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Stephen Innes

In breaking news and of little surprise to anyone, the US senate has acquitted President Trump on impeachment change, but the markets don’t care.

The markets are not only holding up, but they’re going up!!! And to suggest risk appetite continues to “creep” back in favor, might be the biggest understatement of the week as equity markets just burst higher.

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It was another positive day in US equities Wednesday, S&P up a little over 1% heading towards the close, and again with European stocks up a similar amount. US treasury yields have lifted another 5bps to 1.65%. China’s Shanghai composite raised 1.1%. Most notably, the oil market – previously more reluctant than others to shrug off coronavirus concerns – saw prices lift 2.3%. Sentiment had been supported by reports in Chinese media that a cure for the coronavirus might soon be developed. That news was later played down by the WHO.

But any progress on treatment may also be a comfort to investors that the longer-term secondary effects of the outbreak are contained.

Time to focus on the data 

Data has been of secondary importance to markets recently, but as non-farm payroll approaches, perhaps that will change.

Last night’s US ADP employment report was stronger than expected, rising 291,000 in January, supported by a “significant boost” from mild winter weather and is the strongest since May 2015.

While the non-manufacturing ISM also beat expectations, with the headline outcome the best since August and suggests the underlying trend in US growth had been excellent at least before worries about the impact of coronavirus began to set.

But it’s the super-strong US January ADP print serves as a sturdy reminder that as much as the coronavirus is impacting the real economies in Asia, the US is relatively insulated.

Oil Markets

Oil markets have been in the spotlight hit by concerns over a slowdown in demand from the coronavirus. While discussion over whether OPEC make further production, cuts have provided support to prices

OPEC + emergency meeting

Oil markets are rebounding from the 5-day slide as investors turn optimistic that OPEC+ officials will deliver an appropriate response to alleviate current concerns stemming from the spread of the coronavirus. Saudi Arabia is pushing OPEC+ hard for cuts of at least 500kb/d, with some reports suggesting a reduction of double that level is also being considered. Most of OPEC seems to be on board, but there are conflicting reports in the press about Russian support for additional cuts. But we’ve seen this all before, and at this time, there is little reason for the market to suspect Russia will break from the usual pattern of flip-flopping until the last minute but ultimately agreeing to cut.

However, markets are trading well off the intraday highs as more oil price downgrades are expected to come down the pipe due to ruinous demand effect the virus is having on Chinese consumption. As such, for a more exaggerated positive price extension to happen, and to make a more significant dent in this year’s eye-catching 20 % price decline, a deeper than consensus OPEC + production cut would likely be needed as a 500kb/d my just paper of the cracks amid the markets broader appetite to run with the bearish interpretation of the coronavirus knock-on demand effects.

In the unlikely event that Russia doesn’t play ball, the recovering sentiment would take a wicked U-turn.

US DOE inventory report  

Crude inventory build above consensus but below API, 5-year average
Crude stocks rose by 3.4Mb, bearish vs. consensus for a 2.8Mb build, but bullish vs. the 4.2Mb draw reported by the API yesterday and the 5-year average of +6.2Mb. However, the key for the sentiment was the build was similar in magnitude to last weeks with underlying drivers little changed.

US economic data 

While the main event of the week will be the US employment report (Friday), oil investors took solace in a Super-strong US January ADP Employment. The robust jobs data not only suggests that US consumer consumption will remain sturdy in the is the world’s biggest oil consumer, but most importantly, the US market has been relatively insulated from the coronavirus impact.

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Gold markets

Gold is showing its resilience after the latest sell-off despite robust jobs data, and as equity and USD rallies; may remain supported as other risks resurface, and the full economic impact of the virus is realized in the next series of ASEAN data releases.

Supported yes but cause to put on the rally caps? NO 

The USD gained further on the release of the ADP national jobs report, which showed that US private sector employment increased by 291,000 jobs in January, its highest rate since May 2015. Gold demand sucked up this news even as the US equity markets soared to record highs. A positive for gold was the 4% jump in oil prices, which is stoking reflationary concerns.

More detriment to the gold price outlook has been the latest round of Fed speak, and as the Fed’s more optimistic view than the current “Wall street” outlook continues to get confirmed by robust US economic data.

While there was a slight dovish tilt to the Fed meeting last week, it’s not been backed up by speakers since. Both Bostic and Clarida have expressed some reluctance to cut rates further in recent sessions. While Mary Daly, in a CNBC interview, says that she doesn’t see a material impact from the coronavirus in the US. This is consistent with the January sentiment survey releases as well as the relatively limited amount of coronavirus cases in the US. All of which confirms the market’s current lean that the coronavirus will leave a relatively small footprint globally. So, assuming implications from the Coronavirus shock prove temporary, the Fed’s steady rates narrative should hold, which is supportive but not necessarily bullish for gold.

Gold remains precariously perched several dollars above the $1550 level heading into tomorrow, possibly make or break day for near term sentiment with the critical US jobs report on tap. And given the list of risk on inferences, the skew could remain lower as investors jockey for position ahead of tomorrow data.

G-10 FX

The EUR weakened against the USD. ECB economist Philip Lane said inflation looks set to move back towards target. In an interview with the Financial Times, he made the case that wage growth and a tightening labor market would push inflation up. E

The USD gained further on the release of the ADP national jobs report, which showed that US private sector employment increased by 291,000 jobs in January, its highest rate since May 2015. And with US equities bursting higher, US exceptionalism comes back to the fore

GBPUSD went sharply lower overnight after a Bloomberg headline indicating the EU has aimed at the City of London with a post-Brexit MIFID rewrite. As the prospect of regulatory gridlock continues to weigh on financial centers

Asia FX (The Ringgit)

Robust US economic data lessens the likely hood of a Fed cut and supporting the Greenback, which is harmful to ASIA FX.

None the fewer markets continue to work in non-parallel universes.

While Asia economists continue to discuss the gloom ridden impact the virus will have on China GDP, global equity markets do precisely what they have done for the last year. Which is shrug, ignore the fundamentals while investors race to put money to work.

But it’s a bit different back here at home( South East Asia), While it’s hard to ignore that that global risk markets are starting to prices in peak virus fear, however, economies and their currencies and stock markets with keen trade linkages into China like Malaysia ( Ringgit & KLCI) may continue to struggle through the early part of the year as the doomy knock-on effect from the China economic slow down hit home.

Short term pain for long term gain?? 

The Ringgit should more than makeup for lost ground when China’s pent up demand post virus economic recovery kicks in. So I don’t think we will have a repeat of August 2019 when the Ringgit weakened above 4.20, but I think its too soon in the game to say the Ringgit it out of the wood just yet as we should expect a reality check to set in when the end of month economic data rolls in which should capture the local effects the virus has had on export. Circle February 21, as the critical global bellwether South Korea, 20-day export data is released.

 

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