Market Sentiment has Brightened Considerably

U.S. Treasuries sold off sharply Thursday, reflecting better-than-expected August ISM non-manufacturing data and the U.S. and China agreeing to hold a new round of trade discussions in early October

ISM non-manufacturing printed 56.4 versus expectation of 54.0, and 5y and 10y yields were 12bp higher to start the morning. The positive economic data and trade calming headlines triggered a significant drubbing in the bond markets.

However, what is worrying for overextended bond market positions and other defensive strategies like Gold that were built upon recessionary fearmongering and the anticipation of a deluge of central bank easing

On the back of the surprisingly strong run of global economic data, and just as the Bank of Canada threw cold water on the prospects of aggressive rate cuts this week, the improved macro data in Europe China and the USA provides the perfect opportunity for central banks to gingerly walk back from the cliff edge of rate cut mania. Moreover, this improving economic climate allows central banks a modicum of comfort to put policy in moderation mode over the short term.

In a week filled with surprises, deescalating geopolitical tensions in Hong Kong, London and Rome, trade calming trade effect from high-level trade negotiations set for October, and with an impressive rebound in global economic data, Asia investors are heading into the weekend in a much safer investment environment than anyone’s wildest dreams.

Investors are now hoping they can take this week’s positivity over the finishing line, so fingers crossed the August US payroll report, the standout highlight today, doesn’t throw a damp towel on the proceedings.

Trade calming

There is one very good reason we should pay close attention to trade calming this time around as in the wake of the dismal manufacturing ISM reading in the U.S. this week, the economic cost of a trade war in U.S. voters eyes is rising quickly as the global manufacturing meltdown is now leaching into the U.S. manufacturing sector. Indeed, the weak manufacturing industry is not an ideal scenario for a run-up into the election year as the U.S. manufacturing sector is absolutely the chunk of the economy the President most wants to safeguard.

In this light, the trade war is no longer working for the U.S. economic interests, suggesting it could be time for the administration to change tack as the disquieting thud of covert U.S. dollar policy intervention sounds in the distance. After all, if there is one thing the Democratic left and the Trump administration agree on, it’s that the strong U.S. dollar is hurting U.S. workers.

Oil markets

Oil markets have been on a ripper the past 48 hours riding atop waves of optimism from improving global economic data and the “trade calming “effect from the scheduled US-China trade talks. Moreover, oil bulls revelled in the afterglow of EIA data that reported a solid draw to crude stocks, with refining activity at a similar pace to last week.

While the latest oil price move is a convincingly bullish, traders appear happy to take this week run of good fortune to the bank as some pre-weekend profit-taking seems to be setting in, Not to mention 24 hours in the oil pit is now an eternity in the influential realm of President Trumps Twitter account.

If there is one capital markets sector that trade war bluster hangs around longer than welcome, its the oil patch.

The apparition of weaker global demand when U.S. production is near all-time highs hangs like a constant dead weight on market sentiment, even more so as we exit peak driving season and head for Octobers scheduled refinery maintenance period where crude oil inventories tend to expand.

However, so far, the base seems well entrenched on the positive trade war signals.

Gold Markets

Gold markets took an absolute drubbing overnight as overextend positioning caught up with the reality of the massive uptick in risk sentiment triggering waves profit taking and stops as newly minted defensive strategies hurriedly ran for the exits.

Corrections are bound to happen, especially with gold fever built into the current narrative. However, given that the buying data over the last 12 months suggests an excellent chunk of long-term strategic buying is thought to be in at much lower levels, so theoretically these positions are in no immediate danger.

Long term investors remain buttressed by global central bank demand who stay in a constant state of de dollarizing while perhaps anticipating the U.S. administration to embark on a weak U.S. dollar policy

Short term trading influence.

From a risk-reward perspective overnight, with Gold market making new highs on Wednesday then long positions getting sideswiped by trade war calming headlines, selling above $ 1540 made sense while playing the odds for a stronger ADP number given that the deluge of weaker longs in the market could easily get spooked. After all, discovering and then aggressively pressing against the weaker hand is what trading is all about.

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