Oil and gold spike, risk offered on US-Iran tensions

Morning Note

January has started 2020 with a flurry of risk-off moves as investors seek shelter from the risks of Gulf War III. The US air strike on Iran’s top general is the major focus for the markets, particularly energy markets. The killing has lit a fire under oil and gold as US-Iran tensions necessitate a higher geopolitical risk premium. 

Risk is offered – European equity market sentiment is weaker on Monday morning and the major indices are lower. US markets closed weaker on Friday. Even in the event of a limited conflict in the region, I would question just how long this will persist when it entails leaning against the Fed, which looks more than ever like its happy to cut to the bone to let the economy run hot and drive inflation to 2%. 

WTI spiked north of $64 but has failed to make a sustained push beyond the May 2019 highs. For this to really make a difference we should be looking for a rally above the Apr 19 highs at $66.60. If that does not get taken out then we may consider the gap to be open to filling. Brent has topped $70 for the first time in three months but again we are looking to the May 19 peaks above $73 to signal a step-change. Fundamentally oil markets are just not as exposed to oil price shocks as they were in days gone by. US shale and a host of production sources coming on stream mean the threat to global supplies from a Middle East conflict is, though significant, not gargantuan.

We have seen similar moves as those seen in the wake of the Iranian attack on Saudi Arabian facilities in September. That time the gap was filled relatively swiftly as there was no retaliation by Riyadh – there was no escalation. We are in a different territory here and a new order of magnitude, but the rules are the same.

The big uncertainties right now for crude centre on the Iranian response to the killing and on that front we should expect some kind of a response. Will Tehran target US bases? It could focus more on shipping in the Strait of Hormuz, but we have already seen attacks on a US base in Kenya killing three and rockets fired into the Green Zone in Baghdad. Iran does not need to use conventional military forces to respond and indeed so far it has not delivered a conventional military response despite all the chest thumping. It does not want to give the US further excuses to bomb it to the ground with an overt reply. Trump is no Obama – enemies believe he will strike. The White House has said it has 52 Iranian targets it will hit if Iran retaliates. European powers are calling for restraint, but the war is already raging. Whether it escalates into large-scale attacks over the coming days and weeks, and grows into a full-blown US-Iran conflict, is very hard to say. But the risk premium genie is out the bottle again. 

Tehran has however all but pulled out of the 2015 nuclear agreement, saying it will no longer limit its centrifuges for enriching uranium. This unleashes the prospect of Iran acquiring nuclear capability in the near future – given the US is already exerting ‘maximum pressure’ this risks pre-emptive actions on the part of the US a la Gulf Wars 1+2. Fundamentally there may be a bigger risk long term by Iran holding back from responding today and focussing on getting a nuclear weapon. My sense – and it is only my sense – is that if Iran responds aggressively now the US could set its nuclear programme back years with targeted strikes. 

Gold is on a tear as a result of the heightened geopolitical risk and depressed US yields. Prices for gold jumped to the highest since 2013, rallying close to $1600 at $1588. We need to look for a break north of that round number and then to $1620, the March 2013 peak.  

Data since the Christmas break has not been overly constructive – the US ISM manufacturing PMI fell for a 5th straight month, slipping to 47.2% in Dec from 48.1% in Nov and marking its worst reading sine Jun 2009. The effects of the trade war are biting – hopes are pinned on the US and China agreeing to the phase one deal this month or we are in for a rollercoaster.

Elsewhere, GBPUSD has settled above 1.30 having been sold off quite heavily over the first two trading days of the year. EURUSD has recovered the 1.1160 level. USDJPY has recovered 108 having taken a seven handle on haven bid. A lot of pressure on that pair as JPY finds bid but it could be overdone. 

This week: 

Brexit withdrawal bill vote – a majority of 80 makes this a formality. 

Fed – Richard Clarida to speak. Minutes from the last FOMC meeting released on Friday show doves have won the day – worries about not hitting the 2% inflation target are prominent. Loretta Mester, a noted hawk, says she is happy to let inflation run above 2% and said accommodation is necessary. The hawks have turned. 

