A Most Delicate Start to an Uncertain Week
Markets
We were calling for a mixed start today regardless of the middle east bruhaha as the market is weighted down but the uncertainty of what door to walk through. Door number 1: The dovish Fed- Door number 2: Trade war uncertainty -Door number 3: Middle east escalation.
The markets have opened with slight risk-off posturing, and those who remained hedged over the weekend will be keen to see where Sunday’s Iran news flow leads before even thinking about reversing.
Oil Markets
The geopolitical escalation in the Middle East is unquestionably a bullish short-term signal for oil markets, as even the thought of 20 % of the world oil supply being affected is enough to trigger significant tremors across oil markets. And these tremors are noticeably moving up the Richter scale as finally there was some noticeable activity for August $70 calls, but frankly, I have no idea why it took so long.
While Iran risk premiums are tentatively holding, life in the oil market is never a one-way street these days as the lack of a significant push higher at the open suggests the market remains focused on OPEC summit, G-20 and of course U.S.-led oversupply concerns which suggest US inventory data will drive the bus this week.
And while I continue to look for commodity and oil demand side support from the likely Fed pro-cycle rate cut in July, however with U.S.-led oversupply holding the reins, the market remains nervous about counterseasonal builds in both oil and gas inventories and should act as price topper.
Gold markets
A tentatively bullish move higher at the COMEX open as the USD continues losing its haven appeal; Middle East tensions smolder but threaten to ignite, while negative real interest rates make Gold just that much more appealing.
But for today, SGE and TOCOM could provide us with a good read on the broader market sentiment when liquidity picks up later today.
Gold continues to trade well despite equities rallying to all-time highs and while I do think one of these markets will eventually prove to be wrong, but for the time being, the race to the bottom in fixed income market remains supportive for both.
Falling global yields and unwinding of long USD positioning has made gold attractive to a broader range of investors. And these new waves of buyers continue to support gold prices amidst a growing list of catalysts which continues to suggest Gold demand could continue to swell.
Sure, there has been an outsized focus on lower interest rates after the FOMC but ultimately while lower interest provides a supportive scrim, but like most commodities, Gold’s price is a function of supply and demand in the long run where demand is the dominating force. Frankly, gold bulls care little if lower interest rates are driving the market demand, they only care if prices move higher, but they also know lower interest rates alone is not a reason to buy Gold.
If we see signs of de-escalation in middle east tensions it could take some of the shine off Gold, but if he begins to factor in a more trade-friendly atmosphere coming out of G-20, Gold prices could remain heavy, and we could see a correction lower.
But, with strategic buyers backing up the tuck on market dips coupled with the unyielding Pboc appetite, these pillars of support will continue to bolster the market for the foreseeable future.
Gold’s broadening appeal.
Gold’s broadening appeal is what makes it so attractive me as a not only hedge against the weaker USD on the back of a dovish Fed but also against the recessionary signals that we have talked about endless last week.
But with both Gold trading firmly and equity markets making new highs something must give. With stock indexes making all-time highs, equity markets always remain incredibly vulnerable to a significant downside correction. Given the numerous catalyst that could trigger as stock market decline, Gold in this feverish environment, Gold needs to be your first flipside investment.
From the Fog of war to the Fog of currency war we go
As far as a flat-out currency war is concerned, I don’t think that will happen but none the fewer discussions are now shifting from a conspiracy theory lark to a possibility.
But what should be visible to everyone now is that the US administration will most certainly be looking for currency concession from both China and the Eurozone when trade negotiations resume and while I don’t think this will lead to a massive US dollar sell-off, but dollar bulls like myself will need to temper our expectations.
The Euro
The EURUSD sent off a bullish signal by closing above the 200dma (1.1351 Friday) as trader emerged from their low volatility cocoon no longer content to pick up nickels in front of a steam roller by staying long USD for the carry.
But with the uber-dovish Fed still firmly ingrained on traders’ minds and the Fed speak so far failing to walk down the market post-FOMC dovish lean, the USD should remain on the defensive.
But nothing is ever easy in currency trading especially as Draghi and Trump take turns batting the Euro around.
EONIA could temper USD sell-off.
The Eurozone is in dire need of a weaker Euro as the sense of policy urgency builds.
Looking at October EONIA pricing which stood around -10 bp on Friday but went as deep as -14/15 bp after Draghi’s Sintra speech I would expect those level to be revisited this week which could stake some of the steam out of the USD unwind.
But with the Fed dovish shift steering the ship, buying dips should remain supported at least down to EURUSD 1.1325
Dollar-Yen
Since the break of 107.75, it has been a way street, and the market remains mainly offered on pullbacks and could stay that way until the market can close convincingly above 107.75. I’m paying attention to critical levels when liquidity returns at the Tokyo open before making any rash judgment.
Iran Opinion
The worst-case scenarios of a military escalation have been averted, but it appears that choking off Iran’s ability to sell oil to the world is not having the desired economic effect of forcing them back to the negotiating table. Instead, Tehran is showing few signs of backing down preferring to escalate by vowing to reboot its atomic production into gear.
I can’t help but think Iranian tensions will get worse before improving, and even with the immediate crisis over the drone abating, still with the US Administration launching today’s version of “Shock and Awe” a precision-targeted Cyberstrike against Iran is the world that much of a safer place?
On Friday via my direct client Gold chat line, I reminded clients never to look a gift horse in the mouth, referring to the uber-dovish FOMC, and that greed was the eternal killer when it came to Gold trading. But suggested that it’s not out of “greed”, but out of fear that the world could be a less safe place on Monday was the main reason not to take profits on Friday.
So now we have the President threating to choke off the remnants of Iran’ economy, and while this will have little impact on the global economy but after endless hours of weekend wool-gathering, and comparing the opinions of 50 top Iran experts that know 1000 X more about Iran than I.
There is a clear and frequent thread developing that the next wave of US sanction in the context of no weekend military escalation, could be one step back but two steps forward to dragging global capital markets over the cliff.
These new US sanctions could back Iran into a corner and might lead to a tactical military mistake as Tehran could start thinking that if you must fight, fight like a cornered cat. And while the Saudi-Israeli-US axis would have overwhelming success in military terms, but it would come at an enormous economic cost as the surge in oil prices alone could negatively impact the global economy for years to come.
This article was written by Stephen Innes, Managing Partner at Vanguard Markets LLC
This article was originally posted on FX Empire
