerged from its long slumber to recapture the front pages. The British Pound fell by nearly one per cent overnight as UK Prime Minister threatened to walk away from negotiations by October 15th, setting up a hard Brexit. (NB: the author is a perpetual GBP/SGD, and GBP/IDR bear, as cost-centre two enters her 5th year of higher education in London. Brexit has been good to us.)

The Financial Times reported that the UK Government were also preparing to unwind parts of the previously signed exit agreement regarding Northern Ireland with the European Union. That would arguably have more significant consequences for the United Kingdom if it follows the China path with Hong Kong and rips up agreements that don't suit it. Political and economic pragmatism will give China much more international leeway in this respect then the United Kingdom.

Elsewhere, President Trump's campaign trail had a back to the future look about it. The President announcing overnight that he wished to completely decouple the US economy from China and bring supply chains and jobs back to American shores. We just need promises of a trillion Dollar infra-structure package, and the platform will be almost identical to his 2016 one. The announcements will not be market-moving in themselves, but further reinforces that US/China tensions are a known unknown and the new normal.

After hours US equity index futures continued to trade yesterday, with small gains eked out in overnight trading. That, and a lack of headlines, has set Asian equity markets up for a modestly, but positive, start to the day. With all the noise surrounding the use of short-term call options by Softbank and the Robin Hood massive to boost big tech stock prices, the holiday honeymoon may not last beyond Wall Street's return to work this afternoon.

Closer to home, Japan Household Spending for July badly underperformed this morning, printing at -6.50% MoM. Japan Q2 GDP also underwhelmed, covering the height of the Covid-19 movement restrictions regionally. Q2 Annualised Growth fell by 28.10%, as expected, but Private Consumption for Q2 shrank by a much worse 7.90%. The fallout will be modest as Q2 now seems like an age away. What it highlights are the challenges Japan will face in its recovery. The household sector will not drive that; instead, Japan Inc. has everything on black 13 for a recovery in export markets, maintaining momentum. 

Contrasting Japan's data with China's drives home that Asia's recovery will be an uneven one, the region will not grow in linear lockstep.

The rest of the day's data releases are unlikely to be market moving, with the US data exceptionally quiet. Germany's Balance of Trade will receive more attention than usual after Industrial Production faltered yesterday. European Union estimated GDP for Q3 is expected to fall by 12.10%. Arguably the German data is more critical. With so much optimism positioned for an EU recovery, a faltering of the Eurozone's engine room could add more corrective downward pressure on the Euro. 

With a data vacuum in relative terms, markets will be vulnerable to headline-induced short-term swings. That includes Europe where Brexit, having been thankfully forgotten for so long, is now back on centre stage. Realistically, we await the return of Wall Street to see if the holiday mood leaves investors in a positive frame of mind; or if the FOMO-gnomes have spent the long-weekend looking up the definition of "put" in their day-trading manuals. 

In the old days, the "Thundering Herd" was a nickname for Merrill Lynch. (now swallowed by Bank of America) The sounds of thousands of hooves clattering through the now empty canyons of Wall Street, are just as likely to belong to Bob and Chip from somewhere in the mid-West these days, "call-ing" to each other on online forums. Say what you like, this herd has kicked plenty of dirt and dust into the faces of institutional professionals at the watering hole these past six months.

Equities move cautiously higher

With US markets closed, the gentle move higher by US stock index futures, and a lack of negative headlines, has been for Asia to follow suit this morning cautiously.

The Nikkei 225 has risen 0.40%, with the Kospi rising 0.85%. In China, the Shanghai composite and CSA 300 have increased by 0.15%, with the Hang Seng moving 0.35% higher. The tone is more mixed across regional Asia. Singapore, Jakarta and Taipei have advanced 0.35%, but Kuala Lumpur, Manila and Bangkok have edged 0.20% lower. In the ever-optimistic Australia, no news has been good news. The ASX 200 and All Ordinaries rising 0.80% this morning.

The session is likely to be a directionless one, and at the mercy of short-term moves in US index futures, as the street awaits the return of Wall Street this afternoon.

Currency markets trade sideways following US holiday

With the US holiday crushing volumes and volatility, currency markets have contented themselves to range through the overnight session and into today quietly. The US dollar index was almost unchanged at 93.15, very near the top of its one-month range. The US Dollar still has the potential to continue its short squeeze, if Wall Street equity markets return to work with a post-holiday hangover. Asia and Europe though, will likely adopt a wait and see stance until their arrival.

One notable exception is the British Pound. The UK Prime Minister's threat to leave with a Brexit deal on October 15th has unsettled markets which had almost priced out any Brexit risk. That situation is rapidly changing, notably in the options market where volatility has spiked over that time period. 

The rapid repricing of risk saw GBP/USD fall by 120 points to 1.3150 overnight. In Asia, GBP/USD has eased slightly and is testing the overnight lows at 1.3140. A failure implies further losses to the 1.3150 regions. GBP/USD has significant long-term support between 1.2980 and 1.3000. A daily close below this level sets in play the potential for a much larger downward correction.

Oil drifts lower on thin volumes

Oil continued to drift lower on holiday-thinned volumes, spooked in part, by Saudi Arabia lowering its crude prices to international customers. The drift lower though, should be taken with a grain of salt until the US arrives back at its desks this afternoon.

That said, the technical picture is starting to look ominous for oil. Brent crude fell 0.70% to $42.00 a barrel overnight, having tested two-month support at $41.40 a barrel overnight. A loss of this level this afternoon implies deeper losses with an initial target of $39.35, its 100-day moving average. (DMA)

WTI fell by 0.90% overnight to $39.10 a barrel, having tested support at $38.60 a barrel in thin trading. A move through the overnight lows sets WTI up for further losses, initially targeting its 100-DMA at 436.35 a barrel.

With immediate supply plentiful, worries over wavering OPEC+ compliance, a glut of speculative long positioning in the market, and the respective relative strength indexes not yet in oversold territory, the risks of a deeper downward correction remain the path of least resistance.

Gold's consolidation continues, but downside risks increase

Gold eased lower by 0.30% to $1928.00 overnight, with volumes thin due to the US market holiday. Nevertheless, the pattern of the past five trading sessions has been one of lower highs each day with almost unchanged closes. 

Gold appears set to test its two-month support region between $1900.00 and $1920.00 an ounce. The jury is out though on whether additional downside risks remain. Investors are content not to chase the market and pick up gold on dips. Gold is also lacking strong downside momentum, even if the rallies are shallow in scope. Realistically, any further downside will require a spike in the US Dollar and a deeper sell-off of stocks on Wall Street. At this stage, that is a known unknown.