Headline Tease and Tangles

I'm sure sentient will sway back and forth all day, but these are my morning thoughts after a great night out with several Traders who showed up to Bangkok despite the World FX Expo being rescheduled last minute on Wednesday  I guess one night in Bangkok and the worlds your oyster still resonates. 

Markets

Compared with even a couple of weeks ago, the probabilities have shifted significantly in favour of a harmonious photo op, which is undoubtedly better than the doom and gloom walkout scenarios, but well short of a tight trade policy embrace. And while the road to Osaka has been like the drive to Buenos Aires in many ways, but there's a much higher level of transparency.  And despite both sides downplaying what they can immediately accomplish this week, with much more clarity around the G-20 scheduling, equity market continued to price out the worst-case scenarios, and after a few days of modest declines, the S&P500 finished the day up 0.4%.

But buckle up as we are likely in for a day of headline tease and tangles.

Oil Markets

Not a great deal of price discover as tactical position adjustments are dominating prices action ahead of the most significant oil market risk events in some time, which in my view have been foreshadowed.

 OPEC+ will assuredly find a satisfactory compromise to extend supply discipline for another six months officially, while G-20 will most likely end in a handshake.

Middle East tensions and general optimism on US-China trade ahead of talks between Trump and Xi Jinping this weekend continue to support oil prices, though both Brent and WTI are off Wednesday's highs as the President Plan B is still too fresh in trader minds

But from my seat, the primary narratives remain unchanged as the thoughts of protracted US-China trade war compete for air time with the all-out war in Iran which should continue to tug and tow markets in every direction for the foreseeable future.

 While US crude inventories are still above the five-year average in volume in absolute terms, this week inventory reports suggest brimming oil warehouse has been reduced from disquieting levels and fortifies the view that the seasonal draw has finally begun, albeit a few weeks later than usual. So back to back weekly inventory draws are coming as a massive relief to oil markets that we're not mired in a counter season build, and if this trend continues will be viewed bullishly friendly

And while trade war sentiment has improved even from 2 weeks ago, the market continues to price in a "tentative" truce.  Given the comprehensive list of demand from both sides of the table, it not only suggests a bridge too far, but underlying sentiment remains quite bearish in terms of the medium-term outlook for a US-China trade deal as well the global growth outlook. 

Despite the many moving parts in oil prices, provided Iran tension continues to boil, the mere threat of shooting war should keep the bid under oil prices despite faltering global demand, and the thought of bulging US shale supplies. 

Gold Markets

There is a high level of trader fatigue entering the fray and with Fed speak walking down dovish expectation and little if any hysteria over G20, the market has shifted to profit taking mode although the broader weaker US dollar sentiment that unfolded after the FOMC continues to keep the Gold floor in check. My view there is far too much uncertainty in the worlds to lose the plot on long term view, but short term price action needs to be respected. 

Participation in the gold rally has primarily been through futures and ETFs, rather than physical markets as we continue to see sharp discounts in some loco centres vs London.

And while at the money vols have gapped from 8 a month ago and peaked at 16.75 at the markets highest feverish pitch on Tuesday, those too have come off the boil. This price acti9on also suggests that Gold's upward momentum will stall near term, but again it could be little more than trader fatigue setting in.

Currency Market

G-10 

Overall risk sentiment remains stable, and high-beta commodity currencies and AUD   and NZD have continued to gravitate slowly higher. A bit surprised that we still haven't the market cut back on shorts in favour of moving back into JPY or Swissy. But I think with the focus on the Euro as debate revolves around the ECB and the FED interest rate trajectory, AUD and NZD seem like an afterthought and will continue to ride the coattails of trade tensions.

To no G-10 trader, surprise Cable continues to struggle as fears of a 'no-deal' Brexit under the likely leadership of Boris Johnson refuse to fade.

Asia FX

I think the market is very much in the balance ahead of the G-20. I think on a slightly more welcome Trump -Xi meeting we could gap lower to USDCNH 6.75 where it was trading before the breakdown in talks.

 But for a significant dollar melt lower there will need to be at least a sign that some tariffs are removed or explicit signalling that currency concessions have been made.