The US administration Iran deal exit announcement rolled out in typical President Trump spectacular fashion, but at the end of the day, the market’s response was somewhat unenthusiastic with few substantive changes in Gold, Yields or equities.

But that belies the squally interlay moves on WTI which had been down as much as 4.4% earlier amid nervousness ahead of the official announcement.

Currency Markets

In FX, positioning unwinds on the EUR has allowed for more sizable USD gains which have particularly intensified in the EM space. While the weaker links in the chain, Turkey and Argentina have been under the gun all week. The market is growing deeply concerned about the immediate USD liquidity crunches are raising obvious concerns that once the US recommences with interest normalisation and importantly,  starts moving forward with the first experimental phase of QE reduction, EM will be in for some significant pain.

Fed Chair Powell’s earlier speech in London may have a lot to do with the pain in EM. Specifically, the Fed Chair’s comments on EM being able to navigate US policy exit were very notable implying that its Fed policy first and the rest of the world second. Get ready for higher US rates and the long-awaited draining of the QE punch bowl.

This year EM has been able to weather higher US Yields and wobbly equity markets, but it appears that this recent bout of EUR weakness vis a via the USD dollar seems to be the driving factor behind the recent capitulation. If this holds true, it’s probably best to wait for the EUR to bottom before reengaging Asia EMfx exposures. At this stage, the USD dollar doesn’t appear to be running out of charge anytime soon.

Equity Markets

Given the singular market focus on the US Iran waiver, US equity market, for the most part, parroted movements on oil prices but ended up finish flat on the day.

But indeed, some attention should be given to global FX markets that are reeling at the prospects of a stronger USD dollar and higher US rates which could accelerate the pace of capital outflow from Asian markets.

Oil Markets

Oil markets had an extremely volatile session, and predictably volumes soared causing clearing delays. So, what’s next? More volatility of course !!

Given the unilateral move by the US, much of the movement on oil prices had been factored in. But now we are back to the delicate supply balance narrative which is part and parcel of OPEC/NON-OPEC accord, robust global demand dynamics and Venezuelan adversity as its reasonably safe to say that the supply cushion is deflated. Suggesting that even without Iran sanctions Oil prices will remain firm. While Venezuela will arguably be the most prominent tailwind for oil prices over the near term, there is growing OPEC friction bubbling. Saudi Arabia, which wants oil prices even higher, and Iran, which says a reasonable oil price is between US$60-65 a barrel which will make for some exciting headlines as we near the cartel meeting on June 22. And of course, state-owned oil companies in Russia will be asked to turn back the clock as they want to boost production at these current levels.

Gold
Gold prices received a fillip for the unilateral Iran sanctions as the markets worst fears, of course, will be Iran reaction which has promised to be vigorous. But with Treasury Secretary Mnuchin leaving the door ajar to further discussions, gains could be initially capped given the focus could shift back the strong USD, which is showing little signs of running out of charge.

EMFX Asia

The local whipping boy these days is the IDR, and you need to look no further than yesterday local bond auction for guidance with a dreadful bid to cover ratio with foreign accounts side-lined while others continue to look for the exits.

MYR sees presidential elections Wednesday. BN is broadly expected to win, although there is some uncertainty over the margin of victory and therein lies the risk.

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