Dangerous Brinkmanship

Another in the expanding history list of topsy-turvy Thursdays’ when it comes to risk as the President Gave, and the President Hath Taken Away only to leave the door open again when it comes to North Korea discussions.

The increasing headline chatter around the North Korea summit finally culminated with President Trump cancelling his upcoming summit meeting with North Korea leader Kim Jong Un. But of course, as we’ve seen countless times before, the President tends to walk back some of his more boisterous rhetoric time and time again. So, it’s hand out to North Korea in this risky ping-pong match of political brinkmanship.

After the initial knee-jerk reaction of risk off, the fixed income bid has tapered, USDJPY has also rejected a test of the 109 handles while US equity markets have pruned losses. The overall sell-off was a low keyed affair,  but should not be interpreted as diminishing the fragility of the current state of geopolitical risk. But the market has travelled a path well-worn on Korean peninsula risk, and while the US and their allies have offered a way to prosperity for North Korea, it was never going to come without some significant concession on the nuclear non-proliferation front.

But given that Asian markets, particularly the Nikkei, have a higher sensitivity to this issue, the market is treading gingerly ahead of APAC open as we could have another case of risk aversion creep into the picture at that time.

Heading for the Friday finish line with a long weekend looming in both US and UK, we should expect some position consolidation. And while the markets look to favour, a risk-off strategy given geopolitical risk is up front and centre again, however, the slightly dovish lean from the FOMC minutes has provided a spark to US equities after the statement triggered of an unwind on bearish US interest rates short -end positioning. To make a long story short, it’s complicated.

To be honest, after spending the better part of yesterday looking for the ideal set up on a currency trade, I’ve concluded the market will remain fickle until more coherence is offered on trade wars and the North Korea situation. Not the ideal market to be picking bottom or tops for that matter as a lot of currency opinions are gravitating to the ” do not trade zone “ahead of the US long weekend.

Oil Market

Yesterday’s inventory shocker continues to reverberate in the markets as oil prices have gravitated lower. But of course, the potential increase in OPEC output to offset supply concerns continues to in broad strokes paint a bearish narrative. In the absence of another negative supply surprise, the top side moves will likely be capped by short-term trader’s propensity to fade these moves on the assumption OPEC opens the spigot.
But, this supply unwind needs to be viewed cautiously as its very unlikely the OPEC / Non-OPREC compliance will buckle but instead, there will be a gradual supply accommodation commensurate with global demand rather than a decisive policy shift thereby most likely keeping the 3-6 month +$ 80 Brent /bbl views intact.

Gold Markets

The more dovish interpretation of the FOMC minutes coupled with the increase in geopolitical risk has Gold glittering above the critical $ 1300. But the overnight session was all about headline risk as North Korea and Trade risk continue to dominate. So, with the anticipation of more headline risk coming down the pipe, gold should hold a bid as its glittering appeal is hard to ignore when geopolitical risk rises.

Currencies

The dollar rally has cooled it jets after the latest FOMC minutes suggested a willingness to let inflation run hotter than their inflation target. Comparing the relative policy stances from the ECB and BOJ who are fighting neck and neck with the RBA to be the most boring central bank on the planet. Even the Feds three rate hike scenario in 2018s suggests that until either the ECB or BoJ stops sitting on their hands, the dollar should remain attractive over the near term.

JPY: Best instinct suggest staying away, but of course risk aversion trade is sometimes too hard to ignore even more so with the dovish market interpretation of the FOMC minutes. Look for the possible retest of 109 on geopolitical headline escalation.

EUR: The weaker PMI suggest more downside to come as the ECB should lean dovish on the data.

AUD: The dovish read on the FOMC minutes has seen US equities trade well and supporting risk currencies like the Aussie. However,  Oil continues to trade heavy as do some of the other hard commodities suggesting the topside remains limited

MYR: The political noise is bordering on deafening and with fiscal uncertainty continuing to linger it’s unlikely we will see much in the way of foreign participation or any meaningful flows over the short term for that matter. However, given the market tends to fade political risk, if the fire sale becomes big enough it will attract some interest but with the USD still sitting favourably vs the EURO and North Korea tensions coming to the fore, it’s certainly not time to dip ones toe into the turbulent Malaysia waters just yet.