Flattering to deceive

The buy everything trade returned with gusto overnight. Equities rose strongly in Europe and the United States, the US Dollar fell, and precious metals and energy rallied. Looks may flatter to deceive though, with the rallies in precious metals and oil likely propelled by the knock-on effects of the rise in equities, rather than a sudden structural change in their outlooks, especially oil. 

With the end of the month and the quarter upon markets, a lot of portfolio rebalancing is occurring in the institutional investor space. I would suggest that those flows, rather than a sudden "the world is saved" epiphany are the genesis of the overnight equity rally. That appears to have dragged in the FOMO buy the dip mob on a day when nothing materially changed in the world to justify the moves. US airline stocks, in particular, and banks, had an exceptional day. A session where the buy everything mob think airlines look cheap is as good a warning sign for the longevity of the overnight rally as I've ever seen. At least big tech is cashflow positive, even if they are not cheap.

In the absence of any headlines to disagree with the buy everything premise, Asian stock markets look set to trade positively today, with the US index futures all in the green. The procyclical Australian and New Zealand Dollars will no doubt capture the same tailwind, as will regional Asian currencies. 

The potential for four seasons in one day, ending in winter, is there before markets though in the shape of the first Presidential debate this evening. Revelations from the New York Times (NYT) about the state of President Trump's financial affairs and his business empire will bring an extra edge to the debate. Behind in the polls and wrongfooted by the NYT, President "Tax-Return" Trump will have quite a bit of ground to make up on Democrat candidate Mr "Sleepy-Joe" Biden. We can expect fireworks from the President in particular, with the first debate regarded as the most important by political commentators. 

With China PMI's and the US Non-Farm Payrolls still to come this week also, there is plenty of risks ahead, and precious little reason to get excited that the global recovery started yesterday on the 28th of September. Investors should be aware of getting sucked into what may be a sucker's rally.

This morning, South Korean data for August disappointed. Construction Output, Industrial Output and Manufacturing Production all disappointed, although Retail Sales rose. The data highlights the uneven nature of the Asia regions recovery, and that will likely be confirmed by Singapore PPI this afternoon, and Vietnam's data dump at 1000 SGT.

One positive of real substance being reported by UK's The Times newspaper today is a potential breakthrough in trade negotiations between the UK and Europe. European negotiators are indicating they are prepared to start working on a joint legal text, while sidestepping the government subsidy and fishing rights sticking points. Sterling rallied overnight and has moved higher to 1.2850 this morning in Asia. If confirmed, it would be a breakthrough for both sides, but notably the UK. Broadly speaking, my view is that a trade-deal failure would see Sterling fall back to the 1.2000 region, whilst an agreement would see Sterling retest 1.3400. Neither outcome is, in my opinion, priced into the market.

Asian equities track New York higher

European and US equities performed strongly overnight, boosted by end-of-month portfolio rebalancing from institutional investors. That dragged in the buy the dip crowd and saw the S&P 500 rise 1.61%, the Nasdaq climb 1.87% and the Dow Jones rose 1.53%. Asian stock markets are mostly higher, although they are failing to share Wall Street's exuberance with one eye on tonight’s first US Presidential debate.

The Nikkei 225 has edged lower by 0.36%, driven by 1000 TOPIX listed stocks going ex-dividend today. Elsewhere though the picture is positive. The Kospi has risen 0.90%, with Mainland China's Shanghai Composite rising 0.40% and the CSI 300 rising 0.30%. The Hang Seng is unchanged, while Singapore is up 0.15%. Meanwhile, in Australia, the All Ordinaries has climbed 0.75%, and the ASX 200 is 0.10% higher. 

The ex-dividend effect in Tokyo may also be muting gains in other regional markets as well as the end of the quarter approaches. Impending holidays across much of Northern Asia will also dampen activity.

Equity rally sparks US Dollar retreat

Dollar shorts gained some relief overnight, after the rally in equity markets mechanically flowed through to a weaker US Dollar. The dollar index retreated 0.33% to 94.27 but remains comfortably above support at 94.00. In the G-10 space that saw the procyclical EUR, AUD and NZD all trace out modest gains overnight, although all remain at the lower end of their one-month ranges. 

Sterling was an outperformer, as hopes rise of a breakthrough in post-Brexit trade agreement negotiations between the United Kingdom and the Eurozone. GBP/USD spiked by 150 points to 1.2930 at one stage, before settling at 1.2830. GBP/USD has edged higher this morning, and if the Times report is correct, could well retest its overnight highs in Europe this afternoon. GBP/USD has traced out multi-day support at 1.2680 now. It is additionally supported by its 100 and 200-day moving averages (DMA's), at 1.2740 and 1.2715 respectively. 

Asian currencies have edged higher in subdued trading this morning, following the US Dollar fall overnight. With the PBOC determined to keep the USD/CNY anchored between 6.7500 and 6.8500 across the one-week holiday starting Thursday. That should ensure that regional Asian currencies also remain captured in tight ranges. 

Although the US Dollar fell overnight, there were no significant drivers other than the end of the quarter itself, with the ensuing rebalancing flows. With CFTC data showing speculative short Dollar positioning remaining high, it is too soon to say that the US Dollar correction has run its course. 

Oil rallies with equity markets

Oil prices jumped overnight, as equity markets moved higher, which lead to a squeeze on short-term speculative oil positioning. Brent crude rose by 1.75% to $42.50 a barrel, and WTI rose 1.10% to $40.50 a barrel. The rally has quickly run out of steam in Asia, with both contracts giving back some of their overnight gains. Brent crude falling to $42.10 a barrel, and WTI falling to $40.25 a barrel.

The price action suggests that although the speculative community is still short, based on futures data, the underlying bearish drivers are still ascendant. That is, reduced consumption and a global oversupply by producers. That equation should continue to limit oil gains in both size and time duration. 

That said, oil has traced out notable support over the past week. On Brent crude, the 100-DMA has halted price drops over the past seven days. The 100-DMA is at $41.65 a barrel today and should continue to provide support. WTI's 100-DMA is at $39.15 a barrel today, and this region has supported prices over the past week. 

Although both contracts now have strong technical support, the underlying supply/demand situation internationally means both lack the momentum to sustain strong rallies. Brent crude at $42.00 a barrel, and WTI at $40.00 a barrel, look close to equilibrium levels for now. As such we expect both contracts to range trade, albeit noisily, around those points for the rest of the week.

Gold performs impressively overnight

Gold rose 1.05% to $1881.00 an ounce overnight, as the rally on equity markets, and the fall in the US Dollar encouraged gold bulls to return to the market. Gold has edged higher again in Asia to $1883.00 an ounce with regional players seemingly keen to add to longs this morning. With all South Korea and China starting holidays tomorrow and Thursday, risk-hedging flows from the region should support gold prices. 

Gold has traced out multi-day support at $1850.00 an ounce, and that is additionally supported by its 100-DMA, today at the same level. Resistance is nearby at %1885.00 an ounce, with a break of $1900.00 an ounce likely to spur some stop-loss buying as well as flushing more longer-term bullish traders out of hiding.

With holidays and event risks piling up throughout the rest of the week, gold is unlikely to break its $1850.00 an ounce support region.