Trade Talk Doubts Surface

While global equity markets sentiment continues to be the major casualty of escalating trade tensions, there’s a staggering amount of cross-asset collateral damage due to the negative footprint each escalation leaves.

USDCNH continued to press higher overnight zeroing in on the critical USDCNH 7.20 level on the “no deal in sight” narrative.

The Tariff turbulence and the uptick in risk-off sentiment buttressed and helped the yellow metal rise overnight as the S&P sagged below the psychological 2900 level.

Moreover, oil markets continue to struggle under the weight escalating trade tensions.

Yuan watch

For the most part, price action suggests the mood is unchanged, as Interbank traders continue to buy USDCNH dips likely positioning for a move to 7.25-7.40 as at this stage trade war appears to have no end in sight.

Also, over the weekend, however, Vice Premier Liu He chaired a meeting of the Financial Stability and Development Committee, Chinas top financial regulatory body. Also, representatives of the Peoples Bank of China and the Ministry of Finance attended signalling to the markets there could be some policy easing in the offing.

Over the short term, lower domestic interest rates could negatively impact the Yuan.

The weaker Yuan will continue to have a domino effect on other ASEAN currencies, but once Yuan weakness becomes more sensitive to slower growth in China, this is where the cascading force pulls down commodity currencies and the Euro since it has high FX beta to global growth.

The Malaysian Ringgit

Local Traders’ are trying to position currency risk ahead of Malaysia’s trade numbers on Wednesday but the omnipresent overhang from negative trade war sentiment amidst another dramatic Yuan sell-off overnight, suggests the Ringgit sentiment will continue to be influenced by external concerns, particularly the weaker Yuan.

Oil markets

Oil prices continue to struggle as demand concerns weight heavily on near term sentiment as the market remains wary of turning positive while the trade overhang persists.

Hurricane Dorian looks set to leave a swath of carnage along the U.S. East Coast which could dampen gasoline and diesel demand over the near term which too will weigh negatively on oil prices.

It’s oil products that are driving the bus since the Hurricane will not impact the Gulf Coast U.S. oil production or refining.

However, mother nature can be predictably unpredictable, so sentiment could shift on a dime if the forecast or hurricane path changes.

Gold markets

Gold markets continue to move reactively within the broader range to the ebb and flows of US-China trade headlines, but prices are struggling to make significant headway above 1530 so far this week as the boisterous US dollar is likely keeping gold investors honest

Gold is most closely tied to the underlying movement of the US dollar and real interest rates, and these will continue to be the critical factors in gold’s reaction function over the medium term.

The markets have fully priced in a Fed cut in September. The CME FedWatch Tool is showing 95% + probability for a 25bp reduction on September 18, but gold traders will be paying attention to Fed speak this week especially dissenter Rosengren who speaks on Wednesday at 5 PM EST and has been an advocate of holding rates steady. Market participants will be particularly curious to see just how committed his hawkish views are considering the further escalation of trade tensions with China.

With little signs of a looming US recession, there has been some concern amongst gold traders; this could trigger more dissenting votes in the Federal Open Market Committee.

Europe

Eurozone manufacturing activity contracted for a seventh month in August, which bolsters expectations for European Central Bank to deliver a comprehensive easing package on Sept. 12. However, it was German August Purchasing Managers Index which made for a graphic read as shockingly the manufacturing downturn seems to be accelerating

The Euro

The Euro continues to fall under pressure as traders now focus on economic growth differentials which have EURUSD FX flows skewed to the downside ahead of the European Central Bank policy meeting on September 12

This article was written by Stephen Innes, Managing Partner at VM markets LLC