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The Market Remains Supported By Central Bank Easing

Stephen Innes

The People’s Bank of China (PBOC)stimulus action on Friday comes at a timely juncture after it said they would cut the amount of cash banks must hold as reserves to the lowest level since 2007, infusing liquidity into an economy facing both a domestic downturn and blustery trade-war headwinds. You don’t have to look much further the China exports sector from confirmation that the Chinese economy is struggling as China trade is the biggest casualty of increased US tariffs.

China Trade headlines highlight a contraction in exports, further decline in imports and narrowing surplus. A resounding negative yes, but if you look at these in the month to month terms, they are not nearly as bad as initial headlines suggest. Imports are up 2-months in a row, for instance, while further lending in Total Social Financing later in the week is expected to rise offsetting slower trade.

Although markets are always on edge waiting for the next trade war headline; they’re leaning on the pillars of support from monetary policymakers as the expectation is running high for a significant monetary policy response by global central banks. Indeed, The European Central Bank (ECB)is expected to deliver a substantial policy package on Thursday while Federal Reserve Chairman Jerome Powell’s last speech before next week’s policy meeting cemented views for another Fed cut.

With investors ability to dial-up and down leverage at a moments notice, the market will remain very volatile to both macro data in headline risk this week.

Oil markets

There was a surprising changing of the guard at the top of Saudi Arabia oil hierarch after King Salamd dismissed Energy Minister Khalid -Al-Falih, and who decided to keep it “all in the family” by putting, Prince Abdulaziz in charge of oil policy. The writing was in the cards after Al-Falih was removed as chairman of Saudi Aramco amidst internal squabbles over the IPO. However, the change at the top doesn’t necessarily mean a shift in policy as much as it’s as being viewed a move to improve relations within OPEC and with non-OPEC producers in the wake of the latest Russian compliance fissures.

In spite of the dreary China trade data oil prices remain supported by last weeks China RRR cut and expectation for central banks around the world to offer more support to economies all of which is getting framed by the “trade calming “effect from the scheduled US-China trade talks which continues to resonate and keeps the markets “hope” trade alive.

The ECB decision is the macro focus of the week but with no less than Five central banks on tap next week (FOMC, Bank of England, Swiss National Bank Norges Bank and Bank of Japan). – it’s not like the ECB will need to stand on its own as all global central banks are expected to wax dovish

None the less, markets have a fair amount to digest this week after China’s Trade numbers, with the focus turning to European IP releases and global CPI prints so we could be in for a bit of bumpy ride as the comprehensive economic calendar takes centre stage this week.

Gold markets

Gold markets took an absolute drubbing on Friday as hefty positioning caught up with the reality of the massive uptick in risk sentiment triggering waves profit-taking and stop as newly minted defensive strategies hurriedly ran for the exits. Reports Gold CTAs who was showing all 12 strategies still long, first exit levels were triggered at Spot 1512.6 as the market parabolic have shifted to short term selling mode

While the lower than expected Jobs headline report provided a temporary updraft on Friday, any hopes for an extended rally were dashed by Chair Powell who maintained a positive economic outlook which all but snuffed out the market expectations of a more significant 50 basis point response from the Fed.

However, the problem that Gold markets could face is, just as the Bank of Canada threw cold water on the prospects of aggressive rate cuts last week, there’s a small but growing chorus getting more vocal but the day thinking that central banks are gingerly walking back from the cliff edge of rate cut mania.

So, in the absence of Fed Speak due to the pre-FOMC blackout, global economic data will hog most of the limelight.

Absent a trade deal or barring fiscal stimulus in core Europe; analysts continue to expect US yields to ” catch down” to negative global yields which could ultimately provide the cure-all elixir to reverse Gold markets recent slide.

Yuan

The RRR cut will most likely skew China’s money market rates on a downward trajectory and could generate some short-term pressure on the RMB. On the other hand, progress in the trade talks should buttress the depreciation pressure while the Pboc is expected to remain loyal to implementing countercyclical measure to hold the Yuan stable ahead of the US-China trade talks.

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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