A crude warning
Black Friday turned into a fire sale for oil prices, while EU manufacturing continues to flounder with export-orientated figures declining to a 30-month low, compounding the weak run of EU economic data but it was the enormous drop in oil prices that triggered calamitous price action across forex, commodity and bond markets
Exacerbating Friday’s price action, however, was holiday thinned liquidity conditions and traders running very low-risk thresholds.
Trading desks return full staffed today; however, market conditions will be anything but ordinary. Besides headline risk remaining elevated around EU-Brexit talks and the G-20 summit, from a flow perspective, it’s going to be a very tricky week as traders are beginning to fold their cards knowing markets have that remarkable tendency to swing one way into year end. But with month-end approaching and when combined with year-end flows starting to factor, markets could get both messy and noisy in quick order this week.
With every road leading to the Xi-Trump meeting at the G-20 this weekend, possibly the best and last opportunity for the two leaders to share middle ground. The big question is are we going to see Trump the “deal maker “or Trump the ” trade warrior” who wants China to ” feel more pain”. Keeping in mind that betting against the later has been a poor bet for traders this year.
Oil markets
The oil spill accelerated Friday, and the eye-watering tumult is unmissable as bearish sentiment erupted like an uncontainable oil gusher again. Indeed, one of the biggest and quickest wildcats runs in some time. But everything that’s been identified bearish remains intact. Pointing to one smoking gun is impossible. Instead, its a toxic combination of factors, highlighted by oversupply concerns, OPEC uncertainty, a very shaky risk environment on the back of the slowing global growth narrative, the precipitous swing on Fund positioning (based on CFTC report) and financial risk aversion flows.
And while oil market might come up for air at some point (admittedly I said the same at $ 62-63 Brent), the reality is we’ve had a progressive week-on-week substantial reduction in long crude oil futures positions, and gross longs are at the lowest in three years (Reuters).
While analysts are calling on OPEC production cuts, the fact is, all options are on the table, from no production cuts at all to 500-k b/d cut by Saudi Arabia, or a joint 1.4-m b/d cut by OPEC+ to bolster prices. But frankly, traders think Saudi won’t cut due to political pressure from the US administration around the Kashoggi affair. So, given the high level of OPEC uncertainty, long liquidation in futures continues while fast money speculators are hedging for a greater downside tail risk from no production cuts which is adding up to a massively bearish skew.
At the root of the oil market woes, there is too much supply and too little demand, but much of the near term price recovery will be driven by what happens in G-20 in Buenos Aires and at the OPEC summit in Viena a week later
An intense focus will fall on G-20 as Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin, are expected to have sit chat down with President Trump who will unquestionably argue for lower oil prices. With these three oil powerhouses at the table, don’t discount a rebalancing agreement to be in place before December 6 -7 OPEC meeting. When it comes to oil prices the new world order increasing revolves around Washington, Moscow, Riyadh, and Beijing
Brexit
As expected the European Council released a statement endorsing UK PM May Brexit deal, but according to London media UK Cabinet ministers and EU diplomats are privately drawing up “Plan B” Brexit proposal on the looming assumption that PM May’s deal will be rejected by parliament. Not a ringing endorsement for the success of the deal when both parties are still engaged in discussion without the main protagonist involved.
Gold Markets
The stronger dollar dented sentiment into the weekend but with both the US and China suggesting the G-20 could find a silver lining at the G-20 summit, as Trump the deal maker over Trump, the trade warrior, has made some a believer taking the shine off gold. As for this week, USD dollar movements will ultimately provide Gold’s near-term direction, early in the week. Last week the USD was supported by global growth concerns
STIRT and FX markets
The horrible EU PMI data dimmed hopes for the ECB who were wishing for a rebound this quarter ahead of their much-anticipated December stimulus unwind meeting. While last week’s ECB minutes referenced downside risks, as widely expected ECB stick with the planned December halt to bond purchases, while markets have one interest hike priced in by September 2020
Last week’s RBA minutes were in line and suggested next move will more likely be a hike than a cut, but as usual, the RBA was in no rush to adjust policy anytime soon. So, the market is only pricing in 1 hike by June 2020.
To be sure G-10 eyes are honing in on Fed Powell, and Clarida who will be speaking this week, followed shortly after by the November FOMC Meeting Minutes. These speeches will be significant for dollar sentiment into year-end after their most recent appearances triggered the great debate on the 2019 US interest rate glide path. Currency markets will be susceptible to both events. We can be sure they will emphasise data dependence while the rate trajectory will remain gradual as the Fed’s increase interest rates to a neutral policy setting. So the bar remains high for any near terms shift in policy however like a growing consensus of market participants, in 2019 the Feds see a moderation in US economic activity as US fiscal policy inputs fade.
G-10
The USD benefited from risk aversion flow into US bonds on Friday as investors look for shelter ahead of G-20 amidst slowing global growth and sagging equity markets although further gains could be tempered by Powell and Clarida holding a cautious tone on the US economy at their speeches this week
The dismal EU PMI prints predictably exacerbated the Euro losses
Hampering the Canadian Dollar is the fact sagging oil prices offset any positive from CPI inflation running higher than Bank of Canada target. Besides the massive discount on WCS oil notwithstanding, plummeting oil prices should continue to weigh on the Lonnie
The Japanese Yen was the direct beneficiary of moderate risk aversion flow and lower oil prices
The Australian Dollar remains heavy, but its one of the critical binary trades to Buenos Accord’ surprise. Domestically the landslide state election loss is a troubling sign for Australia minority government.
Asia traders will be looking to see if a strong Yuan is part of the trade war compromise as the USDCNH should be the critical currency markets driver post-G-20. If China does not offer the RMB as a necessary trade concession, given the US administrations long held currency manipulator view, the Aussie Dollar upside could be limited given increased China proxy flows on the back of the deterioration in Chinas current account amidst Pboc policy divergence with the Federal Reserve. All of which will continue to weigh negatively for the Yuan, so unless there is a commitment by the Pboc to pursue a stable/ strong currency policy aggressively, markets could fade knee-jerk ASEAN favourable currency reactions
Asia Currency
Despite looming G-20 risk we might have relatively calm seas to navigate this week as the Pboc will hold the Yuan in very tight ranges ahead of G-20. But ultimately the G-20 is expected to provide the guiding light for local currency markets but during the interim expect the broader USD dollar movement to dictate the pace of play in ASEAN currency markets
A surprise Buenos Accord?
If Trump and Xi surprise the markets with a Buenos Accord, global equity markets will bounce considerably higher so local currencies like the KRW would be the direct beneficiary of regional equity inflow. We would see commodity and oil prices immediately rebound, and the fiscally hindered Malaysian Ringgit would benefit from improved inflows. While the IDR and INR carry positions would likely underperform the rest of the bloc but would still benefit from improved regional sentiment.
Crypto
It’s never worth catching a falling knife before the bottom is in. After falling from $20,000 to $4000 in under a year, it suggests the market remains a bottomless pit. There is nothing normal nor positive about this type of price movement so beware of false profits selling soothsayer storylines and never get anchored to a price. Just because BTC is trading below $ 5000, $4000 or $3000 for that matter, doesn’t mean Bitcoin is undervalued even more so when BTC offers up no intrinsic store of value. Just because a rabbit might cost $150 to dig it out of a hole, doesn’t mean the rabbit is worth $150.00
