Asia Wrap: Trading oil into tonight's API report, Gold, What's a Fed to do and the Ringgit

Risk On 

Despite the relatively muted activity in Asia, Europe may grab the "risk-on" the baton and run given the positive confluences building around the stimulus chatter in Germany and the slew of positive trade and economic news coming out of the US. 

Asia traders continue to be a way to focus on the Yuan to notice when something good is staring them in the face!

But history does remind us that betting the wrong way on the Yuan has proven to be a regional occupational hazard in the past.

 

Oil markets into the API report 

Tonight's API inventory report which is seen declining by 1.4 million barrels in the week to Aug. 16  so we could see some action subject to the delta 

But with robust  products demand showing in   last week inventory  data foreshadowing a drop in oil  inventories ( sooner than later) the decline will need to be more significant than expected to excite the markets whereas a counter-seasonal  build, especially as we near the end of peak driving season which is unbelievably only 2 weeks away ( where did the summer go?), will be viewed as the  markets Grim Reaper of sorts. So  I think the tail risk would be skewed to the downside and this too could dampen the market top side ambitions ahead of the API  release.

The Huawei extensions are positive for trade sentiment. Now the proof needs to be in the so-called pudding, which is, a good result from the next round of trade discussions. The outcome of the next US-China trade meeting will be the actual litmus test for oil markets. Oil traders don't want to race too far ahead of the economic realities of the trade war narrative, which could also take the bullish edge off the markets.

 

Gold

The return of risk appetite is proving to be a thorn in the side of the Gold bulls today. Today's slide does  warrant some level of attention as lots of new buyers have entered the fray above $1500

Gold markets continue to struggle under the weight of positive risk sentiment, but the downside momentum suggests we may be one positive trade headline away from testing 1490, which could trigger a dash for the exits. But if the unlikely case of  $1480 level breaches expect knee-jerk pandemonium to break loose.

 

Federal Reserve policy debate

US  data have been robust, but the trade war got worse. What's a Fed to do?

The market currently fully prices a rate cut at the September meeting, plus around a 22% chance for a 50bps cut instead. Rosengren’s comments highlighted how hard it would be to generate a consensus on the board for the more aggressive easing option. Although if there was ever a time to meet the market expectations, now is the time.!!

Federal Reserve Bank of Boston President Eric Rosengren walked back some of the markets overzealous near term or immediate dovish expectations, so now traders have stepped down hopes for a Fed policy pivot at Jackson hole this week. 

But the US consumer is the sole driver of a stable US economy, which is a global oddity as consumer activity metrics are in the tank everywhere else.

The Fed's new reaction function is not all that difficult to understand as domestic circumstance matter little compared to the potential economic blowback from trade uncertainty and global slowdown that continues to muddy their outlook.

The Fed is a forward-looking institution left with the unenviable task of parsing the fall out of a trade war, Brexit and slowing China growth. So do you think the Fed wants to have a restrictive policy stance charging into these hot spots?? Of course not but with the market seeing nothing but tight financial conditions, they will have no alternative to ease further for fear of a market meltdown, but it's the amplitude of the easing that will toggle the markets risk on appeal.

 

US  Treasury

Last Friday the US Treasury hintend they would float trial balloons to gauge investor appetite for 50 or 100 years Treasury not. I guess given the absolute weight of US government debt, and with 30 year Treasury yield hitting an all-time low, it might be a case for the US Treasury to get going when the going is good.