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Stephen Innes
Divorce European Style

Pro-Democracy Bill

Despite the Phase 1 trade deal, US-China tensions still smoke in the wake of the U.S. House of Representatives passing legislation in support of the pro-democracy protesters in Hong Kong. A move China’s foreign ministry said they would counter with “strong” measures. While this news doesn’t precisely provide excellent mood music, it’s not being viewed by markets as a US-China deal stopper even it moves through the U.S. senate uncontested.

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Divorce European Style

The Pound is back on the high horse this morning as European leaders ready to gather in Brussels to cement a deal that will set in motion the U.K.’s amicable divorce with the European Union; this could be the ‘white smoke’ moment where we see the outline of an agreement and can judge the likelihood of domestic ratification.

If an outline of a Brexit deal is announced, the next question is, can it pass in an ‘indicative’ (non-binding) vote as early as Saturday? The position of the DUP will be crucial.

Oil markets

Like broader markets, oil did take some succour from the latest positive steam of Brexit news, but prices buckled under the weight of a potentially overstocked U.S. crude markets after the American Petroleum Institute reported a 10.5 million-barrel build in oil stocks, which if confirmed by Thursday’s government data it would be most enormous U.S. inventory swell since February 2017

For oil bulls, the report was probably seen as one of those in your face eye-watering data prints putting them immediately back on the defensive as an enormous U.S. inventory build hits at precisely the wrong moment when the markets are overly focused on demand devastation due to the latest run of weaker global economic data.

Brexit headline risk aside. Amid the weakening global growth outlook and the copious crude supplies in the world’s largest economy, it suggests traders may assume a defensive posture in today’s Asia session likely not wanting to overcommit on the downside. Instead, they may wait for more clarity from the more definitive EIA report to confirm the inventory supply deluge while considering a possible sentiment bounce if a Brexit relief rally unfolds

Still, OPEC Sec-Gen Barkindo remarks at an industry conference in India that the producer group intended to maintain market balance beyond 2020 have been regarded as supportive.


Gold Markets

Gold markets rose following disappointing September U.S. retail sales data as the data print increased the odds of a Fed rate cut at the end of October. But with that probability already well priced into the fundamental equation, there was little follow-through higher during the rest of the U.S. session.

Treasuries ended higher Wednesday led by front-end and belly of the curve following weaker-than-expected U.S. September retail sales data, but in a similar fashion to gold markets gains were pared during U.S. trading as a Brexit deal Thursday appeared possible.

Gold traders may continue to critique their positions against U.S. bond yields while looking for policy clues from Fed speak —most importantly, Vice Chair Clarida, who will have the last word before the Fed’s blackout period begins when he speaks on Friday about the economic and monetary policy outlook. Mind you, the deterioration in forward-looking sentiment data and confirmed by the retailer’s sales devastation does auger well or another 25-basis point easing at the end of this month.

According to my sources at the worlds largest Gold trading banks, markets have been relatively quiet, with considerably less buying than the current average over the previous 2-3 week. And likewise, in the retail space demand wanes as lower gold appetites might be a result of improving Brexit news flows and phase one of the US-China trade talks.

Currency markets

Today may follow a similar pattern to yesterday – long periods of inactivity punctuated by a sudden burst of trading catching markets off guard. Forex traders may continue to take clues from the fixed income markets and given that Bunds and Gilts were the focus of attention it suggests traders will remain heavily vested in E.U. and U.K. headlines around Brexit.

The Euro

The Euro caught a tailwind from both Brexit news flows and reports that Germany’s CDU party may be prepared to consider fiscal stimulus if the economy worsens, this should move the E.U. bond curve steeper and offers support to the Euro. But it also could spur capital inflows into E.U. stock markets as this would be viewed supportive for equity markets also

Japanese Yen

The “Risk on” environment around Brexit and Phase one trade talks continues to buttress USDJPY as trader remains favourably positioning for a possible Brexit bounce in global equity markets.

Australian dollar

With the RBA move into unchartered territory still clamouring for column inches, the reality of the global “risk-on” environment finally provided a fillip to the Aussie dollar overnight as trader position risk assets accordingly ahead of a possible equity market sentiment bounce around an amicable Brexit divorce.


The Yuan remains a bit of an enigma and while much ink has been spilt about how and why scepticism might still be warranted where now a common theme seems to be that the global economic outlook won’t improve even if there’s a partial deal.

But what might be essential for currency markets and particularly ASEAN currencies is it’s clear we have entered a phase of de-escalation with previously agreed components ambitiously re-tailored to serve both parties current interests and most pressing needs providing a suitable background to build on stage 2 and 3 of the agreement although arguably these steps could be rolled out at a snails pace.


Currently, regional higher yields and quasi high yielders like the Ringgit are now competing for global bond flows in a market where at times investors are rushing to sell fixed-income assets at all cost and duration is not the most pressing need. Not the best environment for riskier high yielding debt.

Also, oil prices remain very depressed, although not a huge factor these days for the multi-faceted Malaysian economy but it doesn’t help Ringgits optics either.

The local unit was then sideswiped, as was most of Asia, by yesterday’s messy local currency market open after the U.S. House passed the Hong Kong pro-democracy bill which triggered a sell-off in the Yuan. Unfortunately, this negative mood music continues playing in the background

All of which suggests this current weakness in ASEAN markets has little if anything to do with the global growth outlook but instead its a function of ASEAN currency traders who continue to wear headline emotions on their sleeve.

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

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