Emerging markets: Channel one’s confidence

USDJPY and Emerging markets traded with a more positive tone overnight, although EM is hardly out of the weeds just yet, as US equity markets ignored a shaky start to finish higher on the day led by energy and telecom sectors.

When the S&P markets rally in the face of higher global yield and a slightly steeper US yield curve, only good should come out of this for investors. Indeed, this price action does suggest we could be in for a bullish extension in US equities over the near term. The buoyant US markets continue to benefit from the run of very robust US economy and should continue to do so as the US economy is firing on all cylinders. Forget that September blues nonsense the markets are readying to take off again!!

Oil Markets

The combination bullish market calls, Iranian sanction developments, preparation for Hurricane Florence were all positive for oil prices overnight and the API data added to the momentum in late NY trade.

The American Petroleum Institute figures for the week ended September 7 showed a much larger-than-expected 8.6 million barrels and WTI had reacted positively to the release on this relatively dramatic decline versus analyst’s expectation. Even Cushing which everyone was fretting about early in the week due to pipeline bottlenecks showed a decrease of -1.17 million barrels.
But the survey did show larger-than-expected 5.8 million barrels build in distillate inventories and a larger-than-expected 2.1 million increases in gasoline stocks. So, we see the drop in crude stocks offset by rising oil products suggesting inventory runs are high.

So, the modest uptick in WTI prices on the headline remains in line with the change in total petroleum inventories.

But energy markets have been supported overnight as there was much more focus on Hurricane Florence than markets had priced in, indeed a case of batten down the hatches along the Colonial Pipeline.

But its Brent that continues to drive sentiment as the premium to WTI has widened out to more than $10 per barrel as concerns of potential supply outages on the back of reduced Iranian imports are driving the global benchmark higher while WTI has been held back by the prospects seasonal builds ahead of the maintenance period.

The Iran sanctions are the most dominating driver and will continue to be so, but with the Whitehouse hawks circling above, the administration issued a stern warning that US will hold Iran accountable for any attacks by proxies in Iraq that cause injury to Americans or damage to US facilities. So again, the middle east risk embers are smouldering and reading to ignite. Typically, escalation and provocations in the Middle East tend to push prices higher, so worth watching this development.

Gold Markets

Gold caught a remarkable strong tailwind overnight as hedgers were in covering possible tail risks prospects for escalating U.S.-China trade tensions. But those constantly smouldering Middle East embers could ignite into raging geopolitical firestorm after the Whitehouse warned that if Iran or their proxies threaten any American assets in the region, there will be a severe price to pay.

However, higher US yields should remain US dollar supportive and does continue to suggest upticks to $1200 will stay fleeting as gold bears will add to shorts at this crucial level. But it will be Thursday’s US CPI and Friday’s retail sales data that will provide the next big test for this bearish theory.

Asia Markets
South Asia market risk is an entirely different kettle of fish, and “when in doubt stay out” as there are few clear-cut risk decisions on the back of the looming China tariffs, tech sector woes and likely slowdown in China. One look at the Hang Seng price action should be enough to scare even the most prominent contrarians.

However, Emerging Market moves are less idiosyncratic and becoming more a function of global risk sentiment. Which is encouraging as we could see all regional markets, even those under extreme currency pressure could benefit immensely from the subtle optimism around global trade disputes being resolved. But its a matter of how to channel one’s confidence in the appropriate manner in these under-owned conditions based after the recent waves of regional capital outflows. Be nimble!!

Currency Markets

Canadian Dollar
Patience is a virtue and even more so when trading the Canadian dollar which is pest done from a playbook. The Loonie is still at the negotiating table but with US President Trump saying the talks are going “very well. The latest Reuters headline suggesting Canada is ready to offer limited access to the Canadian dairy market to the US as a concession. Goodwill concessions are apparent, and the Canadian Dollar has reacted favourably, and as we get down to the nitty-gritty and on any trilateral NAFTA announcement, the USDCAD could drop to the low 1.29’s in a heartbeat, but in the meantime, we could be in for more stop and go on headline risk.

Australian Dollar

Not too unexpected the AUDUSD is putting up a staunch defence at the .71 levels but this could be little more than due oversold conditions as some traders are looking to play a contrarian’s hand as any weakness in US data could see a much greater outsized move on short squeeze than sell off on reliable data. I try to avoid this type of “fools logic “, but it does play a part in the thought process, but with NAB business confidence falling to a two-year low compounding all the negatives from last week, I fully expect the Aussie to bleed from a differential perspective alone with a test of .7000 in the offing. If not for the reprieve from trader’s insatiable demand from buying USDCNH overnight, we could be trading nearer the .7075 levels today in my opinion.

The Euro
The biggest issue is we seem to be doing the same thing over and over. And the EURUSD is doing little more than testing the near-term ranges. Participation is predictably low as the EURUSD remains mired in the ” no trade zone” straddling the 1.1600 level.

Japanese Yen
We should test the 112.00 if risk remains intact, but the big question is, however, do you want to own USDJPY risk at this level. Risk sentiment is turning positive every so gradually while US yields continue to move higher, we could push through that 112.00 on a positive CPI print.

EM

South African Rand

Nothing like a ZAR rally to signal the market has turned on the risk lights back on. Although the test of 15.00 was faded, the market has been holding on these gains on the back of this week positive Brexit headline. Former colonies have enjoyed favourable terms trade with the UK, and Brexit progress will be viewed in a favourable light.

The Malaysian Ringgit

Trade wars are one of the most significant regional factors, and while an escalation will negatively impact the MYR, the currency is much better insulated from terms or trade shifts other ASEAN countries will feel due to Oil exports. Next to that is the negative impact of higher US yields. So, expect the market to open mixed today with US Treasury yields higher, and trade war fears still front and centres.