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Deja Vu All Over Again

Stephen Innes

This news reverses out some of the trade optimism that was dominating overnight flow as investors were hoping that at minimum, some type of a deal could be forged.

So instead of debating how encompassing the deal might be, investors are now back to plucking petals from a flower guessing if there will be a deal at all. Whatever level of trade calm there was,  just gave way to the fact how tenuous any newfound sense of trade war neutrality is in this environment.

However, with the U.S. administration opening economic wars on multiple fronts with China around human rights violations and potential capital flow, this could get much worse than current price action suggest. Indeed, regardless of what comes out of these trade talks, it could be little more than a case out of the frying pan and quickly into the fire again.

A Mini deal is still possible

A mini deal with China would be favourable, but whether it is merely a detente (no new tariffs) or something slightly more substantial (rolling back some tariffs) that’s the big question for how intense the risk revival extends. But regardless, investors would revel at any sliver of optimism for no other reason than gnawing uncertainty would abate.

Trading the risk

I wrote this before the SCMP news broke, but I thought better to include as we might get another headline shift, or who knows maybe even a trade deal before the days out.  

An obvious point of reaction will be how the market reprices both the Fed and the ten-year U.S. Treasury yields on a positive trade talk outcome. With much of the data unlikely to shift immediately, the expectation for easing through December 2019 may not change dramatically or instantly. But a trade war detente + rolling back of tariffs could see some significant repricing of the 2020 Fed curve.

According to the latest commitment of trader data, the pain trade is for a better deal than the market expects given that the street has adopted a defensive once bitten twice shy strategy ahead of the trade talks.

The commitment of Traders CFTC

The S&P index options are running bearishly at nearly 2.5 puts to call ratio, and Gold-backed ETF and Comex positions are running at or near record levels suggesting there’s a massive tail risk is if a deal gets hashed out. Defensive strategies look thick, so if these positions are triggered to unwind, it could exponentially amplify the risk revival on a positive trade talk outcome.

Oil markets

Oil prices struggled overnight as the Syria headline risk was no match for the EIA reporting a bearish build in crude oil inventories of 2.9 million barrels for the week to October 4 which of course was getting compounded by the EIA short term outlook report which is still too fresh in traders mind after it revised down its average price of WTI for 2020

And with oil traders wearing demand emotions on their sleeve, the high level of trade talk circumspect that is permeating every pocket of the capital market in the wake of the SCMP report offers little joy for oil bulls as oil prices are basically left weighed down by yet another trade war anvil around the market neck.

Traders likely have their finger to the wind trying to gauge the intensity of the latest headwinds but at minimum prices could be capped until the markets get some type of favourable headline tailwind at least.

Gold market

When headline risk continues to dominate flows, it’s virtually impossible to anticipate or predict the short-term movements given gold’s volatile nature to headline-driven shifts in trade war sentiment.

However, one arguably bullish read from overnight price action was the fact Gold remained firmly supported well above the $1500 pivot despite firmer U.S. yields and the SPX trading over 1 % higher. The spot gold skew remains firm, but demand is now shifting to the back end of the curve as investors insatiable appetite for haven and all things gold continues to resonate.

With the U.S. administration opening economic wars on multiple fronts, weak global financial data and a Fed likely to cut interest rates in October, all of which could continue to prove a substantial tailwind.

Currency markets

Deja Vu all over again. Weren’t we here yesterday??

The market is back on Yuan watch as the local traders have backed down expectations ahead of this week trade talks suggesting topside risk coming back into focus if  history repeats and the early September Yuan tumult holds. If this scenario does come to fruition, it could be flat out ugly for Asia risk markets.

So just as the Yuan led ASEAN currencies higher yesterday, it will likely lead them lower this morning.

With headline risk busting at the seams, it will likely be another fast money trading session. So, buckle in as you will probably end up staring at your screen at some point over the next 24 hours asking yourself “why “did I hit that button!! (BTW I’m not going to say “ I told you so”)

Downside USDJPY optionality has predictably started to pick up as risk aversion leaks into every pocket of the G-10 currency complex But demand is not that explosive relative to the surge of headline risk which could be a result of U.S. 10 Year Treasury bond yields sitting comfortably about 1.50 % suggesting interest rates differentials haven’t yet started to sufficiently factor negatively into the dollar downside risk equation. Instead, Yen is possibly trading on headline

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

This article was originally posted on FX Empire

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