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Stephen Innes
Clouds Gather Of The Trade Talks

It was a very disjointed 24 hours in global capital markets. Equity markets bounced higher when China retail resumed trading after a week-long holiday, but stocks finally ended up losing ground amid trade talk pessimism after a series escalating headlines raised severe doubts that little if anything will come of U.S.-China trade talks set to begin Thursday.

Chipmakers led the S&P 500 Index to a 1.6% loss, and Chinese companies that trade in New York sank to the lowest since mid-August as the Trump administration put visa bans on Chinese officials linked to the mass detention of Muslims in Xinjiang province.

Fed policy

Investors, however, took consolation in that the Federal Reserve will soon start growing its balance sheet again, partially in response to the recent surge to overnight lending rates in September. Overall, it’s a signal to a more-dovish Fed, which was expected and positioned for by the market.

But Chair Powell says that the three-month 157k average in payrolls is still above what the Fed considers to be the pace to keep unemployment stable versus new people entering the workforce. Suggesting the Feds are not getting bent out of sorts by a slowing in the headline payroll data, but it also suggests the Feds have benchmarked that if the three-month average were to fall below X, the Fed would likely transition from thinking of this as potentially a mid-cycle adjustment and more as a full cutting cycle. (X is believed to lie between 115-135 K headline)

Overall Chair Powell’s comments may not lead to a significant impulse for a weaker USD in the short or medium term. But given the shape of U.S. dollar forward curve, it is plausible if differentials continue to narrow throughout 2019. investors’ and corporate hedging behaviours could change which may result in a weaker USD


As negotiations between the U.K. and E.U. flounder, it seems increasingly doubtful the two sides will reach a Brexit agreement. Financial markets will now turn to whether the Prime Minister will comply with the Benn Act and request an extension to Article 50 as the blame game look set to begin again.

Trade talks

With the recent U.S. trade war escalation headlines,  whether it’s on the human right front or even the war on capital, it suggests from President Trump perspective that at this stage of the election process a trade deal this week, will not offer up a significant enough policy victory that he needs to bolster his polling numbers against the gale-force economic and political headwinds he’s facing stateside. So, it’s back on the trade war offensive. Frankly, it’s incredible how my times the markets get sucked back into the trade war calm only to end up back in trade war purgatory.

Market skews

US-China talks, Brexit, economic data and Fed policy, are offering few positive investments skews but one dominant skew that is possibly emerging is that it’s getting increasingly more challenging to weave a convincing tale to remain anything but underweight in equity markets.

The good thing for risk markets is that investors who ” once bitten twice shy” were not pricing in a substantive deal instead wisely remained hedged as suggested by Gold-backed ETFs which are now sitting at an all-time high.

Oil markets

Oil prices remain driven by trade sentiment ahead of crucial US-China trade talks due to re-start this Thursday, but recent developments in the Middle East are starting to bring supply risks back into focus. And while the market remains untroubled regarding issues on the supply-side, the deadly protests continue in Iraq as Iran is reported to be extending its influence over a broad section of the population raising concerns about the stability of production from OPEC’s second-biggest producers. Cleary this will not go unnoticed by the U.S. administration. But since they are trying to put out economic and domestic political firestorms of their own, energies may have turned focus to internal concerns.

So, with global spare capacity arguably at a shallow level in the wake of the terrorist attack and geopolitical risks to supply rising, it might be enough to keep a temporary floor under oil prices.

However, with oil traders wearing global demand worries on their sleeve the skew could remain lower as the latest headlines are skewed trade risk-negative

Clearly, the last thing oil bulls need is for both sides to walk away from this week’s trade negotiation without at minimum hashing out a skinny deal.

Gold markets

Gold-backed ETFs are now at an all-time high after $3.9 bn of inflows in September.

Collectively, ETF holdings currently stand at 2,808 tonnes, the highest level ever recorded. And this could accelerate on trade war escalation and if the Pboc continues to unwind their European negative-yielding debt in favour of the yellow metal underlining its position as one of the leading central bank buyers of the precious metal.

It is virtually impossible to predict with any degree of certainty the short-term direction for Gold in these unsettled times. Although because of trade war unsettling nature, Gold prices could surge if these trade talks end on a contentious note.

Currency markets

The market is back on Yuan watch as the local traders have backed down expectations ahead of this week trade talks suggesting the 4.20 level is coming back into focus if the early September Yuan tumult holds. If this scenario does come to fruition, it could be flat out ugly for Asia risk markets. 

So just as the Yuan led ASEAN currencies higher yesterday, it will likely lead them lower this morning.

With headline risk busting at the seams, it will likely be another fast money trading session. So, buckle in as you will probably end up staring at your screen at some point over the next 24 hours asking yourself “why why why “did I hit that button!!

Downside USDJPY optionality has predictably started to pick up as risk aversion leaks into every pocket of the G-10 currency complex But demand is not that explosive relative to the surge of headline risk which could be a result of U.S. 10 Year Treasury bond yields sitting comfortably about 1.50 % suggesting interest rates differentials haven’t yet started to sufficiently factor negatively into the dollar downside risk equation. Instead, Yen is possibly trading on headline risk aversion alone.

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

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