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Stephen Innes
Asia Markets Take a Respite

US markets

U.S. equity markets rallied to all-time highs after the trade; however, prices closed well off the intraday high-water marks as an economic reality check set in as global manufacturing data slowed noticeably.

So, despite the discernible dovish shift in the central bank’s narrative, investors ‘don’t want to run too far ahead of economic realities even more so with the soft-pedalling nature of the G20 trade detente.

They are spurred on by President Donald Trump agreeing to ease a ban on American companies supplying Chinese tech giant Huawei. Wall Street investors did stampede into tech shares.

Investors are positioning for an enormous lift to U.S. tech sector exports, not to mention the massive wave of front-loading orders as China will take this opportunity to ramp up on inventories in case the President has a change of heart.

With the positive results from the G20 summit triggering a significant risk-on move, but the fear is from here, is that the Fed may not go 50bp so. Friday’s US employment report will be critical.

With the market focused on every nugget of Fed speak Fed Vice Chair Clarida was in focus on Monday. But there’s nothing new – just a repeat of previous comments on the framework review and didn’t provide any comments on the outlook for monetary policy.

Any while impossible to quantify the Fed’s exercise in verbal gymnastics, but something we commented on two weeks ago after a BTV interview post FOMC and I still feel the same after reading yesterday’s transcript. Is that Vice Chair Clarida doesn’t sound like a policymaker in a rush to cut interest rates, certainly not by 50 bp anyway?

I think the Vice Chair holds the consensus view for Fed Policy, so his silence on policy matters suggest the short end will continue to slide back towards a 25 bp cut ahead of Friday’s most critical US Payroll report.

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Oil Markets

After gushing higher at yesterday’s open, oil prices laggard in the N.Y. session, even after OPEC members ratified their decision to maintain supply discipline by nine months.

But with the cat out of the bag on Saturday, the move had already been priced in into the equation during the post-G20 opening salvo. So, OPEC + confirmation didn’t provide a new catalyst but instead left oil trader debating Russia’s increasing role in controlling oil markets.

But then traders found themselves running too far ahead of the economic realities after a swath of disappointing manufacturing reports from the U.S., China and Europe provided a not too subtle reminder that the outlook for global growth remains quite harmful to risk sentiment.

So, oil prices pared gains after worries about oversupply persisted, sliding back from an early rally as OPEC extended supply cuts until March 2020.

And while I believe the ‘weekend’s display of solidarity between Saudi Arabia and Russia shows “ROPEC” is here to stay. Sure, it’s all about the bottom line revenue for OPEC+, but given the relative “break-evens” between Russia and Saudi Arabia production, the Kingdom is much more incentivised to keep oil prices high.

But this also suggests that going forward Russia could have OPEC over the proverbial barrel especially when it comes to sweetening the pot to keep the Russian Oil conglomerates happy who have been most vocal about breaking the agreement. Which begs the question, how does the rest of OPEC feel about Russia influence?

Also, I think trader is in a quandary trying to figure out the U.S. administrations stance on Iran post G-20 as one of my critical takeaways from G-20 is that it seems the national security hawks ‘don’t have the Presidents ear after all, especially as President Trump turns to focus on his election 2020 campaign. The President even extended an olive branch to Turkey, and with China likely to step up diplomatic efforts in the region as part of a g20 concessions, could we be in for a gradual escalation in middle tension and a subtle unwinding of risk premia? It’s something worth keeping an eye one.

Finally, the U.S. dollar surged by the most in 3 1/2 months on Monday, naturally weighing on the appeal of greenback-denominated commodities.

Gold Markets

Gold plummets by as much as 2% on Monday as the US dollar rallied amid a stampede of investors into to higher-risk assets post G-20 agreement

Also weighing on gold sentiment is that the short end of the US rate curve is shifting back shift back toward a 25 bp cut in July vs 50 bp ahead of the US payroll data Friday. If this shift intensifies, we could press lower.

The Gold sell-off has been quite intense, but we are still clear of the enormous $1375 pivot zone and with the Euro the clearest bellwether for dollar sentiment we think a move below EURUSD 1.1250 Gold market is in for massive collisions with crucial support levels.

The Euro

The battle of the doves continues to play out on the EURUSD while the manufacturing data wasn’t high on either side of the pond the risk-friendly environment post-G-20 has many G-10 traders recalculating their US rate cut probabilities as there has been decided shift overnight away for 50 bp lock in July.

But something that continually rings in the back of my head and probably one of the biggest pushbacks against the short USD view, if you don’t buy USD and invest in US assets what assets are you going to buy instead???

The 200dma continues to provide one of the clearest pivots and sentiment signals for this battle of the doves.

The Ringgit

While the trade truce could be temporary, I feel much more constructive about Asia EM Fx than I do say the Euro, but the shift back toward a 25 bp Fed cut July from 50 bp, it has taken a bit of wind out of the Ringgit sails. Also, the market continues to lean towards the position that the US will escalate trade tensions again, but the longer the cease-fire hold, the more positive this could be for risk sentiment suggesting, dare I say “, but this time it’s different.”. The concession on Huawei was huge and continues to support risk sentiment.

Despite the repricing lower in the July Fed rate cure probability, I’m running against the grain on this one because US inflation expectations are dangerously close to spiralling downward, I think the Fed moves 50bp in July for no other reason than to ignite the inflationary flames.

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