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The Powell ‘Put’ Continues To Resonate

Global equities were in modest demand throughout Monday and continued to bolster ASIA FX EM and G10 commodity currencies. Small-cap and technology companies led gains as optimism over a hopeful compromise on trade resonated. But given the uncertainty over trade, the current momentum suggests the market is still feeding off the Fed who is prepared to give the market precisely what they want, at least for the next few months. After Chair Powell suggested, the Federal Reserve is listening to the concerns of markets and open to changing its policy views next year. Powell’s magic words should continue to support risk sentiment near-term.

The Russell 2000 index is having its best start to a year since 1988. Bottom-line, Fed Chair Powell’s Friday messaging remains front and centre on everyone’s minds quelling fears by conceding the recent moves in equities and a readiness to turn off the ‘autopilot’ on balance sheet normalisation

Despite the positive vibe, the day did not pass without the regular bout of hesitations and supposing regarding the plethora of global risk with more focus on the US shutdown after Atlanta Fed Pres Bostic says if it lingers, it could become more material referring to the number o Federal employees without a paycheck.

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Of course, US-China trade was never far from the discussion but with no real updates on that front traders were then resigned to mull over the US service ISM data which came in weaker than expected but was just good enough to hold the markets bears at bay. However, the ISM data is a reliable barometer for economic health which continues to raise doubts if the economy is rolling over or coming out of a soft patch. This is where it gets rather delicate for both Global equity market and the US dollar as we could see more outsized downside move to weaker data than upside gains to stronger data given the markets bearish tendencies. But until otherwise proven wrong I’m very much in much in the soft patch camp given that the latest surveys are driven by the doom and gloom outlooks over tariffs and energy prices.

Oil Markets

Although falling from overnight highs, Crude is starting the week on the front foot as a positive vibe in risk assets continues to be helped along by a softer Fed ton a weaker USD and more stable equity markets.

A few what-ifs were entering the picture regarding global market risks as trader mulled over the US shutdown, US-China trade and the weaker services ISM data which triggered some profit taking this despite declining OPEC production providing fundamental support for the market.

Traders are quicker to take profits on long positions as the global growth narrative and US supply overhang continues to weigh on near-term sentiment. This is even in the face Saudi oil headlines via OPEC officials, suggesting that the Kingdom may be contemplating more significant cuts in a bid to support higher oil prices not just stabilize the market

The headlines indicate a high level of specifics which should keep Oil supported on dips near-term.

DJ SAUDIS PLAN AGGRESSIVE EXPORT CUTS IN EFFORT TO LIFT OIL PRICES -OPEC OFFICIALS

DJ SAUDIS PLAN TO CUT CRUDE EXPORTS TO 7.1 MILLION DAILY BARRELS -OPEC OFFICIALS

DJ SAUDIS PLAN EXPORT CUT OF 800,000 BARRELS A DAY FROM NOV LEVELS -OPEC OFFICIALS

DJ SAUDIS TO MAKE NEW EXPORT CUTS, HOPING FOR $80 OIL -OPEC OFFICIALS.

Gold Markets

Gold is caught again between duelling narratives getting support from a weaker USD while getting squeezed by more stable risk footings. Demand remains robust as the Gold appears to be continually bid well beyond the usual narratives put forth, weaker USD forward, China and global stability etc. Indeed, the rapid price increase has left many in a bit of a puzzle as Gold bulls have had little to cheer about most of 2018 as a strong US dollar drove market sentiment.

With the Fed sounding the dovish alarm bells this is positive for Gold as this shift should lead to a lower glide path for US interest rates as a softer dollar. But even with equity markets stabilising gold has held a bid suggesting that there’s sovereign buying in the background.

And indeed, China added gold for the first time in two years to its FX reserves which go a long way to explain the surging prices over the last 20-30 days. Its a bullish near-term signal for gold, just like when other Central Banks were hovering up gold below 1200 last year.

Currency Markets

The market is leaning lower USD so no need to fight this one. The softer Fed tone and the markets shifting more positive on US-China trade talks suggest commodity currencies could be in for a significant bounce. Even the Euro, which has its own economic and political woes to deal with is also trying to break out. But I think a lot of the USD weakness is emanating from the rate curve which is now implying rate cuts by the Fed going forward and a 25% chance of a cut as early as Dec 2019, which is more paranoia than logic in my view. But price action must be respected

The Malaysian Ringgit

And as expected with a softer Fed interest rate outlook, thawing US-China tension and higher oil prices, the USDMYR trade through a significant support level and impressive staging move versus the USD, stronger by 0.60%. With Fed Chair Powell dovish comments on Friday green lighting risk, Asia EM Fx should continue to perform well in this environment. Predictably 5-year bonds have been extremely active as a positive sentiment continues to permeate local bond markets.

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