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Trade Calm Continues To Resonate

Stephen Innes

However, consumers are finding it difficult to put on a brave face despite the trade calm as the recent spate of economic downgrades and increasing recession risks continue to cloud consumer outlooks. The final October read on the University of Michigan’s consumer sentiment index ticked down 0.5pts to 95.5. While still showing a rebound from September the direction of the revision was a little negatively surprising in the wake of the announcement of that Phase One China deal earlier in the month.

But in a stark reminder to those waning economic realities – profits at Chinese industrial enterprises continued to contract as the economy slows and factory deflation plumbs the depths after Mainland’s Industrial profits dropped 5.3% in September, according to the National Bureau of Statistics on Sunday.

FOMC

Wednesday’s FOMC meeting will take centre stage amidst a packed economic calendar that will set the tone for market participants into year-end. With the Fed widely expected to cut interest rates another 25 basis points, the meeting statement and Chair Powell’s communications on the policy outlook will be the focus.

There is a chance the Fed may some form of average inflation targeting strategy which could imply an additional series of rate cut even if Chair Powell suggests the “mid-cycle adjustment” are nearing its end, given the muted inflation outlook market continues to price in a probability that the Fed’s easing cycle won’t be ending just yet.

Oil Markets

Oil opened firm in Asia, but there have been some small profit-taking sells on the weak China data released on Sunday and unwinding of weekend hedges. But the market remains well supported on the dip during the early going.

With indications that the U.S. and China are making more progress in tariff discussions, sentiment continues to turn more favourable even more so after the surprising EIA crude inventory draw as oil prices gushed 4.4 % higher last week.

In addition, with U.S. production is thought to have plateaued at 12.6 million barrels and with Oil rigs falling 17 to 696 last week, the lowest since April 2017( Baker Hughes), this too should buttresses well for more inventory draws as the falling rig count provides more evidence of tightening supplies.

On the shifting trade war tides, money manager boosted their net long positions on WTI for the first time since mid-September as the market are turning increasingly less sceptical that a trade deal will happen and a could be viewed in a bullish light.

Gold Markets

Gold continued to hold above USD 1,500/oz amid the backdrop of rate cut expectations. The high hopes for a rate cut at the upcoming FOMC meeting helped to light up the gold market. But gains may be limited as trade tensions – a prime mover of gold in August and early September – are not as tense as they were over the summer.

Also, with U.S. equity market moving higher, the market can’t sustain a simultaneous risk on vs risk off state of mind.

As for the economic data, yes, it’s weak, but it’s not about where the global economies have been as much as where they are going. And so far, the PMI’s and consumer sentiment forward-looking gauges have failed to turn to suggest the FED could maintain an easing bias despite the easing in risk aversion trades due to receding tail risk around Brexit and Trade War. In that light, U.S. economic data could have a significant influence on gold prices through the remainder of 2019.

Key for Today

The $1500 strike for the November option expiry (October 28) has the most significant open interest, 14k lots, so we may see the tendency of the market to gravitate to that level until the option expires later today.

Asia

Despite the hawkish speech by U.S. Vice President Pence last week; there was also an insistence that Washington is not seeking confrontation with China or decoupling of the world’s largest economies. This should help keep the market’s faith that the U.S. administration also wants to ink a mini deal. If anything, the Hong Kong spat will likely be compartmentalised like Huawei and treated separately from the trade talks.

The apparent problem for trading positions is that any flap between the U.S. -China gets magnified ten folds through a politized trade war lens even if it isn’t directly consequential to the current tariff narrative.

ASEAN economies are in a race for the Yellow jersey to attract more FDI to capitalise on the U.S. -China trade tensions. Just over the last few weeks, governments in Thailand, Malaysia, and Indonesia have all announced plans to ease business burdens and provide additional incentives for foreign companies looking to diversify their supply chains. And despite the current trade calm given the chance of further US-China escalations, positive flows may likely persist in the near term.

Yuan

USDCNH traded below 7.05 at the open on a positive spillover from Friday trade calm rhetoric after the White House signalled progress on the trade talks, but for a significant move below 7.05, removal of existing tariffs might be the ultimate precondition.

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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