The Carnage Has Abated For Now.

US non-manufacturing ISM at 52.6 disappointed the market again, after the manufacturing ISM miss on Tuesday. The service employment index dropped to 50.4, adding to concerns about Friday’s payrolls report. While the fall is broadly in line with markets expectations, a quicker slowing in economic activity will put another brick in the Fed’s wall of worries about business confidence and investment and may trigger a significant policy response.
Stephen Innes
The Carnage Has Abated For Now.

It was quite a bounce on the S&P 500 after having dropped 35 points on the lacklustre ISM print, and it’s put all that and more back on again to trade higher on the day.

Is bad news good news still?  Indeed, that does appear to be the case after the markets fully priced in a Fed rate cut in October and price in  December suggesting that its monetary policy that continues to remain one of the essential drivers of investors sentiment.

On FX, the signal from the data is somewhat ambiguous; the weaker US growth could hurt USD against the safe havens such as JPY, but not against ASEAN EM and commodity exporter currencies. As such, an argument could be made that USDJPY is trading too high while USDKRW, the best proxy to express a weaker global growth bias is still trading too low. With that said, today could be more about pre-NFP housekeeping and pre-weekend position squaring so Asia Forex traders may have less of an axe to grind today.

However, sentiment remains weak and any weakness will be seized upon as further examples of a slowdown or recession but keep in mind the downward revision from previous high watermarks could be the most eye-catching and have been a consistent feature of the “ establishments” critical employment report, The  US Non-Farm Payrolls

Trade War Carousel

The  US-China trade meeting remains the critical unknown variable, and perhaps the most prominent toggle for risk sentiment.

The market continues to hope for the best while preparing for the worst that at minimum, the economic carnage inflicted by the US-China trade war will be enough to bring to fruition a partial trade deal. Where there’s a will, there is a way and as such, hope springs eternal.

While the market is still a bit shaky from the US tariffs on EU products on the back of the Airbus row, investors can take some comfort that one of the US’s biggest trading partners Japan announced today that a US-Japan trade deal is set to take effect in January

The EU tariffs are set to take effect October 18 which gives both sides a small window to negotiate, but with President Trump holding back on implementing tariffs on EU automobiles sadly for Germany and their vast automotive export complex, the worst might be  yet to come as the US tariff carousel moves into to full motion across ” the pond”

Oil markets

Concerns about global oil demand are rising, and next week’s US-China trade talks, the significant X factor, will be particularly important, given the sharp drop in the oil price over the last week. However, sentiment remains weak and any economic weakness will be seized upon by fast money traders suggesting the near term catalysts will likely be a function of oil demand

However, after Saudi Arabia quick response to the terrorist attack suggests that they have used up much of their spare capacity cushion to satisfy international export demands does leave global supplies a tad vulnerable to addition disruptions.

Now we have a sudden eruption of protest in Iraq, and the ensuing clampdown by security forces have brought some of this supply and geopolitical risk back into play. While the populist protests have not spread to Iraq’s primary oil infrastructure in and around Basra, there is no guarantee that the anti-corruption fervour won’t next set sights on Iraq oil fields.

Gold Markets

Gold punched above the USD1,505/oz on growth US economic concerns which implies lower US interest rates and that precisely what triggered the surge in Gold demand. In this context,Gold should remain well supported.

Gold traded in a narrow range in Asia and Europe yesterday but popped higher in early US action. The catalyst was disappointing US economic data which intensified concerns of a slowdown.

However, profit-taking was swift when the US equity markets rebounded just as quickly. After this week’s shell shocking market purge, gold traders may be just as content to ” take the money and run ” on rallies thinking that the weak US data and Fed comments are good short term impulses but remain incredibly cautious about a possible interim US-China trade deal.

However, one look at the resilient US equity market might be enough for investors to keep near term long gold position light.

Physical demand remains weak, suggesting these recent up and down moves are more about leverage paper gold impulse which sadly can quickly trigger takedowns that may scare ” weak hands” out of their positions.

Currency Markets


Despite the lousy EU data and the revision lower on the latest round of EU services PMI’s, the EURUSD remains supported by negative risk sentiment.

However, traders appear content paying the current short-term Euro range goalposts 1.0975-1.1075 as it might be too early to call for full bore dollar weakness.

Although the Fed easing narrative is a primary condition for dollar weakness, a 25-basis cut in October and even a follow-up cut in December might not lessen the USD yield advantage significantly as other Central Banks could quickly follow suit.

So, until there’s evidence of the EU economic data improving, traders may still prefer selling EURUSD on moves to 1.1075-1.1100, but on a break above 1.1125-50, that strategy might then come into question.

Much is riding on tonight NFP report so saddle up it could be a busy night for the Forex cowboys.


The market remains happy to sell USDJPY on rallies given the faltering equity markets; However, since the market has been selling USDJPY all week, traders might be content buying on dips ahead of the US employment report to improve their average on short position trade.

Commodity Complex

Commodity currencies may continue to fare poorly if oil prices continue to slide, which suggest both the CAD may continue to struggle.

Asia EM

Traders have been booking some profit in long USDAsia positions with the USD trading broadly weaker vs G-10 as the US economy is showing signs of faltering. However, nascent signs of a more fragile US economy are no cause for celebration for local economies which have massive export exposure into the US markets.

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

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