Oil Markets
Oil prices were pummeled mercilessly after the EIA reported U.S. stockpiles hit a 20-month high. And while the country-wide crude inventories build was much smaller than the survey published Wednesday by the API, still, oil bears took no prisoners. Prices dropped 4 % lower as trade policy uncertainty and floundering demand forecasts continue to hang like an anvil around the market's neck. Amplifying the move is the counter-seasonal uptrend in crude stocks which is showing little signs of reversing.
The return to trade policy uncertainty is terrible news for oil markets, especially when manufacturing data are already weak, leaving oil bulls with a series of unpalatable set of choice. Either hold on for dear life (sheepishly raises his hand after reversing shorts below WTI $51) and hope G-20 pulls the trade deal rabbit out of the hat or as I suggested in yesterday's note, execute your best cut and run maneuver.
To highlight just how nasty the move was overnight, in highly unusual fashion, I received positive slippage on back to back to back buy order fills on the step below WTI $51 overnight suggesting to me anyway, there's panic in the oil pits. And while I think the outlook remains dire, it’s hard not to believe we had a bit of an overshoot overnight.
U.S. Markets
After breaking the 2900 level early in the week the S&P has sprung a few leaks, and while the return of trade war uncertainty stirs markets, investors remain for the most part unshaken as equity sentiment remains buoyed by the prospect of the Fed and Pboc policy easing.
While Fed rate cuts do not always translate into positive equity markets, they most always do when central banks cut interest rates from an insurance policy perspective. I think it essential to distinguish the two; historically central banks have fallen behind the curve and are then forced to raise interest rates due to an already faltering economy which triggers flashing economic warning signals.
However, since the Fed moved interest rates higher in 2018, whether it was a policy mistake or not, they're fortunate to have substantial wiggle room to drop interest rates ahead of the curve, something I’m sure most other global central banks are envious of as for the most part, their policy tool kits are empty.
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But the fear for equity markets is the Fed will not be held hostage to the market or President Trump for that matter and in a show of monetary policymaker solidarity, they could hold off cutting rates for the foreseeable future. Indeed I think the President has made the Fed's job even more difficult by raising credibility concerns. So, as opposed to a series of rate cuts the Fed could drop their longer-run median rate projections to 2.50 % implying a lower "neutral policy rate for the economy and potentially setting up an excellent opportunity to fade the futures on the markets overzealous July rate cut pricing.
Gold Markets
Trader perspective
From a long-time gold trader perspective, I'm having difficulty first understanding why gold didn't fall further when risk sentiment improved when the Mexico standoff was averted, and I'm even more puzzled by the fast money buy on dip reversal uptrend from 1320. OK, so I’ve placed my cards on the table.
Analyst perspective
But the rickety trade backdrop and geopolitical risk premium continue to lend themselves to higher gold prices. And while the Fed rate cut is far from a lock, escalating trade war rhetoric and ongoing support from the official sector is seemingly good for fast money gold bulls to remain on buy the dip mode.
Gold remains buoyed by trade risks and rate cut expectations. But since the U.S. CPI, which fell below-consensus estimate, basically landed on deaf ears. It triggered a bit of profit taking on gold. And dare I say, since I've been consistently wrong this week on this call, we could be headed for a period of consolidation as the markets start to strategize for the new Fed guidance where the FOMC is expected to lay their policy cards on the table at the upcoming FOMC meeting June 18-19.
U.S. CPI and the Dollar
Well, it does seem contradictory that the dollar improved on a lower than expected U.S. CPI print but that all comes down the front-end treasuries pricing that is far too rich. But the fact is the market has bigger fish to fry as its trade policy and sentiment data, which will be far more critical to the Fed.
But traders have turned very neutral on currency markets and perhaps predictably so ahead of this year most critical FOMC next week. Indeed a lot is riding on this one as if the Fed disappoints, I would suspect there’s a ton of room for the dollar to rally. And as the markets' overly zealous dovish expectations get pared in this scenario, not only will high yielders be negatively affected but "high beta" currencies too, as the equity market could tank. For me anyway, this risk is starting to look more appealing by the day.
Malaysian Ringgit
All is quiet on the Malaysian front as local traders continue to take their leads from the yuan as opposed to the greenback especially for those ASEAN currencies that are more correlated to the yuan movement like the Malaysian ringgit.
With the Pboc on an apparent stability kick ahead of G-20, we could see range trading prevail over the next fortnight or so.
But with oil prices in the tank, we should expect the ringgit to trade with a defensive bias today.