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Asia-Open: Markets idling ahead of trade talks

Market Analysis - 4 Min Read Stephen Innes | 11 Aug 2020

US equities were stronger and oil markets were higher on Monday, while better US sentiment followed President Trump's executive actions over the weekend for households after congressional negotiations failed to reach an agreement last week. And while the "cliff-edge scenario" premium has significantly been reduced, so far that unilateral action has not prompted congressional Republicans and Democrats to return to the negotiating table. Still, it seems like Treasury Secretary Steven Mnuchin said there are areas for compromise, which should be favorable for risk.   
The markets seem to be idling before taking the next leap of faith with investors busily reassessing the already hard poached tensions between the US and China ahead of this week's trade talks. And there remains a palatable level of ambiguity about what President Trump's executive orders over the weekend actually mean. Indeed, it certainly hasn’t parted the clouds of uncertainly hanging over potential additions to the stimulus agreement just yet. But hope remains eternal that President Trump's announcement will provide impetus to negotiations with the Democrats that have stalled lately.
 
Given the number of "what if "scenarios likely clouding judgment, I expect the equity market skew to be more defensive in Asia, compounded by the region's gnarly predisposition to trade talk risk. 
 
Oil is holding up in pre-Asia trade on signs that the US may move forward with another economic stimulus deal that could bolster consumption. As the growth in new coronavirus cases in the US begins to ease but Covid-19 resurgent winter risk waits around the corner, I suspect traders don’t want to load too many eggs into that basket yet.  
 
Currency Markets

The Euro 
 
The EUR USD continues to consolidate lower, and just like when you put two violin experts in a room and attempt to appraise a 17th-century fiddle, you get five different answers. That seems to be the case right now as market participants are reaching for reasons why the consensus short US dollar trade has suddenly turned astray. 
 
With the FX markets tending to follow, not lead, the fading momentum in the EURUSD rally may reflect a growing focus on the path of Covid-19 in Europe. Although the new case count remains far below the pace seen during the pandemic's peak, many countries have seen a pick-up as their economies reopened and the headlines remain challenging; Germany's latest data shows the most significant daily increase in new cases since May. 
 
The USD and risk appetite is generally unsure which way to move. EURUSD price action has been less than encouraging in the past few days, with the pair running out of momentum three times just above 1.19. Some longs continue booking profit. Still, the pair is now approaching levels where there was good buying interest last week. Currently, it feels more like a consolidation rather than a change in momentum as European stocks and fixed income are still trading bid; Bund/BTP spreads, for example, are at their lowest since February. I suspect longer-term views are looking to buy EURUSD on a dip on a pivot to the September FOMC, but with the looming trade talks providing a bit of a "safe haven” bid to the buck, the question is where to place that bid.

The Ringgit 

The Malaysian Ringgit has been predictably backpedaling ahead of this week's US-China trade talks. Still, more generally, the MYR has given ground to the US dollar after last Friday’s better than expected US employment report which has seen US dollar demand pick up across the board. More negative for local bond inflows is that US yields have shifted slightly higher.

Arguably the Ringgit’s bullish sentiment may have gotten too far over its skies too quickly, so traders were also quick to book profits on the first signs of weakness.

Gold markets

Gold remains supported by geopolitical risk and potentially more US fiscal package delays. Still, the next leg higher could prove more challenging with the US dollar showing signs of returning to form and as US bonds yields move higher on better than expected US economic data. US yields are admittedly low, and this is supportive, but the yield on the 10-year has inched up in the last couple of days and the USD is slightly higher. That’s not to say gold can’t move higher if nominal yields flatline or move marginally higher from current levels; it just means the load falls on other factors to enhance gold from a bullish perspective.
 
To get the gold smelters working overtime and add jet fuel to the rally, the Fed will need to do the heavy lifting vie inflation targeting, or macro scrim will need to see inflation breakeven normalize higher via higher oil prices. 
  
Still, gold loves uncertainly and there’s plenty of that to go around while the yellow metal remains unquestionably supported by monetary accommodation, geopolitical risks and the US fiscal standoff. 

But we've hit some of the most bullish year-end targets already suggesting profit-taking could remain a course of action the longer it takes gold to launch higher. Not to mention big producers could view these levels as attractive to hedge further production, which continues to flash the amber light on gold. Market exposure is not correlating to physical demand as old correlations die hard.

For more market insights, follow me on Twitter: @Steveinnes123 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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