Long On Optimism Short On Concession

President Trump’s NY Speech

In his speech at the Economic Club of New York, President Trump jumped out of the starting blocks by taking a swipe at Europe. Saying their barriers are worse than China’s which set the stage for another RoRo (risk-on risk-off) session as “risk-on” couldn’t stick when the President took to the soapbox and was at his rambunctious best showing few signs of tariff compromise.

While not wholly unexpected, but still, the market was hoping for a glimmer of concession. Yet, the President avoided commenting on whether a rollback in tariffs part of a Phase 1 deal is, merely saying that he will only agree to what is beneficial for US businesses. At this point, the market may have to wait until the actual signing of a deal (or not) to get confirmation on tariff rollbacks. And while the markets are still in the demilitarised trade war zone, investors remain in tariff rollback limbo.

Finally, the President said he is working on a piece of legislation called the Reciprocal Trade Act (RTA), which could be the critical trade enforcement mechanism likely giving the President sweeping power to raise thousands of tariffs at will. But unlike the Reciprocal Tariff Act signed by Franklin D Roosevelt to liberalise US trade, the new version of the RTA might be used to enforce the US administrations America first policy.

Fiscal pump?

Markets may have received a late session fiscal pump as the White House is said to be considering to campaign on a flat 15 % tax rate proposal for middle-class Americans, according to the Washington Post. The US administration is expected to talk up the US economy as election 2020 showdown kicks off. Still, a middle-class tax is not only an election sweetener but an attempt to insulate the US economy from the global slowdown further. Tax cuts when the President took office helped boost the economy and sparked a surge in share prices on Wall Street.

Oil Markets

In the absence of any real catalyst, Oil prices are trading steady ahead of the delayed US inventory report this week and after the President failed to dangle any tangible trade talk details in his NY speech. Also, the market never ceases to fret over OPEC compliance, all of which continues to weigh on bullish aspirations. However, there’s some thought that the other side of the economic air pocket is near, but it’s too soon to call “all clear”.

OPEC and oil producer alliance are reportedly prepared to maintain current crude output limits through next year and under a stricter compliance mechanism, it could help with the global rebalancing act while providing a modicum of downside insurance.  

Oil view

With oil market speculators seemingly wearing trade war emotions on the sleeve, the outcome of the Phase one trade deal could be the most significant trigger for global sentiment into 2020.

In the meantime, the market could remain captive to trade talk headlines. 

Gold market liquidation?

Gold remained on its back foot in New York trading, weighed down by persistent outflows in the paper market. The yellow metal set a fresh 13-week low early in the NY session in part driven by the enduring trade talk optimism but also fell under the weight of long position liquidation.

Bloomberg noted that on Monday 33,596 futures contracts were traded in a single 30-minute period, more than triple the average trading volume for that time of day. That’s an eye-catching 3.36 million ounces of gold! This type of liquidation goes a long way to explaining why in the absence of any aggravating factors or news developments since the break of $1480 last week, gold has continued to struggle.

Monday’s sell-off and last nights gap below $1450 has all the typical hallmarks associated with stop loss and or liquidation price action.

But gold has managed to lift off the mat as US treasury yields slipped and markets retraced an earlier test of S&P 500 3100 levels after President Trump was at is boisterous protectionist best when delivering his keynote speech at the NY Economic Club overnight.

But by no means is gold out of the woods just yet. Bond traders are relentlessly selling into any futures upticks regardless of the degree of strength. Given that the trend has been for cyclical stocks to follow rates and lead the market higher recently, the bull market conviction remains intact on trade talk hope and improving economic data expectations. This view may continue to propel stocks and yields higher, buttress oil markets and send gold lower again.

Gold view

While the long position liquidation might entice more risk-taking back into the gold market as the length in the market is much cleaner. And even the fact that the market held up well under the weight of a massive position purge suggests underlying demand for gold is still there on sell-offs. However, CTA strategies are expected to remain short-sellers, as gold could move lower facing a strong US dollar and higher US yields alone even without a nudge from a trade truce. Fed futures now show a near-zero per cent chance of another rate cut this year, according to the CME. So, while global monetary policy is gold supportive, absent a Fed policy impulse that argument is moderately watered down. 

Currency Markets

Risk markets are fretting about a possibly revised Reciprocal Trade Act that will allow the President unilateral power to levy trade tariffs as he sees fit. Also, the USTR is expected to submit its report on tariffs on Autos and parts tomorrow, which may allow the President to target specific countries according to FOX. Not much of a stretch to assume China and the European Union will top the target list

The Yen has strengthened on the risk-off narrative around the US protectionist overtones while the Yuan has moved back into a defensive posture as the tariff rollback euphoria continues to ebb which could pressure resources and could weigh on regional commodity currencies.

The overall mood music hasn’t turned negative. Still, much of the positive Asia FX (MYR & KRW) momentum is getting sapped as the US administration has not offered up a stamp of approval to tariff rollback yet.

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