China's prime is optimal

Asia's data highlight has passed without incident, with China's 1-year and 5-year Loan Prime Rates left unchanged at 3.85% and 4.65% respectively. The result was as expected, with China's economy firing on all cylinders and Covid-19 firmly under control, as the world looks on enviously. With the heavy lifting coming from the targeted fiscal of the equation, China needs no transforming of its optimal prime rates.

As the rest of the world descends into a zero forever interest rate environment, China's carry is likely to attract more and more attention. Despite a closed capital account, China's bond market is expected to more and more yield-hungry international investors. Investors will take comfort from China's economic data as well as comments from the PBOC that markets should set the exchange rate. If that is so, and despite having a dirty peg versus a major currency basket, the Yuan is likely to remain a bastion of calm in the storm into 2021.

Elsewhere, financial markets are very much locked into tail-chasing mode as the noise from the US elections, fiscal stimulus and Covid-19 provide so much noise, they drown out the lyrics. Wall Street equities wilted overnight as Nancy Pelosi's pre-election stimulus deadline approached today, with no sign of a breakthrough between the antagonists. Headlines suggesting that Pelosi and Mnuchin were closing differences, and would talk again today, has seen the dentists of Minnesota piling into US equity index futures this morning in Asia, sending them sharply higher.

The final US Presidential Debate has been confirmed, including mute buttons, for 0900 SGT on Friday morning. That will provide a welcome distraction to the street's US fiscal stimulus negotiation love affair. In the shorter-term, those negotiations remain the only game in town, even drowning out the very concerning Covid-19 lockdown developments occurring across Europe. It is clear that the FOMO gnomes of Wall Street are limit long, expecting Ms Pelosi and Mr Mnuchin to reach a deal, ignoring the US Senate Republicans at their peril. 

Whatever the outcome, there will probably be a profit-taking sell-off or a deal failure sell-off in equity markets, in particular. Both the US Dollar and gold should be beneficiaries. Any fall in equity markets could be sharp but short-lived though, as the herd quickly look for another reason to be long everything. In this case, it is likely to be that with a Democrat clean sweep, a juicy stimulus package will arrive anyway, it will just be delayed. Ignoring that that will probably be by early 2021 at best. But that is ok, because we will have billions of doses of Covid-19 vaccine by Christmas if you believe the narrative. 

Given the number of holes in that line of thought, I would expect the US Dollar, gold, Japanese Yen, and yes even offshore Yuan, to potentially do very well in nest few weeks. The only tail-chasing I intend to get involved with, is watching our kitten, Twinkle, chasing hers. It will be far more productive.

A rise in US futures softens the blow

Equity markets fell on Wall Street overnight as the street caught a bout of stimulus nerves. The S&P 500 lost 1.62%, the Nasdaq dropped 1.63%, and the Dow Jones dropped 1.39%. However, headlines suggesting that Pelosi and Mnuchin continue to talk has lifted the aftermarket futures strongly on all three in Asia. That has lessened the potential negative impact on Asian stock markets today from Wall Street falls overnight.

The S&P 500 mini has rallied 0.66% in Asia, with Nasdaq futures 0.65% higher, and Dow Jones futures o.38% higher. The Nikkei 225 has edged 0.50% lower, and the Kospi has fallen 0.75%. In China, the Shanghai Composite has drifted 0.40% lower, with the CSI 300 flat on the day, and the Hang Seng just 0.30% lower. 

Regionally, Singapore has fallen 0.60%, with Jakarta, Kuala Lumpur and Taipei down just 0.10%. In Australia, the ASX 200 has eased 0.65%, with the All Ordinaries down 0.55%.

Globally, equity markets continue to dance to the nuances of the US stimulus negotiations, making it very hard to hold a firm view directionally. With the US Presidential debate on Friday and COVID-19 confirms increasing rapidly in Europe though, a sustained rally by equities from here will be challenging, even if a US stimulus package comes through at the last minute. 

Currency markets remain in a holding pattern

Currency markets have, thankfully, declined to participate in the daily stimulus mood swings prevalent in equity markets now. The net effect though, is that the wait-and-see approach has squashed volatility, leaving currency markets in a range0trading holding pattern. Until a stimulus deal is done, or the US Presidential debate arrives, that status quo is likely to remain the week's theme.

The US dollar index eased 0.32% overnight to 94.42, almost exactly in the middle of the index's broader 93.00 to 94.00 range. That left the EUR/USD and GBP/USD practically unchanged at 1.1775 and 1.2940 respectively. Amongst the rest of the majors, the story was much the same. The technical picture continues to suggest that the major currencies could suffer at the hands of the US Dollar over the next couple of weeks. Such a downward correction would be in keeping with risk-hedging flows into the US Dollar ahead of the US election, and the complacency surrounding both Brexit trade negotiations and Covid-19 in the United Kingdom and Europe.

In Asia, both the onshore and offshore Chinese Yuan’s continue to grind higher versus the Dollar, supported by Chinese economic data and China's interest rate differential. A situation highlighted by the unchanged Chinese Loan Prime Rates this morning. That has anchored regional Asian currencies as well, with their high beta to China. I continue to expect regional Asia, ex Indonesia, to outperform versus G-10 currencies. 

Consumption fears weigh on oil

Oil prices eased overnight, as the OPEC+ JMMC meeting signalled no change to OPEC+ production cuts in the future, and surging Covid-19 cases in the United States and Europe cloud the consumption picture. That sentiment will at worst, cap oil prices going forward, and at worst feed into a negative feedback loop, especially if the US Dollar rallies into US election day. Evidence also suggests that China's pre-holiday buying spree has run its course for now, with private quotas full. I continue to believe, though, that OPEC+'s hand will not be forced until Brent crude falls through $35.00 a barrel and stays there.

Brent crude fell 0.80% to $42.45 a barrel overnight, edging another 0.25% lower in Asia to $42.30 a barrel. Brent crude now has well-defined resistance at $43.50 a barrel, with support in the $41.30 to $41.60 a barrel zone, containing the month's low and the 200-day moving average. (DMA)

WTI fell was unchanged overnight at $40.70, edging slightly higher to $40.80 a barrel in Asia. WTI has resistance at %41.50 a barrel, with nearby support at $40.25 a barrel, its 100-DMA. Critical support remains around $39.00 a barrel.

Gold treads water around $1900.00 an ounce

Gold continues to range trade each side of $1900.00 an ounce in subdued range trading. Gold rose five dollars to $1904.50 an ounce overnight as equities fell but has since eased to $1900.50 an ounce as US equity futures rose in Asia. It is clear that gold is moving to nuances in other markets, and not on gold fundamentals alone. However, the ever-compressing ranges continue to form a triangle formation that suggests a massive breakout is coming, with a potential to move over $100 an ounce. 

The top of the triangle lies at $1920.00 an ounce this morning. The triangle's base is at $1890.00 an ounce, with the 100-DMA behind that at $1875.00 an ounce. A daily close above or below those levels signalling a breakout is finally commencing. In all likelihood though, the driver will come from elsewhere, and hence, waiting to see which way the tree falls is probably the wisest strategy for now.