Payrolls – Nonfarm payrolls could well show a softer Dec but seasonal numbers will make it hard to read. Fed is not doing anything but cutting anyway. 

OPEC risks disappointment, US jobs report on tap

Forex
Morning Note

OPEC and allies are poised to formally agree to a policy of deeper production cuts, but there’s not a lot for bulls to be glad about. The 500k bpd increase to 1.7m bpd sounds good but only reflects existing over-compliance, led by Saudi Arabia, which has been pumping less than it is allowed, and it’s going to be short-lived. The deal looks at the moment to only extend through the first quarter of 2020. If OPEC doesn’t extend the curbs through to the end of next year it could act as a de facto loosening of supply that markets would punish with lower prices. There’s a real risk that even with deeper cuts OPEC fails to live up to expectations. We could of course see another meeting soon after this one to agree an extension – critical to today’s formal announcement therefore is whether there is any extension beyond March 2020. And we’ll wait to see if any arm-twisting by the Saudis forces Iraq and Nigeria into complying – but why would they bother now when they’ve not complied thus far?

Oil prices are reflecting a tinge of disappointment with WTI softening to $58.40 after hitting a high above $59 yesterday. Brent meanwhile has eased back off the $64 level to trade around $64.30 – importantly on Brent we failed to beat the November high, a sign that the market isn’t buying into this deal. The 200-day moving average remains a hurdle a little above $64. Prices for WTI and Brent are simply back to where they were before the attacks on the Aramco facilities in September. It’s all got a buy the rumour sell the fact look about it. But we must stress that if OPEC accompanies the deepening of cuts with an extension, at least to the next scheduled meeting in June, but perhaps until Dec 2020, prices could enjoy more upside.

There was good news for Saudi Arabia as Aramco priced well at the top of the range and raised $25.6bn in its IPO. A record listing values the company at $1.7tn, but we shall see where the shares head on day one. Regional and domestic investors have come good but the worry is that the big foreign institutional demand has not been there – if you’re just recirculating oil money among Arab states and Saudi households (levered) then what good has this float actually done?

In equities, Asia has been broadly higher amid more upbeat sentiment around trade talks.

Equities stumbled in Europe yesterday but the good old cocktail of trade optimism and a Friday mean they are pointing higher. However some very nasty German industrial numbers have taken the shine of European stocks ahead of the open.

Wall Street was steady with the Dow and S&P 500 trading mildly higher yesterday. Futures indicate more gains today. Trade will be the deciding factor.

After the usual pump and dump comments from Trump saying that trade talks are ‘moving right along’, we got more concrete news on trade as China agreed to cut tariffs on some pork and soybeans from the US, although it did not mention the quantities involved. This could be due to necessity from a shortage of pork because of African swine fever, more than desire to get a trade deal done, but nevertheless it’s pointing in the right direction. Nevertheless, the toing and froing of trade talks continues – we’ll be waiting for any fresh signal and will only believe a deal once it’s been served up on the table, not when the chefs say it’s in the oven.

In FX, the US jobs report is the big set piece event. A very weak ADP reading this week has forced some to revise forecasts for the NFP, although as always stressed, the ADP number is not always a reliable predictor for the NFP. Consensus is 180k but this is affected by GM workers returning. The three bears likely won’t be happy – expect more low unemployment, which is seen at 3.6%, and decent wage growth (3%). But markets are in a reasonable nervous frame of mind right now – a big miss could signal weakness in the US economy  – bears are sniffing around for anything that points to recession.

Last month’s reading showed US labour market strength remains intact: we saw a strong beat for the US labour market report with nonfarm payrolls up 128k in October, well ahead of the 85k expected, whilst there were upward revisions to the prior two months. The August print was revised up 51k to 219k and the September number was hiked by 44k to 180k. The 3-month average at 176k against the 223k average in 2018

Momentum behind sterling remains solid. GBPUSD has continued to drive higher and has consolidated around 1.3160 – perhaps resting for the assault on the May high at 1.31750. Looking at the charts it’s just one bull flag after the other, but possible 14-day RSI divergence should be watched. A debate tonight between Boris Johnson and Jeremy Corbyn may produce some moves – the election is Johnson’s to lose so he simply needs to avoid any booby traps. Polls as ever need to be heeded – latest from BritainElects shows the Tory lead down to just under 10pts. At present it does not look like the gap is narrowing quickly enough for Labour to mount a serious challenge, but upon such complacency have many best laid plans gang aft agley.

The euro remains steady with EURUSD holding onto 1.110, despite some very nasty looking German industrial numbers – down 1.7% vs +0.1% expected. The collapse in German manufacturing is staggering. Whilst PMIs are indicating recovery, these numbers suggest the very opposite. USDJPY has steadied above 108.60 having found decent support on the 50-day moving average.

Elsewhere, gold was down at $1473 having encountered firm resistance on the 50-day line at $1482. At send time gold was trading at $1473, with November lows sitting at $1445.

Week Ahead: Nonfarm payrolls, China PMIs and Eurozone inflation on tap

Forex
Week Ahead

Welcome to your guide to the week ahead in the markets. China trade talks are ushered in by PMI data, Eurozone inflation results and US nonfarm payroll reports.

US nonfarm payrolls 

The set-piece US labour market report on Friday is the main eco event for market watchers. Signs of a slowdown in employment growth are showing, supporting the doves’ case for further rate cuts. Will we see stronger wage growth though? The NFP report missed expectations on the headline number with employers adding just 130k last month versus the 160k expected. 

China data ahead of trade talks 

The week gets a kickstart with more economic data from China likely to give more clues about the impact of the trade war. The official manufacturing and services PMIs will be followed by the closely-watched private Caixin manufacturing survey in the early hours of Monday. 

Eurozone inflation 

The European Central Bank has cut rates, so what now? Inflation has proved stubbornly weak in the Eurozone, with headline inflation in August of just 1%, while core inflation was a meagre 0.9%. Market expectations for inflation remain subdued. There seems little hope that inflation will start to tick higher and give the ECB some breathing space. Euro area CPI preliminary readings will be delivered on Tuesday morning. 

Brexit 

MPs are back to business, but we don’t know where this leaves the only thing that matters for sterling right now – will there be a deal or not? GBP pairs will remain exposed to headline risk as the market tries to figure out which way the wind is blowing. 

RBA  

The Reserve Bank of Australia is expected to cut interest rates again when it convenes on Tuesday. Speaking last week, governor Philip Lowe gave a very strong signal that rates would be cut again from the current record low 1%.  

Corporate Diary

There are several corporate data releases this week, here are the main ones to put in your diary.

Oct 1stFerguson FY 19 Full Year Results
Oct 1stGreggsQ3 Trading Update
Oct 2ndTesco Interim Results
Oct 3rdPepsicoQ3 Earnings
Oct 3rdTed Baker Interim Results
Oct 3rdH&M GroupQ3 Results

Coming Up on XRay

Don’t miss our upcoming video streams on XRay. You can watch them live directly through the platform or catch-up afterwards when it suits you.

07.15 GMTSept 30thEuropean Morning Call
15.00 GMTSept 30thCharmer Trading talks Forex
15.45 GMTOct 1stAsset of the Day: Oil Outlook
19.00 GMTOct 1stLive Trader Training
18.00 GMTOct 3rdThe Stop Hunter’s Guide to Technical Analysis (part 5)
12.30 GMTOct 4thLIVE Nonfarm Payrolls Coverage

Key Economic Events

There’s a lot of data coming out in the next few days, particularly at the start of the week.

01.00 GMTSept 30thChina Manufacturing and Services PMIs
01.00 GMTSept 30thANZ Business Confidence
01.45 GMTSept 30th China Caixin PMI
08.30 GMTSept 30thUK Final QoQ GDP
12.00 GMTSept 30th Germany CPI Inflation YoY
03.30 GMTOct 1stRBA Interest Rate Decision and Statement
08.30 GMTOct 1stUK Manufacturing PMI
09.00 GMTOct 1st Eurozone Preliminary CPI
14.00 GMTOct 1stUS ISM Manufacturing PMI
12.15 GMTOct 2ndUS ADP Nonfarm Employment
14.30 GMTOct 2ndUS Crude Oil Inventories
08.30 GMTOct 3rdUK Services PMI
12.30 GMTOct 4th US Nonfarm Payrolls

European equities rally as euro, pound crack lower

Forex
IPO
Morning Note

European markets were on the front foot on Friday morning despite a weak cue from the US and Asia as currency weakness and expectations for yet lower interest rates fuelled risk appetite. Asian shares plumbed a three-week low but European bourses are trading up again. The FTSE 100 continued the good work from Thursday to hit 7400 and make a clear break out of the recent range. With the move north a decent case to make for the 7450 area, the 61.8% retracement of the August retreat.

The S&P 500 declined quarter a percent to 2977.62 against a back drop of political uncertainty in Washington. Markets won’t like these impeachment hearings but ultimately the risk of Mr Trump being ousted by Congress appears very slim indeed.

Another stinker of an IPO – Peloton shares priced at $29 but were down $2 at $27 on the first tick and ended 11.2% lower at $25.76. First day nerves maybe but this stock has fad written all over it. Think GoPro.

On the matter of dodgy prospectuses and dubious IPOs… S&P has downgraded WeWork debt another notch, and slapped a negative outlook on for good measure.

FX – the euro now looks to be on the precipice, on the verge of breaking having made fresh two-year lows on EURUSD. Whilst the 1.09 level may still hold, the banging on the Sep 3/12 lows at 1.09250 has produced a result with overnight tests at 1.09050. We’ve seen a slight bounce early doors in Europe but the door is ajar for bears. The Euro is under pressure as ECB chief economist Lane said there is room for more cuts and said the September measures were ‘not such a big package’. How much more can the ECB feasibly do?

Sterling is tracking lower against the broader moves in favour of USD. There is a chance as we approach crunch time on Brexit that GBPUSD pushes back to the lower end of the recent range, the multi-year lows around 1.19. Bulls have a fairly high bar to clear at 1.25. At time of publication, the pound had cracked below yesterday’s low at 1.23, opening up a return to 1.2280 and then 1.2230. The short-covering rally is over – time for political risk to dominate the price action.

Bank of England rate setter Saunders made pretty dovish comments, saying it’s quite plausible the next move is a cut. In making the case for a cut now it conforms to the belief in many in the market that the Bank is barking up the wrong tree with its slight tightening bias in its forward guidance. The comments from Saunders are clearly an added weight on the pound.

On Brexit – there’s a lot of noise of course and all the chatter is about MPs’ use of language and how could Boris possibly still take the UK out of the EU by October 31st without a deal. The fact is he can and he intends to. There is some serious risk that GBP declines from here into the middle of October on the uncertainty and heightened risk of no deal. This would then be the make or break moment – extension agreed and we easily pop back to 1.25, no deal and it’s down to 1.15 or even 1.10.

Data to watch today – PCE numbers at 13:30 (BST). If the core CPI numbers are anything to go by, the Fed’s preferred measure of inflation may point to greater price pressures than the Fed has really allowed for. Core durable goods also on tap, expected -1.1%. Plenty of central bank chatter too –de Guindos and Weidmann from the ECB follow Lane and then Quarles and Harker from the Fed. Should keep us busy this Friday.

Oil is in danger of entirely fading the gap back to $54.85, the pre-attack close, having made a fresh low yesterday at $55.40. There’s still a modicum of geopolitical risk premium in there though, but bearish fundamentals are reasserting themselves over the bullish geopolitics. WTI was at $56.10, ready to retest recent lows at $55.40. Bulls require a rally to $57.0 to mark a gear change. However we are now touching the rising trend support line drawn off the August low at $50, so could be finding some degree of support.

Gold is pretty range-bound now, but we are seeing it test the $1500 level which could call for retreat to near $1482, the bottom of the recent range and key support.

Week Ahead: Inflation readings to shape central bank views

Forex
Week Ahead

There are a lot of things going on this week, with inflation leading the headlines.

Inflation 

With investors betting the Federal Reserve will cut interest rates again in September, Tuesday’s US inflation figures will be of key importance for the direction of global markets. Core CPI advanced 2.1% in June, its biggest increase in a year and a half. If inflation pressures continue to build, it could undermine doves on the FOMC calling for more hikes. UK inflation figures are released on Wednesday. 

China and Germany growth 

Fears about a slowdown in China and Germany are at the heart of investor concerns for the global economy. As such a batch of data from the two countries this week will be important for risk assets. China’s industrial production figures and the German preliminary GDP print on Wednesday will be the most closely watched. 

Walmart and US retail sales  

Q2 earnings season is well past its peak but US retail giant Walmart delivers its quarterly numbers on Thursday before the market opens. Q1 earnings were a positive surprise with EPS of $1.13 beating expectations of $1.02. The key comp sales number hit 3.4%, making it the best quarter in 9 years. Despite fears for the US economy, consumer confidence and retail sales gauges remain robust. On that front, US retail sales numbers are due on Thursday shortly after Walmart reports. 

Tencent and Alibaba 

We’ll also be watching earnings from China giants Tencent and Alibaba. The ongoing trade dispute between the US and China is sure to be a weight, however Chinese consumers have remained relatively robust. For Alibaba, in addition to its ecommerce platform, we’ll be watching to see how well its cloud computing business is doing. Both represent important bellwethers for the Chinese economy. 

Corporate Diary

Earnings season is still going strong, with these earnings releases in the next week.

Pre-Market14th AugustTencent Holdings Ltd – Q2 Earnings
After-Market14th AugustCisco Inc – Q2 Earnings
Pre-Market15th AugustWalmart – Q2 Earnings
15th AugustAlibaba – Q2 Earnings
After-Market15th AugustNVIDIA Corp – Q2 Earnings
XRay

Tune in live or watch on catch-up.

07.15 GMT12th AugustEuropean Morning Call
17.00 GMT12th AugustBlonde Markets
12.30 GMT13th AugustLIVE: US CPI Coverage
15.30 GMT13th AugustAsset of the Day: Bullion Billions
10.00 GMT15th AugustWalmart Earnings Preview: LIVE
Key Economic Events

Watch out for the following economic events in the coming week.

08.30 GMT13th AugustUK Average Earnings
12.30 GMT13th AugustUS CPI Inflation
09.00 GMT13th AugustGermany ZEW Economic Sentiment
01.30 GMT14th AugustAustralia Wage Price Index
02.00 GMT14th AugustChina Industrial Production
08.30 GMT14th AugustUS CPI Inflation
01.30 GMT15th AugustAustralia Unemployment Rate
08.30 GMT15th AugustUK Retail Sales
12.30 GMT15th AugustUS Retail Sales, Philly Fed Manufacturing Index

Dow off 575 points; Market turmoil deepens as trade war panic sets in

Forex
Indices

Where to start? Last week’s surprise announcement from President Donald Trump of new tariffs against China continues to panic markets. Just when it looked like relations were beginning to thaw again, we’re back where we started.

The trade war looks to have no end in sight. The new 10% tariffs on $300 billion of additional Chinese goods could be raised higher. It may even go above the 25% level imposed upon other imports. Beijing has already retaliated (even though the new tariffs don’t come into effect until September): the People’s Bank of China has let the yuan depreciate to its lowest levels in years.

Incredible losses for Dow: Equities hammered again as sell-off deepens

Two weeks ago the stock market seemed like a rosy place. Belief was that the Federal Reserve was about to start a sustained cutting cycle, and that US-Sino relations were on the mend.

Fast forward to today. The Dow is off a whopping 575 points, the SPX is recording 2.2% losses, the FTSE 100 is at a two-month low and the Dax is not far off the lows of April 1st. The ASX has plunged 2.8%, or 191 points, while the Hang Seng has been knocked for six, with losses of 3.8% or 1,000 points taking it down to lows not seen since January 8th.

Meanwhile, the VIX is up two points and challenging the highs of early May.

FX: Chinese Central bank braces for trade pain with yuan devaluation

The yuan is trading above 7 per dollar for the first time in over a decade today after the People’s Bank of China set the daily mid-point of its trading range at US$6.9225.

The dollar may be up against the yuan – and the commodity trio – but elsewhere it is sliding. EUR/USD has leapt 0.6% to trade around 1.1175, USD/JPY has dropped half a percent to trade just above 106, which makes it very likely it’ll be the lowest close of 2019 for the pairing. Meanwhile the greenback has dropped 0.8% against the Swiss franc to 97.50 – its lowest level since the end of June.

While Sterling is holding its ground against the dollar, elsewhere it has tumbled as well. A spokesperson for the European Commission has claimed that the current Brexit agreement is the ‘best deal possible’, denting hopes that Brussels will budge and open the way for more negotiations ahead of the October 31st deadline.

Gold surges as investors flee to safety, oil slides further

Gold is up 1.8%, adding around $25, to trend around $1,465 as markets dump risk and look for shelter in safe-haven assets. Silver has jumped 1.8%.

Meanwhile, crude oil has dropped 1.4% to trade below $54.50 and Brent is down 1.2% and trading around $60.60 after giving up support at $6.

Natural gas is taking an absolute hammering, off more than 5% and trading around $2.035 – not that far from the key psychological $2.00 handle.

Cryptocurrency: Sell off? What sell-off?

Things are much rosier in the cryptocurrency market today, with Bitcoin up 14% to test the $12,000 handle again. Litecoin is up 6.2% ahead of this week’s halving, Ethereum has gained nearly 5%, and Bitcoin Cash and Dash are both trading up 3.3% on today’s opening levels. Ripple is something of a straggler today, registering comparatively small gains of 1.5%.

Some view cryptocurrency as something of a safe-haven, with the equity sell-off prompting many to pile into cryptos.

Trump blows up markets with surprise China tariffs

Forex
Indices
Morning Note

All hell broke loose in the markets yesterday and continues today. with the sharp shooters having given way to the heavy artillery.

The trade war just got very hot, just as we thought things were improving. And just as the Fed had come up short as far as the market is concerned. What can the Fed do now?! Markets are like Test matches – you think you’re on top and suddenly a big hitter comes to the crease and knocks you all the park.

Donald Trump torpedoed the markets with a surprise decision to slap a 10% tariff on an additional $300bn in Chinese goods effective Sep 1st. China is sure to retaliate – this is real escalation.

Commodities hammered as risk-appetite evaporates

Risk assets took a pounding and gold rallied very hard from its lows of the days. Gold found bid to rally about $40 off its lows – incredible. It has eased back slightly today but still remains around a two-week high. Bond yields have sunk as investors sought shelter. These kind of risk-off moves are quite phenomenal.

Oil was absolutely hammered. We saw enormous selling in crude oil and Brent with the latter retreating to the $60 handle. Having been hanging around the $63 mark it gave up 5% in a matter of minutes. WTI shipped $4 from $58 to $54 in minutes too. Those are big, big moves and highlight the kind of sensitivity the market has to trade. Today the two benchmarks are on the rise, but even with gains of 1.5% for crude and 1.9% for Brent yesterday’s pre-announcement levels are still far away.

Equities sink on tariff drama

US equity markets, which had been in the green, turned sharply lower. SPX dropped 40 points or so from its highs in short order to breach the key 2970 level and trade around 2952 at the lows. Today is has shed another 6 points to trend around 2,943 – after a brief drop all the way down to 2,933.

European indices are still being hit hard – the FTSE 100 is off 0.75% to trade around 7,446, while the DAX has drop a whole percentage point to trade sub-12,000.

FX: Yen leaps on flight to safety

Bid for the yen, which had been strengthening all day, accelerated markedly as USDJPY returned to the 107 handle – and today it dropped lower, bouncing off support at 106.70 to trade a little shy of 106.90. GBPUSD has held its ground and the euro also a touch firmer as the dollar has taken a knock. USDCNH has firmed up – a possible retaliation by China is to let the 7 handle be breached. Australia’s dollar has been hit for six.

