Trade War Risk and Central Bank Easing Vie for Top Billing

While the window on pre-G20 negotiations was closing quickly, President Trump, in a hellacious fashion, forcefully slammed it shut when he suggested a deal will only occur on his terms. While there was only a sliver of hope a deal would get done before the G-20, his comments hardly suggest he’s heading to Osaka in the most agreeable spirits.

Still, investors are clinging on to hope buttressed by significant central bank backstops, that the  G-20 can somehow pull a  rabbit out of the hat and as such don’t want to be caught short if the event produces a deal. But with 2 significant competing narratives ( Global easing vs Trade War) taking centre stage it would not surprise if the market begins to consolidate with a weaker bias as equity traders will get super fidgety as we near the G20 event horizon.

CPI figures in China and the US will be the primary market focus today

Oil markets

In the absence of new catalysts, Oil markets continue to struggle for traction. Overproduction continues to haunt traders as despite a fall in the Baker Hughes rig count last week, US inventories continue to swell The API said the US crude inventories increased a whopping 4.85 million barrels well above analysts forecast of a 1 million barrel decline while Cushing, the major WTI storage facility ballooned by 2.37 million barrels. This data print will likely cause a sleepless night for oil bulls as if the EIA data confirms, we could see a more significant cut and run on WTI oil positioning.  Indeed just the thought of overproduction in this deteriorating global economic environment suggests unless OPEC and allies can bridge the agreement gap markets will head south in a hurry.

Gold Markets

Gold recovered from early losses as USD pared recent gains. Gold prices steadied after bumpy yesterday session. Yesterday’s news report that China would loosen restrictions on how proceeds from exclusive bond sales are spent triggered a significant rally in global equities which diminished gold risk related appeal but then also triggered a wave of stops when the critical $1325 level breached.

Overall, I attribute the bounce in gold to some nascent signs of equity weakness, a slightly weaker USD and lower US yield.

While gold prices remain buttressed by rate cut fever and trade risks, in the absence of a decent sell-off in equity markets, gold prices are in need of a short-term catalyst to push higher so we could see markets start to consolidate between the $1320-$1330 range near term.

Currency Markets

Since President Trump is in a happier place about lower oil prices, he’s now turned his attention to currency markets and in particular the ” undervalued “Euro. And while his currency coercion appeared to have temporarily dampened the USD enthusiasm, but traders are currently predisposed to trim rather than add to long US dollar positioning particularly against the Euro which in my view will continue to limit any thoughts of USD gains ahead of G-20.

The Malaysian Ringgit

It’s been a rather uneventful 24 hours for the Ringgit as risk premium across the currency world has quickly deflated after the Mexican tariff stalemate was averted.

The primary focus for regional currency markets will be the China CPI and the CNH fix so we will hold off our intraday views until later in the day.

The Yuan

I still think it’s doubtful that a trade deal will happen at G-20, but it’s the possibility of a deal happening which is causing  Asia FX traders, including myself, sleepless nights given the bulk of my currency Asia FX exposure is based around that expectation.

And while I’m trying to convince myself that yesterday’s CNH reaction to a lower Fix and news of the Pboc selling bills in HK in late was an overreaction. So, for the time being, I’m holding my nerve on long USDCNH but whether I hold through G-20 will significantly depend on how many restless nights occur between now and then. Indeed it’s gut check time!!

This article was written by Stephen Innes, Managing Partner at Vanguard Markets LLC