Markets

As US-China trade negotiators are about to order the last call at the Last Chance Saloon, the fog of trade war is beginning to lift giving way to an air of trade optimism sweeping through global capital markets. With the exasperatingly conflicting tempest of trade headlines abating, investors are starting to believe there is light at the end of the trade war tunnel as hope springs eternal injecting the elixir of life into global capital markets after President Trump says day one of the trade talks went very well. 

Stocks gained, and Treasury yields jumped as a brutal day of reckoning could unfold for bond investors as U.S. 10-year yields soar possibly indicating the "pain trade" could be on the verge of short-circuiting a heavily subscribed global bond market. Treasuries fell Thursday amid a global government bond rout triggered by a combination of US-China trade calm and Brexit optimism which sent the Pound soaring. 

The pain trade is a point of reaction and how the market reprices both the Fed and the ten-year U.S. Treasury yields on a positive trade talk outcome

Oil markets

Crude rose after OPEC Secretary-General Mohammad Barkindo said members and allies including Russia would do "whatever it takes" to prevent another oil slump as the global economy weakens.

Jawboning aside, at a minimum it reaffirms OPEC + position and supply discipline to do what is necessary to support oil prices that have been severely undermined by slowing global growth.

Also, OPEC reported that oil markets were in the most considerable supply deficit since 2007 as OPEC exacted deeper production cuts. 

But its possible optimism around trade talks is what continues to steer the tanker. The US is the largest global consumer of oil while China, the biggest driver of year-on-year oil demand growth. So, it would seem logical that the most significant sentiment driver hinges on the outcome of the trade talks which if end on a positive note could go along way to begin to repair the economic damage done as a result of the protracted US-China trade war and these economic powerhouses would need more oil. 

Gold markets

Gold has lost a lot of momentum as we await the outcome of the U.S.-China trade talks.

Trade talk optimism, rising U.S. Treasury yields and a divided Fed which suggests October rate cut might not be such a done deal, continues to lean on record long ETF gold-backed investor positions.

The trade talk optimism adds another layer of complexity on top of the current Fed narrative, where U.S. growth is arguably near trend.

A worst-case scenario for gold?

And while the market current base-case scenario suggest a pre-emptive 2019 Fed interest rate cut is in the cards, the issue for Gold markets is if we are entering the first phase of a tariff unwind, the Fed could still cut in October but reiterate this is still a mid-cycle adjustment implying a hawkish cut which could seriously undermine gold market.

Currency markets

ASEAN FX

With too many juicy currency correlations to ignore as talks of a US-China Yuan based currency pact continues to percolate and the U.S. dollar, kindly for ASEAN risk markets, cedes ground as local fear factor hedges unwind, ASIA FX trades well overnight. 

Ringgit traders are sitting tight awaiting the budget announcement where a possible budgetary conflict of prudence and growth will intersect with the Ringgit and Malaysia capital markets.

Local FX traders will be focused on the THB as the Bank of Thailand, and government officials relentlessly jawbone the THB weaker to no avail as the current-account surplus, and $220 billion of foreign reserves makes the Baht a key destination for haven flows. 

Its a concern for everyone

As an FYI it's even holding me back from buying another property in Bangkok as my projected break-even on CADTBH is at 25.0 vs the current 22.88. The Baht strength is absolutely mind-boggling.

 

 

 

G-10 

 

Boris Johnson met his Irish counterpart Leo Varadkar for crucial talks over lunch as the U.K. and European Union seek a way through the impasse with time running out to reach a deal.

 

The two leaders said they could "see a pathway to a possible deal," in a joint statement after the talks, which saw the Pound soar and Euro bulls desperately trying to hitch a ride as European equities gained on the positive Brexit news

 

But with Euro Forex traders watching the November 13 deadline for President Trump to decide on tariffs on EU-produced cars, the EURUSD rally ran out of steam.

 

US-China trade talks have been the market's focus, where possibly a better bid in risk assets would put more downward pressure on the EURUSD. 

 

Without the European economy shifting into gear providing a quantifiable reason to buy Euro's, in this low yielding G-10 environment, it's still costly to short the USD.

 

And while U.S. exceptionalism has been questioned after the ISM report, given the considerable economic benefits the U.S. economy could receive if a trade deal is forged supporting that very same U.S. exceptionalism trade, it suggests the U.S. dollar may not suffer a knockout blow anytime soon.

 

Safe-haven currencies like the CHF and JPY have been the biggest losers as risk sentiment has shifted considerably less doomy.

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