All bets are off as trade war escalates

The new tariffs have completely taken the market off guard. You have to question the motives when a) the trade team have been in China this week conducing talks, and b) it’s coming just a day after the Fed disappointed the president by not signalling enough cuts. Trump got his cut, so he’s pushing China again. It’s just gaslighting.

Your move, Beijing…

Could this be the biggest monetary policy meeting in years?

Forex

Could the upcoming Federal Open Market Committee (FOMC) be the most watched monetary policy meeting in a long time?

It certainly has a lot weighing on it.

Stocks are at record highs, pushed higher by a certainty that the FOMC will cut short-term interest rates for the first time in a decade this week. The two-day policy meeting kicks off on Tuesday, with a policy decision announced on Wednesday.

While Chairman Jerome Powell signalled a cut in July, its unclear what the policy could be for the rest of the year. And is a cut even necessary? While the consensus is that a cut is coming – the only quibble is 25bps or 50bps – the recent economic data looks strong. As our Chief Markets Analyst, Neil Wilson, explains:

“Is a cut justified? I would point to underlying core CPI at 2.1%, retail sales +3.4% in June and a 50-year low in unemployment as perhaps arguments to the contrary. Increasingly there is a sense that the Fed is no longer data dependent, but being held to ransom by the White House and the market.”

But what can we expect from the meeting?

The answer is, it depends…

Confirmation of a cut from the FOMC, if paired with signals of a more dovish policy in the long term could send greenback diving.

On the flip side, if the markets are surprised and a cut doesn’t happen, expect stocks and commodities to tumble and the dollar to surge.

At this stage, despite stronger-than-expected data, growth momentum is weaker. While a recession has been avoided, a cut is still the safe bet. This policy meeting could define the direction of global monetary policy for years to come and provides a lot of opportunities for traders. One thing’s for sure, the announcement on Wednesday is not one to miss.

Boris enters Number 10

Morning Note

As the prime minister elect prepares to enter Downing Street, markets are wondering what the regime change will mean for investors.

Plus ca change: A new prime minister, the same problems. Key questions remain over who he appoints to cabinet and what tack he’ll take with the EU over the coming days.  A lot of the Boris factor is priced in – what’s not is an actual no-deal. If Boris does well in selling a new(ish) deal – lipstick on the pig if you like – then the pound can rally hard from here. 

Sterling has been steady and didn’t look too closely at last week’s lows yesterday. Nevertheless there is yet potential for the pound to slip lower still. The arithmetic hasn’t really changed for Boris, but what has is that Tory MPs now realise they have the Brexit Party knocking. At send GBPUSD was holding around 1.2450. 

Equities

Equities are firmer again – Wall Street pushed up again yesterday to move close to record highs again. SPX rose 0.68% to 3,005. Asia positive with the Nikkei up 0.4%. European shares are around the flat line but on the open we see the FTSE 100 is underperforming, slipping into the red as the rest of the main bourses were higher.

The trade outlook is a little better – or at least the news flow is onside this week – as we wait for face-to-face negotiations between the US and China to take place next week. Things can change quite quickly on this front. Markets still eyeing the ECB likely to turn very dovish tomorrow.  

Oil steady, Bitcoin tests key support

Oil – Brent remains anchored around $64 and WTI at $57. Reports of a second Iranian drone maybe being shot down by the US last night. API data showed a bigger draw on stocks than expected last night – US crude stocks declined 11m barrels versus the 4m expected. EIA figs today forecast for a draw of 4.2m. So some bullish news flow and data points but as ever it’s the demand side that is really important in a world that remains awash with crude – on that front we need a big turnaround in the macro data and/or a China-US trade deal. Smart money moved more net long last week of course.

Bitcoin is weaker again, slipping the $10k level and is finding support on the 50-day line around  $9650. If this goes then that bearish flag formation we’ve traced looks important. Look for a possible bounce off this level though and return to $10k.

Shares climb post Powell, gold and oil rally

Forex
Indices
Morning Note

All power to Powell, but is this the Waterloo for the bull market? His dovish remarks lit the green buy light across the board. Stocks, oil, gold, bonds and currencies ex the dollar are pretty well all bid up with the Fed apparently happy to keep its hand on the pump. What happens when it stops cutting (one and one for insurance purposes?) and what happens if the US-China trade sitch goes awry? Market seems priced for perfection and earnings are slowing.

The S&P 500 briefly broke through 3,000 to achieve an all-time high, but closed a few points short of its record close at 2,993.07. The Dow also set a new intra-day peak, while the Nasdaq set a closing high. 

Asia has been lifted higher on the coattails of Wall Street. European markets are up across the board. Roughly quarter point gains for the main bourses – hardly euphoria in Europe and still some way off all-time highs. Come on Mario, now’s your time!

Powell power 

Powell said the stronger jobs report last week didn’t alter his outlook – so what might? Certainly the jobs market has slowed a touch this year – employment growth has averaged 172,000 per month thus far this year, compared with an average monthly gain of 223,000 in 2018. But it’s hardly requiring a cut.  

As noted yesterday: Investors are buying the Fed put hook, line and sinker. 

The Fed chair has well and truly left the door open to a rate cut in July, albeit there remain doubts about whether this is going to be first of several cuts or just an ‘insurance’ cut designed to keep markets on an even keel. The testimony didn’t appear to tell us anything about what the Fed is thinking longer term. His comments though did nothing to nudge market expectations towards a more neutral position. He seems happy to allow markets to crystallize their belief in a July cut.

Minutes 

Interesting set of minutes from the FOMC’s last meeting coming in the middle of this Powell testimony. What’s clear is that they will cut in July. Hat tip to Helen Thomas of BlondeMoney for noting that the Fed has basically admitted that it is going to cut because the market wants it to. From the minutes: “While overall financial conditions remained supportive of growth, those conditions appeared to be premised importantly on expectations that the Federal Reserve would ease policy in the near term to help offset the drag on economic growth stemming from uncertainties about the global outlook and other downside risks.” 
 

French-US relations 

The threat of EU-US trade spat needs to be considered. The White House is not happy with France’s digital tax, which it says unfairly targets the big US tech giants. For sure it does – but that is because they do not pay an appropriate level of tax. It’s also because Europe doesn’t really have many big tech firms that would be affected. Nonetheless, Trump will use this to beat the French and we can expect Tariff Man to do something. The US doesn’t want to cede the regulatory leadership to Europe either. 

FX – Dollar weakness has returned after Powell’s testimony. Some bid seen this morning for the euro and sterling. Neither the euro nor pound however are able to mount a serious challenge yet – we’re not seeing this as a major technical breakout. GBPUSD has firmed above 1.25, but Brexit fears are unabated. Richard Branson says no-deal would take cable back to 1. Pound-dollar parity is a risk but longer-term it wouldn’t last. A kneejerk to that level is possible, but we’d anticipate the pound recovering ground.

EURUSD at 1.1270 is still well short of the Jun highs around 1.14. Potential head and shoulders – we could in fact see a big breakdown to the downside if the ECB turns extra dovish. Need to clear the left shoulder at 1.1350 for bulls to be happy. 

Oil – Brent futures firming up above $67 and WTI north of $60 after a big drawdown on US stockpiles and an escalation in tensions around the Strait of Hormuz. Reports indicate a Royal Navy frigate warded off Iranian boats that tried to impede a BP tanker. Iran had warned that it would retaliate after Royal Marines seized an Iranian ship off Gibraltar. Dollar weakness and Fed dovishness are also supportive.

Bitcoin – another rollercoaster session. Bitcoin skidded sharply lower yesterday and continued to move south overnight. Seems to have encountered fairly stiff resistance around that $13,300 level we mentioned previously but the selloff was pretty brutal – down to $11,600 in short order, where it has found support. Look for another push higher to the $13k mark, but if the $11,500/600 level fails to hold then $10k is possible in double quick time.

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