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Stephen Innes
Global Bond Market Yields Race Higher

Bunds tumbled triggering a sizeable sell-off in Treasuries as U.S. 10-year yields lifted 8bps to 1.64%, 2-years up 5bps to 1.59% after reports surfaced that Germany is considering the creation of a “shadow budget” to be able to increase public spending “beyond limits set by its strict national debt rules”.( Reuters)

Indeed, the prospects of fiscal stimulus in Europe’s largest economy has triggered a significant squeeze across bond markets. Moreover, while Asian equity futures are pointing to rather meek open, best to strap in as the turbulence on Tuesday will come from the Asian sovereign bond desks that will likely experience a painful day playing catch-up with their U.S. and European peers.

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While equity investor, especially those in Asia, appear more than happy to run with the risk on the squeeze on the back of the latest positive short-term developments. First, a high-level China delegation going to Washington in October; and second, more aggressive Chinese policy stimulus, they could take a step back today and watch the agony unfold the regional sovereign bond markets.

However, supporting the positive trade talk vibe, Treasury Secretary Steven Mnuchin said earlier that the U.S. and China have made “lots of progress” on talks.

Historically when the U.S. bond yields race higher, systematic and momentum equity markets strategies will pause for thought if not move into asset rotation mode. However, given the uncertainty around trade and central bank policy that continues to complicate the capital market landscape, apprehension could remain the predominant theme.

Asia FX

Despite the bad data out of China on Sunday, Asian F.X. is picking up right where it left off last week – the market is reducing USD longs in the early goings. The JPMorgan Asia Dollar Index has rebounded significantly since the start of the month, suggesting that Global investors appetite for the riskier assets is increasing, which is bolstering ASEAN currency markets.

Of course, the Yuan remains at the epicentre of the currency debate and the People’s Bank of China effort at tempering the Yuan weakness is having a soothing knock-on effect across ASEAN currencies markets. Indeed, ASEAN investors are extremely sensitive to a stronger USD which tends to act like a wrecking ball moving across Asia capital markets as a strengthening U.S. currency means higher interest costs for servicing foreign debt.

However, where the most significant benefits of a stable to stronger Yuan is playing out is that it has the calming effect of de-escalating trade war hostilities given the U.S. trade administrations focus on all things, Yuan.

Make no mistake its not just President Trump who what a stronger Yuan but the rest of the world also does.

Oil Markets

Oil markets continue to revel in the afterglow of the newly appointed Saudi Energy Minister Prince Abdulaziz bin Salman which comes on the cusp of key members from the OPEC and OPEC+ coalition will meet in Abu Dhabi this week to review the progress the supply cut agreement. All of which is stirring up hopes for additional supply cuts even more so after the International Energy Agency cut its forecast for global oil-demand growth again, blaming the trade war and now forecasting demand about 10% lower than the agency’s previous estimates.

So, despite the gloomier agency forecast, the oil market remains supported by OPEC and OPEC + ongoing compliance while bolstered by the hopes of a trade war detente. Even a return to post- G-20 trade war neutrality could be viewed in a positive light by oil markets.

Gold Markets

Gold has traded relatively poorly since news the US-China trade talks would restart, along with easing of ‘no deal’ Brexit risk as the markets have backed up to significant support levels ($ 1490-1500). As well Gold markets received little support from U.S. rates markets as UST yields moved higher overnight.

However, the one constant pillar of support continues to stand tall as trade war rumbles. China added almost 100 tons of gold to its reserves since it resumed buying in December 2018. However, the great thing about central bank purchases is it sits in the vault collecting dust for decades so little fear of the flow reversing

G -10 Currency Markets

A lot of position housekeeping ahead of the European Central Bank (ECB) policy decision taking place as the debate continues to toggle back and forth as thought begin to surface that the ECB could disappoint even more so after the Germany fiscal policy news broke which saw the EURUSD race higher

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

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