All is Quiet on the Western Trade War Front

For a change, all is quiet on the western trade war front as the drop in aggressive US tariff posturing and the nonfarm payroll after effects have propelled US equity market to the third consecutive day of substantial gains. While traders sit tight awaiting the next US trade salvo, but for the time being robust US economic data is offsetting concerns about rising trade tensions. In addition to the strong payrolls report, Federal Reserve Board data showed that consumer borrowing picked up in May with total consumer credit increasing $24.6 billion to a seasonally adjusted $3.9 trillion, up 7.6%. Indeed, this incredibly strong pace of credit growth points to a resilient US consumer while continuing to highlight an extremely robust US economy despite growing trade concerns.

But markets remain deceptively tricky and could be even more so as we enter the US dog days of summer.

In Asia markets, all eyes were on Xiaomi Corp IPO but the coming out party was less than a hit and didn’t exactly attract the feeding frenzy expected from high tech investors. Indeed, global high-tech investors continue to feel more comfortable investing in global stalwarts like apple as opposed to debutantes like Xiaomi who have more of an Asia centric presence. Of course, escalating trade war concerns weighed on sentiment but being the first of many prominent Chinese tech names coming to market seeking IPO in coming months, investors may have thought Xiaomi valuation a tad “toppish” in current market conditions. And are perhaps looking for more significant fire sales as more of China’s glittering tech giants swamp the IPO markets in the months ahead.

Oil Markets

Indeed, there’s a bullish undertone in the markets with the Iranian supply question expected to support and eventually push prices higher. The Brent market climbed amid ongoing concerns regarding Libyan supplies while treader weighed the bullish medium-term impact of Iran sanctions.

While WTI was under some early pressure after Syncrude Canada announced it would be restarting production from its Fort McMurray oil sands upgrader earlier than expected, but prices remained firm and started to rally after API showed another major draw of 4.50 million barrels.

Looking to Libya, the head of their state energy producer warned that output would keep falling day by day if significant ports remained closed because of clashes last month that lead to a standoff. Mustafa Sanalla, chairman of the Tripoli-based National Oil Corp, stated that “Today, production is 527,000 barrels a day, tomorrow it will be lower, and after tomorrow it will be even lower, and every day it will keep falling.” But keep in mind, current levels are less than half what the country was producing in February pre-political deadlock levels.

Even under the supposition that production from Saudi Arabia and Russia is sufficient to offset declining output from Venezuela, Libya and Iran, keeping the market in an approximate physical equilibrium, the stream of supply disruptions will continue to upset those dynamics.

Gold markets

The weaker dollar had gold bulls charging but the run of stop losses above $ 1261 cleared a path for Gold to touch $ 1265 overnight after political turmoil reared its ugly head in the UK when Boris Johnson resigned. But technically, gold has a long road to travel before breaching the more relevant technical levels around $1300 suggesting it remains ever so prone to the stronger USD. But the robust US economic data, fading of trade war rhetoric and extremely buoyant US equity markets turned golds tide overnight as “risk on ” saw gold prices fall from interday peaks and retreat before eventually finding support at around $1258 levels.

Currency Markets

In the currency market, Political unravelling in the UK has provided the best trading opportunities.

GBP: Another roller coaster ride on GBP overnight as Brexit markets got very uneasy after Boris Johnson resignation and the thought he could force a party coup which all but unwound the positively from Friday Brexit Chequers meeting. Long Sterling is arguably the G-10 most crowded trade so any Brexit hic up will likely trigger an outsized move as weaker near-term stops get triggered. But overall the long Sterling trade remains bruised but not broken.

AUD: The lack of trade drama is underpinning the AUDUSD. But the Aussie was arguably the most subscribed USD dollar long play in G-10, so players were mercilessly squeezed as ongoing China/US trade skirmishes are showing nascent signs of easing.

JPY: US yields and equities were soundlessly trended higher which have propelled USDPY to within striking distance of the 111 level. With investors running very neutral USD dollar exposure vs the JPY, short-term traders are boarding the risk- on wagon and buying USDJPY. If US equities continue to stabilise let alone move higher and US 10-year yields continue dribble north, we could eventually test the key 111.40 support line that has proved to be an impenetrable force for months.

MYR: The relief rally on the toned-down trade rhetoric continues to take hold of ASEAN markets. Risk on sentiment in US equity markets should play out positively for local bourses. Asian currencies are trading stronger aided by a sharp move lower in $RMB, robust equity performance and improved risk sentiment which is in complete contrast to last week’s markets tumult.

However, Malaysia registered another 1.65 billion in June outflow all but wiping all the reported 8 billion in fixed income flow from March 2017-2018 which tells the real tale of the election’s impact.

The next crucial focus will be the MPC on the July 11th This will be the first policy meeting chaired by the new BNM governor and with no real drive for BNM to adjust interest rate policy at this stage, however, given all the political uncertainty their remains a chance the BNM could offer up a dovish pause.

In the meantime, the MYR is benefiting from positive regional risk sentiment and rising oil prices all the while the Chinese RMB continues to unwinds last weeks trade induced tantrum.

CNH: For me its a case of know when to hold them and know when to fold them. While I think the RMB will eventually come under renewed pressure as China risk continues to wobble, markets have read far too much into the China economic slowdown which will likely be modest at best. Still this week tier one China economic data will continue to supply food for thought.