US equities closed higher, S&P up 0.3% as investors economic concerns were mollified after reports suggested that Saudi oil production could be restored more quickly than initially expected.
The US reported very robust industrial production (IP) data for August. This data point is a huge surprise for a sector thought to be in the dumps and even more significantly for the Fed dot plots, Chair Powell recently highlighted manufacturing weakness as a significant concern for the Fed’s domestic policy outlook.
The IP data surprise, while viewed in the context of a recent string of supportive US economic data, it provides the Fed with a perfect opportunity to walk down some of the market’s dovish ambitions.
Regardless market pricing indicates a rate reduction is certain. The only question is the size of the cut. The highest probability is assigned to a 0.25% reduction, but a 0.50% fall has a significant weighting.
Source: CME FedWatch Tool
Oil prices corrected sharply lower in the wake of headlines from the Saudi press conference. Saudi Energy Minister Prince Abdulaziz bin Salman said oil output would return to normal by the end of this month, with half the production lost in drone attacks on two critical facilities already restored.
With spare capacity, limited and primarily in the hands of Saudi Arabia, Oil prices near term reaction will be a function of how quickly production comes back online.
However, with no adequate global spare capacity to cover this type of crisis, the US inventory data may also become more impactful on prompt crude prices.
Restoring production may placate global investors immediate economic concerns, but that’s only half the problem as the attacks exposed some significant vulnerabilities. None more so than just how inadequately prepared the markets are for disruptions of this magnitude which suggest that the supply risk premium could stick around well after production is restored
The latest intelligence reports suggest the attack was a result of a series of low-altitude cruise missiles fired from at least one location in Iran.
Indeed, if fully verified, it suggests there are very sophisticated and well-funded operators at work in the middle east terrorist theatre also implying risk premium could linger. After all the middle east powder keg is but a spark away from igniting
However, thankfully in the name of world peace, US officials are reportedly drumming up interest for concerted sanctions with allies against Iran, which would likely be the most palatable response from Saudi Arabia’s perspective.
So for today at least, global investors can heave a sigh of relief that the US isn’t as “locked and loaded” as President Trump originally suggested.
Gold had struggled to rally on the back of increased geopolitical risks in the Middle East and the sizeable rally in the oil market. Suggesting that traders are getting increasingly nervous about the magnitude of the Fed forward guidance in the wake of the robust US economic data, along with the pause in the US-China trade war escalation which could weigh on the yellow metal given extreme long speculative market positioning.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll