Global Equity Markets Roar

Third-quarter results for UnitedHealth group were better than expected and led it to raise profit guidance for the year, with similarly upbeat reports also from Johnson and Johnson and JPMorgan. European equities were mostly up, too. Gold struggle in the face of surging US bond yields and the general risk-on fervour 

Brexit

The Pound galloped higher overnight, leaving the currency around 4% stronger over the past week. RTE News’ Tom Connelly, who broke the original Brexit ‘deal’ story, writes that the EU and UK sides are the closest they have been and that there is some optimism now. He has Irish sources typically, so this is another positive sign.

European stocks rallied to levels not seen in more than a year as speculation that a Brexit deal is imminent prompted traders to scoop up shares across the board.
Of course, any ‘breakthrough’ between the EU and the UK must still face the British house parliament.

But traders remain favourably positioned for the ‘white smoke’ moment hoping for domestic ratification on Brexit.
Framing out the “feel good” risk-on vibe, the US-China trade discussions seem to be making some progress, and the prospect of a genuine truce has risen.
Asia open

While Asian cash market looks set to gain however entering the morning session, traders have hit the pause button possibly awaiting the outline of a Brexit agreement to judge the likelihood of parliamentary approval, which suggest there still much wood to be chopped before pen gets put to paper.

As well, investors are looking for more clarity around the various phases of the US-China trade talks. Individually, Chinas firm commitment to buy $50 billion in US farm goods, details around December tariff detente, possible first-level tariff rollbacks and any signs progress on lifting the US export ban on Huawei, yup lots of wood to chop there also.

Oil market

Crude fell for a second day amid a weakening global growth outlook and as US oil producers defensively hedge against copious crude supplies in the world’s largest economy.

Oil markets continued to struggle overnight under the weight of a dreary macro scrim as back to back miserable China data prints (bad trade data and factory gate inflation) were compounded by a Germany’s sickly ZEW survey which pressured prices.

However, a lower base is being tentatively held in check after OPEC Secretary-General Mohammad Barkindo reiterated his “whatever it takes” to sustain oil market stability mantra.

While corporate earnings reports and phase one of the US-China trade talks is buttressing general risk sentiment, without an implicit rollback of existing tariffs, a tariff detente will have minimal effects on shifting the global growth dial to a more pleasant setting and therefore limited impact on oil prices. In other words, a detente means things may not necessarily get worse, but it doesn’t suggest that global economic conditions will improve any time soon.

But the fact that the losses are very sticky at these downcast levels it could be another worrying sign for oil bulls.

Gold market

The robust US corporate earnings reports coupled with positive developments on the Brexit front has triggered a market rotation out of bonds into equities resulting in US 10-year bond yields significantly rising which is weighing on the opportunity cost of holding gold.

Roaring US equity markets and an upsurge in US bond yields are possibly two of the worst flatmates for gold; as a result, gold toppled nearly $20 top to bottom overnight.

Also, The NY Fed manufacturing survey lifted a better-than-expected 2pts in October, giving the hawks on the FOMC “something to talk about” and perhaps hawkishly influencing their October policy decision process.

Currency markets

Japanese Yen

The “Risk on” environment has propelled the USDJPY higher within reach of the psychological 109 level as the S&P 500 had a peak above the equally cerebral 3000 markers.

Australian Dollar

The market is still debating the RBA’s monetary policy gymnastics. But given the RBA Board is expressing some doubts about the efficacy of dropping rates further operating in what for the RBA is uncharted territory, it could mean slowing the pace of rate cuts but doesn’t necessarily alter their dovish bias. Despite a frothy global “risk-on” environment, the Aussie dollar is trading 20 pips off yesterday’s session tops.

The Yuan

The Yuan may remain stable within the current 7.05-7.10 level while the phase one trade deal gets chiselled out.

Back to back weaker economic data out of China (Trade and factory inflation gate) provided a stark reminder if not a reality check that a weaker Yuan from a pure fundamental landscape may still be in the cards. As such the USDCNH has traded with a better bid overnight.

But given there remains a strong possibility of a Phase 1 deal getting inked, at minimum USDRMB topside should remain capped and we could see the CNH outperform in the weeks ahead assuming phase 2 and 3 of the propose US-China trade deal comes to fruition.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader