Equity markets have begun the week on a somewhat positive not picking up from Friday rebound as bargain hunters have returned on the first sign of stability. I guess if you owned a stock for fundamental reasons seven days ago and its 5 % lower this week, why not add to the portfolio? So the story goes.
While the VIX has pulled back to the 25 zone, it’s very trying to view this weeks stock market bounce as anything other than technical correction after critical global benchmarks had one of the there worst performances in years. However, the market is trying to find a positive equilibrium, and if we can get through this week’s critical US CPI relatively unscathed, then it would most certainly look as if last week was little more than a corrective episode rather then the commencement of a bear market.
None the less, government bond yields have found some stability after yields moved higher, albeit in very thinly traded bond markets, adding to the semblance of calm which has started the week. But concerns abound that the bond markets have only begun to factor in both the global reflation trade and burdening supply which could drive US bond yields considerably higher.
Oil Markets
Ignoring US supply-side concerns, oIl markets attempted to make a half-hearted recovery overnight on little more than an equity market correlated bounce and indeed the weaker USD added to the momentum.
Despite the oil market exhibiting all the hallmarks of technical trading, toppling from massively overbought conditions to retracing on an equity correlated bounce. But technical momentum or not, with the EIA data around the corner, it’s hard not to overlook their expectations that U.S. crude output may rise to 11 million bpd by the end of the year.
However, global demand remains firm, and despite the shale oil boom, the supply tightening narrative remains prevalent with oil towing the line.
Battle lines are forming in and around the WTI 60.00 bpd level which should make for an exciting market this week.
Gold Markets
Gold prices were supported by a weaker dollar and physical demand ahead of Chinese lunar new year. The equity market carnage has abated, and the waves of cross assets selling to replenish equity margins have temporarily decreased providing a calmer market to re-establish gold longs. But prices should remain within a range ahead of this week US inflation data as the US CPI will be a monster print for the markets inflation views and could provide a catalyst for gold to bounce higher.
Currency Markets
The US dollar traded lower as currency traders are analyzing the rebounding global equity markets. Lots of noise but little momentum as traders are keying on this week’s US CPI with volumes and liquidity density much lower to start the week.
Japanese Yen
The markets continue to digest the potential FX trading leverage cap for individuals in Japan. Mrs Watanabe was a considerable player in the market (especially for retail brokers), so we’re keeping a close eye on the developments
As for the yen, we seem to be at a crossroads in all Asian markets with currency markets barely budging looking for some inflation clarity in Wednesday's CPI. The fear is that a higher print will send bond yields sky high and equity markets will tumble once again.
Australian Dollar
A rebound in risk sentiment has seen USD haven hedged unwind and buoyed commodity markets. As such, the Aussie dollar has found some solid footing this morning.
Malaysian Ringgit
We’re at a bit of a crossroads this week as the markets are grappling with inflation versus the global growth narrative.
An uptick in inflation will lead to higher yields and will present the most significant headwind for the Ringgit. While the market has priced in 3 US rate hikes for 2018, a sudden uptick in US inflation could quicken the pace of the FED interest rate normalisation and could weigh negatively on regional sentiment.
We expect the market to trade in a tight range ahead of this domestic GDP and US CPI. Both monster data points for the Ringgits near-term fate.