Another flat day for US equities as the S&P 500 Index closed little changed, as investors searched but failed to find a decent incentive to buy suggesting markets remain mildly disappointed by the latest round of central bank policy. It appears no longer are investors happy with the Fed hitting the minimum of rate cut expectation, it looks as if they are now demanding a holiday surprise.
However, maybe investors took one look at the calendar and decided to take a pass as Friday quadruple witching day looms ominously. After escaping this week no worse for the wear, it possible no one wants to get steamrolled by a surge in volatility as the IMM expirations are expected to create a massive traffic zone later today.
The Fed fallout
If the Fed was suggesting that it is done for the year, the market doesn't appear to be listing. This point is nothing new as the market decided long ago that it was right, and the Fed was wrong. Moreover, looking at US news flows from overnight, it appears little has changed in that narrative. In other words, "trade war" concerns supersede consumer and labour market strength.
At the end of the day and despite the accommodating move in the dots, the barrier to ‘out dove’ the rates markets remain high suggesting there could be more investor dovish disappointment to come.
Oil markets appear to be giving Saudi Arabia the benefit of the doubt they can deliver on the optimistic timeline for the restoration of production following last weekend's attacks.
But doubts leaked into the equation after reports that Aramco was looking to import crude oil for its Saudi refineries sent oil prices higher (later denied) — leading oil speculators to surmise the repairs are not going along as smoothly as hoped and that Saudi Arabia oil stores are not as ample as had been assumed.
Prices then fell as tropical storm Imelda drenched the heart of Texas oil country with a reported 25-40 inches of rain. The deluge has caused extensive flooding has forced the shutdown of crucial oil pipelines and causing disruptions at operations at the US Gulf Coast terminal. Due to the severity of the flooding, it might weigh on the demand for domestic crude while delays at key export hubs could occur.
Still, even with the fall in prices, the forward curve remains bid as traders appear to be hedging that the initial estimates for the duration of repairs, given the complex nature, could well underestimate the time required. All of which continued to keep a bid under prompt oil markets
Also, the politics of war continues to move in the background. While US Secretary of State Mike Pompeo said, President Trump wants a peaceful resolution. Saudi Arabia foreign minister Al -Jubeir was not as amenable, suggesting that "complacency toward Iran will encourage it to commit further acts with implication for the world. All the while, the US continues to build a sturdy collation to hammer Iran with sanctions as a primary deterrent which is causing Iran to lash out.
As we head to the weekend, the fact that oil market remains bid it suggest traders are very reluctant to give up the so-called " lottery ticket trade" (spike to $100). The market continues to price in higher geopolitical risk, with the full-length forward curve now steeper than it was pre-attack.
For a trade supposedly hinged on a uber dovish central bank narrative, gold has remained remarkably resilient on dips — possibly garnering support from geopolitical risk in the Middle East and the lower for longer central bank interest rate narrative.
The long Gold trade may continue to resonate with investors as it provides the ultimate hedge against recessionary fears which remain elevated. Moreover, as US-China trade tension persists, it will likely force the Fed's hands to cut interest rates later aggressively.
While the market does remain vulnerable to a near term correction especially as the market continue to debate Fed policy. And improving trade news flows might take some of the shine off owning gold. The markets proclivity to buy gold in dips suggests any correction could remain shallow at best.
The Yuan remains at the epicentre risk markets in Asia. The Yuan is the critical bellwether gauge of trade war sentiment as well as the outlook for the world second-largest economy. But with the market is looking out for any updates on the working level meetings between China and the US this week and US Congress reviewing the bill to support Hong Kong's pro-democracy protesters, there are even more uncertainties at play than normal.
The explosive rally in the Australian fixed-income market has grabbed more than a few traders’ attention after the jobless report brought forward expectation of an RBA rate cut. October RBA cut expectations are in bloom again as October is priced for 20bps of reductions.
The quick sell-off in the Australian Dollar suggest the market is nowhere nearly as prepared as they should be for possible RBA action. After all, traders had all but thought the rate cut story had run its course, and more easy money was all but a pipe dream after Jackson Hole, when Governor Lowe said: "Monetary policy cannot deliver medium-term growth. We risk just pushing up asset prices." Instead, he called for investment in infrastructure and structural reforms.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies