Asia Morning: Sitting Atop the FOMC "Wall of Worry"

Market Analysis /
Stephen Innes / 02 Oct 2019


Yesterday’s price action highlights the significance of US manufacturing survey data as the slowdown in the critical sector is thought to sit atop the FOMC's "Wall Of Worry".

Not only that, but it’s thought to be the specific chunk of the economy the President must protect and the sector the USA’s aggressive trade policies were supposed to enhance. So, the data could also imply not only monetary policy infusion is on the way but could increase the odds of some type of trade war détente.

The brutal US September ISM manufacturing PMI immediately repriced higher the likelihood of a Fed rate cut in October but what's curious is that equities sold off in dramatic fashion, suggesting even bad news is no longer good news – at least for equity investors.


Moving into October, memories of Q4 2018 seem to skulk everywhere as the end of Q3 heralded negative risk appeal. The dreary ISM may offer further evidence that equities might be entering a risk aversion phase of the cycle. Back to back contractionary prints on the ISM, compounded by the hefty sell-off on the S&P 500, could be the first signal that the Fed easing inspired equity market rallies could be a thing of the past as investors may interpret a Fed policy pivot to an explicit easing bias as the ultimate leading indicator of an ailing economy.

However, with that doomy gloomy view aside, if there was a time for global Central Banks and political leaders to defibrillate the markets while connecting an intravenous cocktail of easy credit and fiscal glucose, now is about as good a time as any.

Political uncertainty around elections and the impeachment saga does add an element of volatility. However, monetary policy matters more to stocks than political events. Central Bank easing is the primary driver of equity markets risks – politics is headline risk.



Crude prices moved lower after the dreadful US ISM data which intensified concerns over waning energy demand as the US economy was thought to be on relatively stable footing.

However, it's not one singular data point. Rather, it’s the current global run of gloomy economic data, whether it’s manufacturing devastation in Europe or flagging industrial production in China, none of the economic data offers any reason for Oil investors to be optimistic over global demand.

Thankfully for Oil bulls, they were able to take temporary comfort in the fact The American Petroleum Institute reported late Tuesday that U.S. crude supplies fell by 5.9 million barrels for the week ended Sept. 27. There are a lot of narratives in play so we could expect volatility and, with limited follow-through after the initial spike, there appears to be a reluctance to push the envelope higher in early trades.

But also pressuring oil price lower, Ecuador is reportedly indenting to leave OPEC 2020 which has created more fissures in the OPEC cartel as countries that are in dire need of Petro revenue don’t want to be shackled down by a production cut agreement.

Moreover, while their departure is unlikely to add a significant number of barrels to the global supply equation, it does provide negative compliance optics and may even encourage other smaller members to follow suit.

As usual, the oil markets are never short of narratives as only yesterday the Saudi oil infrastructure attacks were old news and the focus is shifting once again to US-China trade.

Finally, yesterday, I didn't focus enough attention to US EIA data that showed a 2.3% drop in US production in July vs. June and dismissed it as a weather-related disruption. However, that was far too narrow a view. With rig counts dropping and onshore production falling, if this trend continues and the market does conclude that US production growth is slowing, it could be a significant and defining moment for oil markets heading into 2020.



Gold and silver both jumped higher on the back of the weaker US ISM data, and US President Trump was criticizing the Fed on Twitter. With short term speculative length thought to be shaken out a bit over the past several days, positioning is cleaner as both metals may be poised to continue higher if US yields cooperate by moving lower. Mind you, the near term outlook will significantly depend on this Friday’s Non-Farm Payroll data where it’s thought that on the first sign of significant weakness in the employment data the markets are going to scream “Recession!”.

This latest Gold purge was a significant positioning wipeout. Sure, it was a bit of gold fever mini-mania all the way up, with one headline in August saying “Buy Gold at any price”. However, with more questions than answers about why now, new Gold investors will be less inclined to chase Gold higher as shellshock is still setting in. Even in my very well seasoned circle of Gold traders there seems to be little consensus as to what specifically triggered the move.


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