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From the Floor: Risk rally 'likely to continue' — #SaxoStrats

   • Risk sentiment bounces back in Asian session
   • VIX retreat from 16 bullish for equities
   • WTI rangebound after failing to break $50.50/b
   • North Korea fears wane, but US/China now on watch
   • 'Headline risk continues in bond markets': Fasdal

By Michael McKenna

Last Friday's weak US inflation print sparked a risk-off reaction that saw equities wither, EURUSD punch higher, and German 10-year bunds briefly spike to 164.30. Today, however, the Asian session appears to have inaugurated a recovery on the back of waning fears of escalation with North Korea, among other factors.

"One factor to watch here is the US-China relationship, particularly on trade," says Saxo Bank head of forex strategy John J Hardy. Hardy added that China "is the enabler of North Korea's bad behaviour" and says that the US' reaction to the hermit kingdom's recent belligerence could take the form of tough trade stances against Beijing even as the likelihood of direct military action recedes from headlines.

The US media have shifted their focus from Pyongyang to Washington following the Weimar-esque street battle between far-right and anti-fascist street demonstrators in Charlottesville, Virginia, on Sunday, with many commentators accusing Trump of taking an overly cautious approach after an apparent white nationalist killed a left-wing protester with his car.

In FX markets, Tuesday's UK inflation release, Wednesday's Federal Open Market Committee meeting, and Thursday's European Central Bank are the week's tentpole events with John Hardy pointing to GBPUSD as a pair that could break out of its 1.30-area range on either a CPI surprise out of London or new information concerning Westminster's Brexit preparations ahead of the resumption of talks later this month.

In EURUSD, Saxo's forex head says that investors will be looking for central bank comments on the EUR's recent strength Thursday. According to Saxo Bank head of equity strategy Peter Garnry, EURUSD's recent high of 1.1910 remains the key line in the sand for the benchmark pair.


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Source: Saxo Bank 

With the VIX volatility index retreating from the 16 area touched last Friday, Garnry says that he sees the current wave of risk-on sentiment as likely to continue as European markets follow their Asian counterparts higher.

One item to note from today's Asian session was Japan's strong GDP beat, which saw growth come in at 1% versus 0.6% expected for 2017's second quarter, representing annualised expansion of 4% versus 2.5% expected. Inflation, however, remains elusive.

On the commodities front, Saxo head of commodity strategy Ole Hansen says that crude oil finds itself rangebound again after WTI failed to break the $50.50/barrel resistance area. Although Libyan supply disruptions put a dent in the North African nation's significant return to a three-year production high last month, this is being offset by a slowdown in Chinese refinery activity.

In gold, the return of risk sentiment raises the risk of profit-taking as the metal failed to break $1,295/oz on last week's sentiment plunge.

"We look to reduce exposure with re-entry above $1,300/oz," says Hansen.

Pyongyang, North Korea
Fears of a military exchange with North Korea are receding, but the tensions 
could resurface in the Sino-US trade relationship. Photo: Shutterstock

Michael McKenna is an editor at Saxo Bank 
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