May’ hem engulfed markets overnight after PM May beat a hasty retreat ahead of Tuesday’s parliamentary vote on her EU withdrawal deal and the Brexit impasse triggered expansive volatility in the markets. The Pound plummeted as the market took out two years of pent-up frustration and “Pounded the Pound “mercilessly as traders spent the better part of the session remodelling Sterling risk around ” worse case “scenario — especially, the notion that PM May’s political obituary is penned and the appointment of a new leader who would take a harder line on Brexit highly likely. The pound slumped to near 1.2500, the lowest level in two years after the prime minister said her Brexit plan would have been rejected by a “significant margin” in a Commons vote pencilled in for Tuesday. And the Pound found little support from PM May herself in the Commons where she fielded far more questions than answers.
In Asia, the sudden resignation of RBI Governor Patel (especially ahead of state election results Tuesday) added to global investor unease as the Rupee plummeted over 1.5 %
Indeed, not the ideal situation for risk which is facing a towering wall of worry as virtually every major economy in the world is slowing suggesting the synchronised global slow down is accelerating at a much faster pace than thought.
It was a harrowing day in the US markets, and at the worst, the DJIA traded – 508 points lower on the day, but investors did muster up the courage to retrace these extreme moves. However, let this be a stark reminder to investors just how frangible liquidity is at this time of year, which will exacerbate market movement even more so in this risk-averse environment.
It looks like a bit of a mixed bag for Asia after US markets rebounded from sharp losses earlier in the day as US investors turned bargain-hunting mode snapping up arguably oversold Facebook and Microsoft shares for holiday stocking stuffers.
The market response to OPEC production cuts has been anything but overwhelming after oil prices slipped for its worst loss in two weeks eroding all of last week’s gains. There remains a lot of uncertainty if the production cut is thick enough to make a significant dent in global supply, but price action does suggest a substantial tranche of market participants remain entirely unconvinced that a floor is in place. But the general risk-off tone in global markets and the stronger dollar on the back of haven flow is contributing to the selling pressure also.
This tepid response to the OPEC cut is likely a result of both sides of the equation. Traders returned to from the weekend to face a towering wall of worry as the worlds largest economies (US-China -Japan) have all reported significantly weaker economic data. And when you factor in the political upheaval in India, it does muddy the demand side of the equation given that these colossal consumers of oil products economic outlook remain hazy at best Especially when traders continue to view the production cuts as little more than the best of many worst-case scenarios.
Gold prices fell form yesterday’s Asia highwater mark as the US dollar gained on haven appeal. Also denting sentiment, US equity market investors mustered up enough courage to step in front of the global equity market rout and buy tech stocks. But from my seat, this looks to be little more than technically driven short covering rally as the investor sentiment remain incredibly fragile suggesting the Gold will stay bid on the dip while remaining supported by the dovish Fed pivot.
As per yesterday note and sticking with this view “Of course, the markets are always prone to short covering rallies; even still I expect traders to be better sellers for risk knowing the hurdle for flipping to bullish positions seems high.”
The USD gained across the board. primary rounding in risk aversion appeal
Yesterday’s phantom rally on the EUR left more than a few scratching their heads. Again the 1.1430 pivots held with very little follow through. I still believe the break above 1.1400 was an extension of the US dollar sensitivity to weak US economic data after Friday NFP miss.
Kicking the can down the road but the longer it takes, the more uncertainty builds, and the lower the pound can fall
My desk must listen to me ad nauseam discusses interest rates and suggest this is the only real way to play currency markets over the long haul.
Looking at yesterday softer China PPI means an actual rise in real interest rates in China, and as the economy goes in the tank, it would suggest one of two things. The exchange rate via a weaker RMB will need to do more of the heavy lifting, or the Pboc will have to step up to the plate on the monetary policy front. Either way, it would seem the elusive 7 USDCNH is back on the table again for early 2019.
The Malaysian Ringgit
The Ringgit fell prey to weaker risk sentiment and slippery oil markets, but losses were relatively contained. But given the fact we are entering the silly season and liquidity is drying up fast an furious across all EM markets. Since we’re unlikely to see a shift in US-China relation before the New Year while we should expect a more unfavourable change in market sentiment, the prospect of both worsening market and horrible liquidly is triggering trader and investor alike to pare back risk substantially.