A Crude Warning | OANDA Weekly Market Commentary with Stephen Innes

Black Friday turned into a fire sale for oil prices, while EU manufacturing continues to flounder with export-orientated figures declining to a 30-month low, compounding the weak run of EU economic data but it was the enormous drop in oil prices that triggered calamitous price action across forex, commodity and bond markets

Exacerbating Friday’s price action, however, was holiday thinned liquidity conditions and traders running very low-risk thresholds.

With every road leading to the Xi-Trump meeting at the G-20 this weekend, possibly the best and last opportunity for the two leaders to share middle ground. The big question is are we going to see Trump the “deal maker “or Trump the ” trade warrior” who wants China to ” feel more pain”. Keeping in mind that betting against the later has been a poor bet for traders this year.

Oil markets

The oil spill accelerated Friday, and the eye-watering tumult is unmissable as bearish sentiment erupted like an uncontainable oil gusher again. Indeed, one of the biggest and quickest wildcats runs in some time. But everything that’s been identified bearish remains intact. Pointing to one smoking gun is impossible. Instead, its a toxic combination of factors, highlighted by oversupply concerns, OPEC uncertainty, a very shaky risk environment on the back of the slowing global growth narrative, the precipitous swing on Fund positioning (based on CFTC report) and financial risk aversion flows.

And while oil market might come up for air at some point (admittedly I said the same at $ 62-63 Brent), the reality is we’ve had a progressive week-on-week substantial reduction in long crude oil futures positions, and gross longs are at the lowest in three years (Reuters).

At the root of the oil market woes, there is too much supply and too little demand, but much of the near term price recovery will be driven by what happens in G-20 in Buenos Aires and at the OPEC summit in Viena a week later

An intense focus will fall on G-20 as Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin, are expected to have sit chat down with President Trump who will unquestionably argue for lower oil prices. With these three oil powerhouses at the table, don’t discount a rebalancing agreement to be in place before December 6 -7 OPEC meeting. When it comes to oil prices the new world order increasing revolves around Washington, Moscow, Riyadh, Moscow and Beijing.

 

Gold Markets

The stronger dollar dented sentiment into the weekend, but with both the US and China suggesting the G-20 could find a silver lining at the G-20 summit, As for this week, USD dollar movements will ultimately provide Gold’s near-term direction, early in the week. Last week the USD was supported by global growth concerns.

 

Brexit

As expected the European Council released a statement endorsing UK PM May Brexit deal, but according to London media UK Cabinet ministers and EU diplomats are privately drawing up “Plan B” Brexit proposal on the looming assumption that PM May’s deal will be rejected by parliament. Not a ringing endorsement for the success of the deal when both parties are still engaged in discussion without the main protagonist involved.

 

G-10

To be sure G-10 eyes are honing in on Fed Powell, and Clarida who will be speaking this week, followed shortly after by the November FOMC Meeting Minutes. These speeches will be significant for dollar sentiment into year-end after their most recent appearances triggered the great debate on the 2019 US interest rate glide path. Currency markets will be susceptible to both events. We can be sure they will emphasise data dependence while the rate trajectory will remain gradual as the Fed’s increase interest rates to a neutral policy setting. So the bar remains high for any near terms shift in policy however like a growing consensus of market participants, in 2019 the Feds see a moderation in US economic activity as US fiscal policy inputs fade.

The USD benefited from risk aversion flow into US bonds on Friday as investors look for shelter ahead of G-20 amidst slowing global growth and sagging equity markets although further gains could be tempered by Powell and Clarida holding a cautious tone on the US economy at their speeches this week

The Japanese Yen was the direct beneficiary of moderate risk aversion flow and lower oil prices

The Australian Dollar remains heavy, but its one of the critical binary trades to Buenos Accord’ surprise. Domestically the landslide state election loss is a troubling sign for Australia minority government.

Asia traders will be looking to see if a strong Yuan is part of the trade war compromise as the USDCNH should be the critical currency markets driver post-G-20. If China does not offer the RMB as a necessary trade concession, given the US administrations long held currency manipulator view, the Aussie Dollar upside could be limited given increased China proxy flows on the back of the deterioration in China’s current account amidst Pboc policy divergence with the Federal Reserve. All of which will continue to weigh negatively for the Yuan, so unless there is a commitment by the Pboc to pursue a stable/ strong currency policy aggressively, markets could fade knee-jerk ASEAN favourable currency reactions.

 

Asia currency markets

Despite looming G-20 risk we might have relatively calm seas to navigate this week as the Pboc will hold the Yuan in very tight ranges ahead of G-20. But ultimately the G-20 is expected to provide the guiding light for local currency markets but during the interim expect the broader USD dollar movement to dictate the pace of play in ASEAN currency markets

 

Crypto

It’s never worth catching a falling knife before the bottom is in. After falling from $20,000 to $4000 in under a year, it suggests the market remains a bottomless pit. There is nothing normal nor positive about this type of price movement so beware of false profits selling soothsayer storylines and never get anchored to a price. Just because BTC is trading below $ 5000, $4000 or $3000 for that matter, doesn’t mean Bitcoin is undervalued even more so when BTC offers up no intrinsic store of value. Just because a rabbit might cost $150 to dig it out of a hole, doesn’t mean the rabbit is worth $150.00

 

Stephen Innes is the Head of Trading, at OANDA Asia Pacific.

Innes has a deep-seated knowledge of the G10 and Asian currencies and is regularly called upon by leading TV, radio and print publications to offer his informed views on the financial markets. He offers specific expertise in trading spot and forward FX, currency and interest rate futures, money market derivatives and precious metals.

This weekly market commentary is powered by OANDA.

(By Stephen Innes, Head of Trading, OANDA Asia Pacific)

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