The Yuan Is Nothing To Yawn AtUS Equity markets are making new closing records in electrifying fashion with the likes of Apple, Tesla, and Microsoft gapping higher by the day. All of this has captured investor’s creative imaginations of what could be as the fear of missing out takes hold again.
The US-China trade deal is a massive trigger for Tech investment; China is way too big to ignore with 600 mn Chinese will be 5G enabled by 2025. China is now capable of delivering solar electricity cheaper than conventionally-generated power (and in 22% of cities, less expensive than coal-generated power). Some nine out of ten electric vehicles sold in China are Chinese-made. So, if investors are looking to invest in 5G or ESG, China is too big to ignore ergo, so is the US Tech sector.
And while the US consumer continues to hold up well, these markets are less about dentists in Topeka Kansas driving the bus and more about the computer engineers in Secaucus New Jersey running the show.
Systematic strategies have raised equity exposure to the top of its range. Equity allocations for Vol Control, CTAs, and Risk Parity are all near a historical maximum. The only other time that systematic strategy positioning was higher was in January 2018, before the broad February selloff. Vol control funds are usually the first to sell equities when vol rises. Still, with volatility having been subdued for an extended period, they would need to see a significant and sustained spike in vol for their selling thresholds to be hit.(Deutsche Bank)
Even discretionary positioning that typically follows growth indicators has moved sharply higher, suggesting these positions are running miles ahead of the economic realities. And while the data hasn’t gotten worse, at the same time, it doesn’t point to a significant reassessment of the economy.
With that said, if you look at these markets through an analytical lens, you could come up with the big loser moniker. Instead, it would be best if we listened to the story the market tells every day.
The Yuan is nothing to yawn about
The RMB is the purest and best barometers to gauge the market’s view on US-China trade tension. With the Yuan strengthening ahead of the “P1” deal signing, it’s indicating the potential for further improvement in trade relations.
Try not to get lost in the flood of positive Yuan headlines in itself; it’s the knock-on effects to the global market that a strengthening Yuan positively elicits on key risk markets
Sure, the strong Yuan is less detrimental to the US term premium. But China is by far the largest of the emerging markets, and it is the most significant weight in the Fed’s trade-weighted emerging markets currency index.
Hard to ignore the ink spilled about the potential demise of the US dollar this year, which has left many to ponder its resilience so far. Of course, a weaker dollar is most welcome to global risk, but it’s just not the EURUSD relationships that matter!
While the popular US dollar indexes concentrate (overweight) developed markets, it is the emerging market currencies where the dollar selling activity is happening. Asia FX is where the headwinds from trade have been most severe, and that is where trade war dispersion is likely to show up the most.
Hence the reason why FX traders have quietly been building their dollar shorts via FX Asia over the past few weeks and ignoring G-10 for the most part. Besides, there’s a short dollar carry in Asia vs. negative short dollar carry in DM. And with the bulk of trade war dissipation in Asia which has been triggering equity inflows, it makes a lot of sense to run dollar short in this part of the world.
The Malaysia Ringgit
Asia exporter currencies, and in particularly high yielders, have been in massive demand. Inflows have notably increased, and the Ringgit has also reaped the rewards. With low currency volatility, investors are growing yield-seeking appetite where “carry is king “should help the Ringgit.
Traders are quickly pivoting to the fundamental supply and demand scrim as the US-Iran tensions dissipate, which is now in the rear-view mirror, and yesterday’s news as far as oil trader are concerned.
So, it appears the markets near term bearish outlook on oil was merely postponed but not canceled.
Looking at overnight price action relative to other risk assets, it seems that traders believe the P1 is mostly in the price. And given that it could be a skinny deal at best, the thought is that P1my not have an immediate enough impact on the data to shift the prompt markets sufficiently enough from holding a bearish near-term narrative.
Although political tensions are ratcheting up again in Iran, Oil markets have not reacted. International political tensions with Iran affect markets because there is a threat of disruption to other economies. Iran is too small an oil producer for domestic pressures to directly be a concern for markets.
Overall, traders might be looking to trough out a floor at the moment. Acknowledging the supplies from non-OPEC producers are concerns but are dueling against ongoing production cuts by the Organization of the Petroleum Exporting Countries and its partners, which should ultimately keep the floor well entrenched.
The problem for oil traders is the lack of a definitive springboard.
Reiteration of yesterday view which continues to resonate among my oil trading colleagues
Without Iran related energy disruption, additional non-OPEC supply will comfortably exceed demand, likely placing downward pressure on prices, Although OPEC and friends have protected prices by cutting production. Still, the threat of excess oil supply continued to weigh on market structures compounded by IEA’s executive director Fathi Birol who suggested that demand growth could remain weak compared with historical levels.
Gold dropped on receding geopolitical risks and trade deal optimism that continues to push equity markets higher. With little in the way of fresh buying coming into the market, gold prices weakened. Equities are on a tear, so expect gold bulls to be put to the test today.
Although the dollar is substantially weakening against EM, For G-10 persistently low volatility, which means the positive carry offered by holding the USD against the rest of G10 remains attractive, the greenback has remained stable, which is also weighing on gold sentiment.
This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader