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Walking Up The Down Escalator

Stephen Innes

Drawing attention to the importance of the trade negotiations for market sentiment is the negative turn in the latest US data. Non-manufacturing ISM for November fell 0.8pts, and ADP employment rose just 67k, both weaker than expected. These are critical chunks of the economy the President must defend, but the more vulnerable data also provides inferior optics for his election 2020 campaign. If these gloomy forward economic gauges start to leak into the consumption and or employment sectors, one would have to assume that President Trump from a purely economic perspective would be as motivated as his counterpart Premier Xi, to table a trade deal sooner than later 

Pivot point remain 3100

Resistance 3120-3150-3170
Support 3075-3050-3025

The US ADP employment number came in at 67k, which is well short of the 135k expected and with a small revision lower to the October number. The Street usually shrugs off this data print but no longer as it seems to be relevant to Fed Chair Powell. So, we will likely see expectations for Friday’s payrolls revised down.

The dicey outlook for a US-China trade deal coupled with the weaker US data has seen a pick-up Fed rate cut expectations further along the curve as the slide in US PMI’s is raising more than a few eyebrows.

Despite the weaker US data, it was a good day for risk as the winds of trade war shifted more favorably again. But it really feels like we’re always walking up a down escalator when it comes to navigating these never-ending US-China hostilities

I not sure about others, but I’m not surprised by the US administration walking down the latest Trump-inspired risk-off clobbering. I even hinted at this when I sarcastically inferred this would happen in my Asia wrap last night” But, why do I feel the Grand Old Duke of Mar-a-Lago is going to walk these risks down the hill as quickly as he walked them up?” This is the biggest flaw in US President Trump’s negotiating style. He loves grandstanding and will never miss an opportunity to drive crisis headlines to the top of the list only to have his lieutenant neutralize the damage over the next 24 hours when he then claims victory.

Oil market

With a tricky OPEC meeting set to kick off, today, trader traders will be on the dual headline watch with one eye on OPEC and the other on trade talks.

Oil market found support from the EIA inventory report as commercial crude falls 4.9Mb; SPR -1.0Mb Crude stocks fell 4.9Mb, bullish vs. consensus for a 1.7Mb draw, and the five-year average of -3.6Mb. It was a more significant draw than the -3.7Mb reported by the API. According to the data rising, refinery inputs and falling imports helped drive the decline.

Resistance: 58.75-59-59.25
Support : 57.95-57.70-57.45

Oil and trade talks

Oil traders were encouraged by yet another favorable shift in the “winds of a trade war” after a report that negotiators are nearing an agreement on the amount of tariff relief in a phase-one deal between the US and China. Any hint of tariff rollback is absolute positive mood music to the oil market’s ears.

Opec meeting

I think an extension of the existing OPEC+ agreement and stricter enforcement of compliance would be the bare minimum to expect, but the real debate is on whether deeper cuts will be announced.

Taking comments on Tuesday from Iraq’s Oil Minister at face value hinting at an additional 400kb/d cut has set relatively low bar expectations that should not be too difficult to achieve.

So, with all the news on supply cuts that appears now known, the market is now subject to untoward headline risk. But assuming all goes as planned, it’s on to the post-Aramco IPO where a significant tail risk for oil prices to move lower is starting to wag given talk that the Saudis have threatened to boost their own production because other members have failed to comply with current output reductions fully.

The real demand for oil

The weaker US economic data is a sour point and all but capped yesterday’s bullish ambitions. We can’t seem to string these nascent positive economic strands together. When China and Europe do well, the US sags and vice versa. The issue with this type of uneven economic recovery is it gives rise to the notion that all the actual data start to look like a head fakes and that the data surprises will continue to come from the dark side.

Currency Markets

Euro

The Euro bulls are back with a vengeance after weak data prints out of the US as the big miss on the ADP print stuck a dovish Fed chord in the currency markets. The pair broke the critical resistance level of 1.1095-1.1100, clearing out some reasonable offers in the market. Interest is finally coming back to the Euro with good macro demand on the dovish Fed impulse, and real money flows into EU equity markets.

Resistance; 1.1100-1.1125-1.1150
Support : 1.1070-1.1050-1.1025

European equities surged the most in almost two months, on renewed hopes that the US and China are inching closer to a trade deal. Real money flows could be supportive for the Euro into year-end. Long term equity funds are overweight US markets and underweight global equities. So, with a bottoming in the EU data unfolding and US economic exceptionalism waning, more equity flows could find their way in the European markets to balance our portfolio risk and take advantage of undervalued sectors.

We could finally be seeing some wear and tear in the Teflon dollar.

Gold markets

The iffy outlook for a US-China trade deal and the weaker US economic data has seen an increase in Fed rate cut bets where were no nearing in 50 % chance of a cut June 2020 (CME FedWatch Tool)

While the tight inverse correlation with trade talk headlines will continue to ping pong prices around current ranges. With the equity market at the highs and valuations starting to look stretched, it makes sense to consider buying gold as the SPX index has gained nearly 25 % this year and it would suggest profit taking will remain on the cards.

Resistance: 1485 -1500-1505
Support : 1470-1460-1445

In addition, there could be a reluctance for bond desks to short markets given the seasonality drop in primary issues in December

The macro risks remain elevated even though some green shoots are starting to emerge in China and the EU. And also, if there is a trade deal the initial tariff roll back part of the equation might not be enough to right the economic ship and may force the Feds hand to cut interest rates. If more policy easing and dollar weakness unfold, global investors in 2020 may look back to current prices at $1475 with a sense of nostalgic longing.

Ultimately when it comes to gold trading its all opportunity cost of risk-free asset returns as measured by the real 10y Treasury yield.

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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