Fishing Trip edition.
I’m off for the next week on my annual deep-sea fishing trips. This year I’m fishing 15 hours off the coast of Sarawak while spending six consecutive days and nights on a leaky boat trolling the Laconia shoals as well as jigging the numerous oil rigs off the East Malaysia Coastline, which I’m looking forward too!
Into the depths of Malaysia
Moody US Markets
Risk markets tentatively stabilised overnight attempting to bounce back from Wednesday ‘s steep equity sell-off. Of course, the big question is why given that little has changed and if anything, the Feds new Vice Chair Clarida, who the markets were extremely focused on, stuck to the data dependent optimistic view his boss Chair Jay Powell rolled out last FOMC cementing the December rate hike narrative. Not the best news for equity investors in the unstable environment as the FOMC continues to dig in their monetary policy heels.
But without trying to oversimply matters, the reason the markets stabilised is that everyone is still in buy the dip mode and or wants to sell the year-end rally as everyone expects 2019 to be a real stinker. But this also tells me that the market is nowhere near bearish enough and suggesting we’ve not even come remotely close to putting in a low on the S&P.
I’m always a long-term equities bull, and who isn’t?
Now, I’m still a long-term bull when it comes to equity markets. I know five years down the road the S&P will be trading much higher than it is today if history tells me anything. But when my signals suggest with more certainty, that the S&P will sell down to 2300-2400 before breaching 3000, I remain a much better seller of risk until the markets prove me wrong. I don’t think I’m alone as the short-lived move above 2700 was faded as investors took their cue from Nasdaq Emini’s which are tanking as various tech stocks are melting post-earnings.
What’s different about this sell-off
So, what is different this time around versus the undulating markets we’ve seen for the past two months. Unlike the previous sell-off in 2018 that tended to hit a sector or two at a time, the breadth of the latest rout was much more pronounced as it was heavyweight champions of the US markets that were leading the way. Indeed, this sell-off is entirely different as on top of the mountains of geopolitical risk; US interest rates are rising quickly and mercilessly squeezing financial conditions. In turn, this is putting immense stress on both long bonds -long equity positioned portfolios that have been the markets mainstay due to central bank largesse.
With the Feds committed to draining the trough, and with US tax cuts expected to run its course. Markets will then pivot to the not too cherry prospect of a massive US deficit to fund. Sometimes you must pay the piper, and just maybe we’re going to have to pay the piper for a while.
Since the fasten the seatbelt sign is still on in my plane it suggests market turbulence is unlikely to leave the picture anytime soon.
First look at Tokyo
Osaka looks a bit firmer in pre-market action, but this will be as much about position squaring as it is bullish sentiment.
Oil markets moved higher on profit taking after risk sentiment tentatively stabilised overnight. But the gains were further supported by another apparent shift in Saudi and OPEC oil policy. From putting customers minds at ease that the response to US sanctions on Iran will be to maintain adequate supply (maybe even a bit oversupplied) towards now keeping inventories under control. Indeed a subtle bullish retort. Market positioning is much cleaner now after the recent long oil position shakes out, so buyers. Bulls are less concerned about the crowded trade mentality trampling over bullish bets.
On the flip side, US inventory builds the proclivity for the front ” time spreads” to move to contango as well the macro sell-off which should continue to be critical downside catalyst are huge concerns. But the subtle shift in Saudi policy language should be enough to keep the bears caged, at least for the time being.
It does appear the battle lines are getting defined as Gold markets have entered a new trading zone $ 1228-1238, but of course, investor mood swings on the S&P are steering the ship. However, a hawkish nod from Vice Chair Clarida dented sentiment. Markets had shifted from 80 % probability of a December rate hike to only ~ 65 % after Wednesday equity rout. But Clarida optimistic view of the US economy has increased those odds today.
Ultimately, however, Gold will be a crucial hedge against a possible protracted global equities market meltdown, and with risk aversion gripping the market more aggressively than risk on, gold should remain bid on dips.
The Malaysian Ringgit
Regional sentiment remains very shaky but even more so for the Ringgit as budget time looms. The stronger USD profile across G-10 is not helping sentiment, and neither does Fed Clarida cementing his views for a US rate hike for December.
While global risk sentiment is improving into the weekend, all bets are off for next week as we continue to expect the USDMYR to nudge higher and test 4.18 resistance into the November budget release.