Spotlight on Powell

Outside of equity markets where the  US stock indexes clocked in gains of 1 %, most asset classes remain parked in neutral as all eyes are on Jay Powell.

After yesterday’s  wave of broader USD weakness during the APAC session, led by USDJPY on the back of mushy US yields, the DXY ended nearly flat on the day, as pre-Humphrey Hawkins position adjustments dominated the NY session.

Investor focus also remains on China after the ruling party will pave the way for President Xi to extend his rule in office, with a proposal to remove the constitutional clause limiting presidents service to two five year terms. And also of significance, Chinese President Xi Jinping’s top economic adviser, Liu He, will be visiting the US from Tuesday through Saturday

Removing Xi’s term limits is a boon to regional economic sentiment as it guarantees continued market reforms and staying the course on the trade-and-infrastructure program called the Belt and Road Initiative.

Investors will be eying Liu He USA visit where the discussion will centre on Bilateral trade. It comes at a time when the trade tensions are broadening. Liu He is expected to be the next central bank chief so all eyes will be on these trade discussion. In the past high-level talks tackling their enormous trade imbalances produce few if any significant results so while discussion moves forward and the market hopes for some level of cooperation, it is worth preparing for the worst.

Equity Markets

S&P500 powered higher overnight and chalked up it’s strongest close for the month as a positive uptrend is reemerging. Investor feel less threatened by US rate hikes as those that were on the road to 3 % US 10 Year yields have temporarily parked at the roadside rest stop.

Investors appear less concerned  by US rate hikes than at any point this month, which is what is providing the positive tone in global equity markets

Oil Markets

The confluence of bullish signals has WTI moving above 64.00.But It’s the dwindling Cushing inventories that continue to resonate with oil traders while another supply disruption in Libya has provided that extra fillip. Given last weeks Cushing collapse in oil stockpiles, traders are keenly awaiting this week’s US inventories data. Keeping in mind, with oil prices trading in backwardation there is less incentive for oil producers to warehouse supply.

Gold Markets

Upbeat equity market and the DXY returning to this weeks opening levels have erased most of yesterday’s market gains ( on a weaker USD) as the Gold hedge remains exceptionally correlated to the USD and a lesser degree to US equity markets.

But given the Fed has struggled to surpass their 2 % inflation target it’s possible the Fed’s could opt to run the economy hotter than expected by keeping interest rates lower for longer. If the market perceives any hint that the Fed will remain behind the curve, Gold could bounce considerably higher.

With that said, the market will trade very neutral ahead of Jay Powell’s testimony,

Currency Markets

The Japanese Yen

USDJPY, as expected continues to be the go-to vehicle for G-10 traders. A bit of a topsy-turvy day yesterday as what seemed to be decent dollar demand into the 9:55 Tokyo  Fix on the back of active equity markets and a dovish sounding Kuroda turned lower on huge volumes. While US yields were soggy, traders should be cognisant of exporter supply entering the picture for both month and year-end selling. Also, it looks like the market was caught a bit long and wrong at higher levels, and there was a bit of panicked rush for the exits.

Well, that’s my view on yesterday, but for today I suspect it will be the case of wait and see. But even dollar bears like me after years dealing with arguably the most dovish sitting Fed Chair of all times; it might be worth positioning for a hawkish surprise after all Powell is highly unlikely to match Yellen on the dovish scale or is he?

The Australian Dollar

The Aussie dollar turned gangbusters yesterday as Iron ore futures in Asia rallied to a 10 month high on news that steel supply curbs in China could go beyond the winter season but have come off overnight highs as the market is prepping for Powell.

The Yuan

Predictably the RMB traders have embraced the Xi’ news as the announcement removes any political uncertainty of Xi’s successor, and provides a stable political scrim.But it also guarantees that deeper market reforms remain a priority as to does the Belt and Road initiative.

The Malaysian Ringgit

The Ringgit has been trading favourable due to some front.

Oil prices continue to move higher on collapsing US inventories.

Bond and equity inflows picked up as US yields fell and risk on returned to Global equity markets

The positive tone in yesterday local bond market suggests today auction will be fully subscribed and should provide a bounce to the MYR sentiment.

Removing presidential term limits in China not only provides political continuity in the region but guarantees the continuation of the Belt and Road initiative of which Malaysia will be a huge benefactor for decades to come