Markets Remain In Waiting To Trade Mode

While the HK bill headlines are far from signaling that the doors always open, they are. The WSJ reports that the doors are open to a deal suggesting that China still wants a trade deal to mitigate pressure on its rapidly deteriorating economy.

China did warn that meddling in Hong Kong could hurt ties and cooperation, but traders resisted the temptation to go into risk-off mode. In the bigger picture, the details of this bill are relatively tame -sanctions against human rights violators isn’t new. Not to mention now that its law, the White House has flexibility as in implementation.

Also, as we saw with Huawei, the US and China have, in the past, been able to compartmentalize issues from the broader phase one trade negotiations.

Of course, Hong Kong is exponentially more significant than Huawei. But China also must be realistic, realizing that pressing back against global support of the HK protest, not only could they lose big time in the court of public opinion, but it could boost President Trump’s polling numbers. I’m not suggesting the bill a storm in a teapot, but the market has taken this news well in stride. While it could just be another example of the way, the market has become less sensitive to trade headlines. But this too could say a lot about the better run of US economic data that is putting to rest the Armageddon prophecies

The bulldozer

Traders should be more concerned about Trump’s bulldozer style of negotiation when the trade meeting occurs. Not only does he tend to browbeat, but he always marches crisis to the top of the agenda before backpedaling and forever leaving markets in the lurch.

For today, I would expect the market to trade risk agnostic until traders can assuredly connect the dots on the HK bill’s impact on trade negotiations.

Oil Markets

The trade deal and its positive impact on global growth remain at the fore, but there’s still several issues impacting oil prices.

At least some clarity is starting to emerge surrounding the OPEC meeting where all parties concerned will attempt to enforce stricter compliance with the existing agreement.

Supply/demand fundamentals suggest more stringent compliance could be enough to bring the market close to balance in 2020, although deeper cuts are probably needed to prevent sentiment from turning more negative. Holding off on deeper provides a significant bearish tail risk in the absence of a rollback in a good chunk of US tariffs and will keep oil bears interest in the game.

Although Oil production has resumed, serving as a stark reminder of the potential geopolitical risks to oil supply, El Feel production) was halted by Libya’s NOC following airstrikes used to disperse militia groups that had been massing close by.

The Baker Hughes rig count reported a drop of 3 rigs for the quiet Thanksgiving week, and with this week’s economic ‘feel good ‘upward revisions to US GDP and the generally improved economic mood music much, ultimately, it should lead to improved demand.

However, unforeseen headlines risk, dwindling liquidity into the weekend, and the fact every little bearish inference starts to get magnified three folds when viewed through the potential trade deal negative HK bill lens. And given holiday conditions, it might bring about a bit of randomness amid choppy liquidity Which might suggest risk-neutral is an excellent spot to be ahead of the weekend as there a ton of headline risk that could upset the apple cart.

Gold markets

The markets bounce off $ 1450 this week, and the market seems to be respecting that level as the market appears to be gingerly building longs ahead of that level. Which, of course, could trigger another significant sell-off if the level breaks like what happened with the critical $ 1480 level earlier this month.

Its been tough to get a clear handle on flows this week as most desks are reporting low speculator volumes, although with the constant sellers emerging on upticks to $1460, it suggests bigger trading desks are preferring to speculate from the short side while jobbers remain bid on dips.

A bit surprised there wasn’t a sharper move lower on the upward revisions to US Q4 GDP as several big houses revised their projections higher as well. But this is likely attributable to the Fed’s shift in policy stance, which is preventing fixed income yields from getting too far ahead of themselves.

Therefore, next week’s US economic data is enormous. So, with all the data that matters before Christmas getting released next week, especially the US ISM and NFP, it could be a telltale week for gold markets heading into year-end.

Last week, the Markit PMI was released, indicating a pickup n US manufacturing. The magnitude of which was better than expected. If we get a couple of decent follow-up prints next week, it will be difficult for the doom and gloomers to articulate an Armageddon stance on the US economy.

It would likely knock gold lower as investors start looking at reflation trades for 2020 through “steepeners”; with central banks anchoring front ends and growth expectations recovering.

Currency Markets

To a more significant degree, the trade talk optimism is papering over the economic cracks in China as so far, risk asset continues to turn a blind eye to the deteriorating economic landscape.

The market still feels a bit squeezy, but there’s a risk-on tone that is trying to climb out of its 24-hour HK bill-imposed cocoon.

The USDMYR is trading very much correlated to the Yuan as local traders continue to wear trade talk emotions on their sleeve. In the meantime, traders will key on equity and bond flows while cautiously biding time ahead of the next trade headline. Traders may keep ASEAN currency risk very much anchored to flat ahead of the weekend.

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