US Markets
Another case of headline overload overnight.
US markets closed lower overnight due to some factors including, trade war phase 2, more political turmoil ahead of US midterm after reports surface ahead Attorney General Rod Rosenstein was resigning from his post and of course equity investors taking bets off the table ahead of any potential FOMC bullish tail risk. But given the short half-life that political turmoil has on the overall market sentiment, profit taking is more to do with trade war escalation fears and a possible hawkish Fed.
FOMC bullish tail risk
Yesterday we looked at the dovish tail risks but now a look at the opposite side of the coin.
With a rate hike baked into this FOMC meeting will be all about the future path of interest rates.
Don’t toss your dollar out the window just yet, by any standard all the US economic surprise index still favour the USD by a long shot. Of course, all data should be gleaned but its the surprises are what move asset currency markets and since most if not all Macroeconomics data are generally priced in over the long term, therefore adding up the sum of the data surprises can shed significant into monetary policy vies , and a very basic understanding of anticipated moves in currency markets. And by all current standards, the US surprise index is leading the charge and Fed will be looking at this metric.
Surprise = Realized Change – Expected Change in Economic
To that end, the markets still have a relatively pessimistic view on the US rates curve into 2019 and beyond as there has been too much focus and external issues and if trade wars etc. were really a concern for the Feds, they wouldn’t be raising interest rates this week nor guiding the market to another rate hike in December.
But a hawkish case can be made after several Fed members have been turning the dial up but none more so significant that Lael Brainard.
It’s challenging not to be dollar bullish from a pragmatic US interest rate storyline. But of course, price action needs to be respected especially with the EUR veering towards 1.1800 again. The strong US economy suggests USD yields have further room to run. And when former doves like Fed Governor Lael Brainard, who I dare say, is starting to roost with the Hawks and provides the clearest of signals hat this sitting Fed is more hawkish than the markets 2019 overly pessimistic lean.
Oil Markets
Oil continues to hold on to astonishing gains as the latest move was helped along by headlines from OPEC’s weekend meeting as the organisation agreed to no immediate supply boosts here and last weeks reports that Saudi Arabia was now comfortable with Brent at $80.
But with the 72nd session of the United Nations General Assembly kicking off, and President Trump set to hold court. Indeed, Iran is sure to be a fashionable topic so prepare for some headline risk, and I would expect some of Trumps OPEC barbs to surface. So it will be interesting to see how Oil markets absorb headlines with Brent trading near four years highs.
Headline risk notwithstanding, price action suggests that oil investors hopes are skyrocketing that US sanctions on Iranian crude oil exports will cause a significant shortfall in global supply. With that in mind, it’s possible we could see further advances in the weeks ahead. With OPEC showing little inclination to add amounts anytime before the December 3 summit, it’s very likely, in the absence of any about-face from OPEC, that Brent could trade to $85 + and WTI $75 + ahead of Nov 4 Iran sanction date as bullish expectations should continue to boil. But when taken in combination with the fact US commercial crude oil inventories are at their lowest since early 2015, it makes for a convincing bullish argument.
Gold Markets
It’s interesting to see Gold glued to the $1200 see-saw level this morning as frankly, I was expecting the yellow metal to be trading a tad weaker ahead of the FOMC. But with the markets in the very much oversold territory, some short bets are ceding just in case the Feds do unexpected give some notion of a pause for cause in the current 2019 Fed rate hike cycle. As a dovish inference for the Feds could send Gold prices above the critical $1210 level. There’s a lot of cross action inference on this week’s Fed forward guidance.
Currency Markets
No idea why dollar bulls are so scared of their shadow these days, but It does tell me a significant number are long at not so comfortable levels.
Euro
Hawkish comments from Draghi has a significant impact on EUR volumes overnight as I continue to view the EURUSD the primary battlefield for USD positioning. Anytime the Uber dove Draghi underline the pick up on inflation, the market listens. Which triggered a rally in Bund yields, with a close above 0.50% but the EUR was rebuffed above 1.1800.
EU zone data remains uneven and at least currently in the USD cycle dollar bulls feel comfortable to sell EURO at 1.1800.
1.1720 remains the key for downside after it was such an obstacle to push through last week
JPY
Starting to see a nascent recovery in USD strength the back of this week’s Fed meeting, my views for a stronger JPY are a way to far in the horizon as the market is testing some significant near-term levels with a break into 113’s will open test of 114.25 on follow through. Interesting from my seta was yesterday absolute zero reaction in JPY to the glint of risk off, suggesting the dollar bulls are targeting USDJPY higher.
EM Asia
The Malaysian Ringgit
Brent above 80 has improved, but one look at global yields ratcheting higher in the wake of Draghi’s hawkish inflation comments and the true inflationary impact of surging oil prices are having on the US yields, will make local EM traders think twice about diving in headfirst.
Support comes in at 4.12 resistance 4.15
