Asia Morning Note: Markets Stumble And Bumble To Start The Week


Given that the dismal global manufacturing sector sits atop the Feds policy fix list, the Purchasing Manager Index's were in considerable focus on Monday. Despite central banks' best efforts to offset the impact of trade war conflict, this is not filtering into business sentiment.

Australian manufacturing PMI was 49.4, the first time below 50 in this cycle. Eurozone PMIs fell further, led by Germany, as manufacturing continues to contract to an atrocious decade low level with contagion to services starting to appear broadly. Which provides a stark reminder to investors of the economically damaging effects trade wars and Brexit are having on business sentiment.

According to the IFO and ZEW survey don't bet on a dramatic upgrade in the German economy anytime soon. However, most damaging of all is if the sub-zero borrowing cost is insufficient to get companies to spend again, it does suggest that the German economy is but a step away from mushrooming into a full-blown worst-case scenario, a full out recession.

The weak European PMI's triggered as significant rally across all fixed income with the US bond markets leading the charge. The US curve, as it is so prone to do recently, is bull flattening, taking its cue from Europe. All of which provided a convincing signal for investors to seek shelter under a Gold umbrella

US equities ended the day flat to small down in low volume trade after US data rolled out mostly in line with expectations while placating some of those recessionary fears triggered by the European data.

As well, investors sentiment remained bolstered by the supportive Fed policy, which assuredly remains standing in the wings ready to act at a moments notice. If it were left up to Federal Reserve Bank of St. Louis President James Bullard, who resonates with many market participants these days, the monetary floodgates open next month.

Oil markets

Oil price eventually rose 1% in New York despite a battle of the repair headlines, and the ugly European PMI prints which sent oil tumbling lower initially.

Those dreary, soft data PMI's do at minimum suggest that investors fragility over demand worries could start to compete for centre stage in the oil markets again even more so if US hard economic data starts to weaken noticeably.

Crude oil fell over 2.5% at one point yesterday after Reuters reported the Saudi Aramco facilities damaged in last weekend's attacks would be back to full production by early next week. This conflicts with weekend media reports that it may take several months for total output to be restored.

Wherever the truth may lie, which is usually somewhere in the middle, the oil market might remain focused on Saudi spare capacity as well as geopolitical risk in the region for the next while — suggesting that oil prices could remain supported through higher risk premium, despite the dreary European data, and until there is conclusive evidence that Saudi Arabia can deliver on their repair timeline.

Gold markets

Gold rallies on global slowdown jitters despite a resoundingly strong USD dollar While geopolitical and trade war risk continue to offer support.

However, so far investors appear content to take some chips off the table on moves to $ 1525 suggesting that the thought of progress on the trade issues could be a significant barrier to breach ahead of the October US-China meeting unless of course news flows suggest otherwise.

What should be great for Gold prices and more concerning for policymakers is that contagion to the services sector is starting to appear with private sector activity shrinking for the first time in 6-1/2 years in September while eurozone business growth stalled

Indeed, if these macro conditions continue to deteriorate, there will be only one direction for gold, and that could be to the moon as the markets may continue to price in more Fed accommodation which will drive bond yields lower making gold even cheaper to own.

With the trade negotiation signal completely obscure it too suggests investors may continue to maintain a more defence risk posture until something more definitive unfolds after all one bitten twice shy continues to resonate post-G-20 in Osaka.

Asian currency markets

The Yuan

Price action continues to suggest that the markets think both China and the US are keen to make some trade concessions in October, so interbank types continue to offer up substantial resistance above 7.12 But with that said, the market remains stubbornly bid on dips possibly signalling that traders do not want to have too much short dollar risk on board with uncertain USD funding costs and even more so when Yuan liquidity turn south over the October 1st – 7th 2019 China National Holiday.

The Malaysian Ringgit

The Ringgit has been struggling to claw back lost ground after the USD/CNH traded up to 7.1299 on EBS after Chinese officials unexpectedly cancelled US farm visit on Friday, which had a negative effect across all ASEAN currencies but triggered significant local equity outflows. Moreover, confirming this Bloomberg reported that Overseas investors withdrew $ 40.7 million for Malaysia equities on Friday.

However, the major elephant in the room is not just a wary retracement of the early September US-china goodwill measure, but traders may be adopting a more cautious approach ahead of the FTSE Russel decision which could see the Ringgit topple if Malaysia gets removed for its World Government Bond Index.

The Thai Bhat

The market is pivoting to the Bank of Thailand policy meeting on Wednesday so failing any trade war outbursts; range trade could persist.

In a Reuters poll, most economists (13-20 surveyed) expect the Bank of Thailand (BoT) to keep its policy rate unchanged on 25 September, but market participants will be looking if the BoT strikes a dovish chord to set up for a cut in November. Keeping in mind, the BoT surprised the market with a rate cut in August but remain very wary over the strengthening baht.

The BoT continues to express concerns that the baht's strength relative to trading partners' currencies could affect the economy to a more significant degree amid intensifying trade tensions. All of which suggests they could remain on an easing bias

Indonesian Rupee

The Indonesian Rupiah continues to trade relative flat waiting for the next signal on US-China trade war developments.

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