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At Least for Today, the Inflationistas Returns

Stephen Innes
The S&P traded flat ahead of earnings season while investors  picked up little from Fed’s Clarida who stuck to the Feds current  mantra  “we can be patient as we assess what adjustments, if any, will be appropriate to the stance of monetary policy.”

China Market

Reports suggesting the government is growing uncomfortable with the pace of the recent rally and so could look to curb leverages sent China market into the tank. However, there were no official comments but none the less foreign investors turned nervous nelly as according to DB data foreign investors sold CNY4.2 bn of stocks on Thursday, taking the total on the week to CNY12.4 bn – the most since October.

Oil Market

According to Reuters  “OPEC could raise oil output from July if Venezuelan and Iranian supply drops further and prices keep rallying because extending production cuts with Russia and other allies could overtighten the market, sources familiar with the matter said.”

Supporting our view from earlier this week that ” traders were busy plugging in data to come up with a theoretical price point that may convince both Shale and OPEC producers to increase production.  Well, at least that’s what we were doing anticipating that OPEC would try to pour some ice water on this sizzling rally knowing full well that President Trump wants to squeeze Iran crude export to zero, but he also wants OPEC to keep the rigs pumping. The big question for the market is whether  Saudi Arabia is willing to stand in front of a barrage of increasing Trump pressure. If  ” sources familiar with the matter” are correct, apparently they are not!

Traders have a subtly implied top side to play off, which  I suspect is either side of  $75  per barrel prompt Brent, a level which could trigger  OPEC to up supply as that level suggest global markets are tightening a tad beyond their expectations, as I commented on 938Now Radio in Singapore yesterday.

While oil prices should remain bid on dips since the market is tight and there’s a strong possibility that output from either Iran or Venezuela could drop further. But for the oil bulls,  +$75  Brent per barrel may be a bridge too far unless of course there was a catastrophic supply shock from Libya.

Given this twist, I suspect established oil bull positioning would be more inclined to sell on rallies than profitably pyramid price action at least until the next significant bullish catalyst emerges.

However, I still believe we get a six-month extension of OPEC supply curbs at the June meeting, but I  think OPEC discipline will veer more towards price stability rather than higher prices.

On the demand side of the equation, there are still some concerns about weaker demand in Europe, but these fears should be offset by Chinas demand growth.

While it’s very unlikely prices will fall off a cliff, the raging bull market will probably pause until the next catalyst emerges.

Gold Market

Splat Splat Splat !!! that was the sound of gold bugs hitting the inflation freight train as the “inflationistas”  were out en masse today keeping in mind that the FOMC’s central view had been that the tightness of the labour market would cause inflation to rise.

And lo and behold we got better than expected PPI data, and a significant low for jobless claims which blindsided the gold bulls who appeared oblivious that the minutes revealed an FOMC that sees a strong underlying economy, admittingly one that should decelerate from  2018 fervent pace.

But more significantly there was no page in the minutes that remotely suggested the Feds were contemplating a rate cut. The problem for gold bulls was the market has already baked in 2 rate cuts for 2020 but today’s robust and widely unexpected PPI print certainly threw a spanner into those works. As a result,  the inflation data severely tarnished golds appeal keeping in mind that Fed policymakers’ mandates have more to do with the convergence of inflation targets than any other metric.

The robust US data triggered a tsunami of stop-loss order collapsing markets and blowing out virtually every weak bullish gold position.

But let’s not forget  China’s central bank will remain, net buyers of gold, this year, and this dip should present an excellent opportunity to engage longs given the Pboc’s convincing backstop. In my view which has been consistent since 2018, higher gold prices will most certainly be linked to higher demand from the worlds number one buyer, China !!

Currency Markets

The dollar had a good showing during the NY session boosted by strong economic data but Its a struggle out here and it easy to get y dispirited by the lack of good fortune.

I’m running in circles especially trying to play currencies that have the most negativity priced in, like the Aussie. From my chair, China PMI is flashing positive signals suggesting the Pboc stimulus efforts are having a positive effect, but the Aussie dollar price action is anything but audacious! But hanging in on this trade ( + AUD)  as I’m convinced China data is flashing buy signals and the thought of a US-China trade deal is just too juicy of an opportunity to pass up. Let’s see how much support we get from China money supply and credit data, and of course, on the domestic front all eyes will be on the latest RBA Financial Stability Review, keep an eye out for details regarding the impact of falling house prices as the bank is assessing this development.

EM Asia

A negative vibe in ASEAN currencies

The Malaysian Ringgit

The Ringgit is hitting a rough patch as domestic conditions deteriorate, yet another victim of US-China trade war.

Malaysia’s IPI grew 1.7 per cent year-on-year in February, registering the slowest growth since June 2018, as manufacturing and electricity sector indexes expanded at a softer pace while mining posted a more significant decline.
This data plays into a dovish BNM narrative, and with the FOMC showing little inclination that the Feds are even considering cutting interest rates, the MYR continued to struggle for traction.

Adding to the Ringgit woes, oil prices have fallen on chatter that OPEC could ramp up supplies if prices continue to rise.

However, growth headwinds are easing and factoring in a possible  US-China trade deal we should expect the Ringgit to make up lost ground quickly.

Korean Won

The downturn in the tech sector will likely out weight any positivity from a bounce in China data. Tech sector woes will weigh negatively on semiconductors exports suggesting the KRW will continue to struggle even if global growth picks up.

This article was written by Stephen Innes, Head of Trading and Market Strategy at SPI Asset Management

This article was originally posted on FX Empire