A turning Point??

While a drop in geopolitical risk premium comes as a welcome relief, but with the omnipresent trade war clouds looming ominously over the market threatening to come thundering down at any time, the air remains thick with caution. Investors continue to walk the thin line between expectations of central bank policy easing and a weakening economic environment.

Yesterday was another example of how the narrative toggles from one extreme to the other, especially in equity markets. Yesterday morning we walked on all ready for bear and more doom and gloom, but by lunchtime, the mood swung back the other way.

Hong Kong Chief Executive Carrie Lam announced a formal withdrawal of the contentious extradition bill and then it was time to don the global rally caps as risk sentiment was given a further boost after the UK government failed in a bid to call a general election for 15 October.

The problem investors are facing is that every day seems to trigger a so-called turning point. However, with the manufacturing sinkhole forming in the wake disappointing ISM manufacturing and with trade war hanging like an anvil around the markets neck, it might be too early to sound the all-clear siren.

Hong Kong Chief Executive Carrie Lam’s withdrawal of the controversial extradition bill saw a massive move in local stocks. However, somehow it doesn’t feel like we are out of the woods just yet as Hong Kongers may not be ready to cede their pro-democracy movement any time soon.

Yuan Watch

While the Peoples Bank of China continues beefing up the countercyclical mechanism to defend against capital outflows, the Yuan has been under much less pressure since the weak US ISM print that has seen the US dollar trade off the back foot since. Traders reduced long USDCNH positions which immediately had a soothing effect on ASEAN markets as it reduces the chance of currency influenced capital outflows.

Oil Markets

Concerns regarding tariffs and trade policy uncertainty remain. But the fast-paced positive developments on the geopolitical landscape and better than expected global macro data out of China and Europe set the stage for a scintillating oil market rally that was boosted when the US announced a new section of Iran and Russia said it would tighten it’s OPEC compliance commitment by trimming production in September.

While the surprisingly positive shift in Europe and China economic data has most welcomingly walked back some of the more bellicose economic doom and gloom scenarios, the Russian compliance is also a significant boost to sentiment as it puts to rest any thought that a fissure is building in the OPEC and friends supply cut agreement.

However, oil bulls can’t seemingly catch a break after the rally sapping surprising build in The American Petroleum Institute oil inventory survey has throttled WTI upward momentum dead in its tracks.

Gold Markets

Gold markets defied gravity overnight homing in on significant topside resistance levels despite a steadily improving global risk environment. The oddity is that gold surged even though both the geopolitical and macroeconomic environments were improving.

The weaker dollar and signs the tariffs are starting to leak into the US economic data via the more inadequate US ISM data may have some gold investors agreeing with St. Louis Fed President Bullard who said in a speech on Tuesday that a 50bp rate cut would align the Fed with market expectations. He said the Fed funds rate was too high and that it would be better to get the policy in the right place in one step, rather than in small increments. Keeping in mind Bullard was a voice of policy moderation last policy meeting, suggesting that the recent trade war escalation is changing a couple of opinions on the FOMC committee.

Currency Markets

The Malaysian Ringgit

The Malaysian Trade data continues to defy the regional trade trend coming in above water and much better than market consensus.

However, with external factors driving the bus, precisely global risk sentiment and the Yuan, there has been less focus on domestic concerns.

None the less, with pressure tentatively off the Yuan, Oil prices higher and surprisingly robust trade data, the Ringgit is trading better this morning
The Euro

The duck hook in US ISM numbers continues to ease downward pressure on EUR/USD, which then found more support from better macro data out of China and on the continent.

Currency markets are revelling in the afterglow of the geopolitical relief rally; and with tariffs effect leaking into the US data, the US continues to weaken

Signals from ECB members hinting that markets might be pricing too much for next week’s meeting could also be wear on dollar demand.

The Japanese Yen

Rather slow once again, and the move higher in risk hasn’t done too much to bolster USDJPY as the constant risk overhang has trader treading cautiously in the Yen space.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader