Oil Markets
With Brent Oil Futures gapping 18 % at this morning open, the primary focus falls on oil markets in the wake of the shocking and market-disrupting drone attack on Abqaiq oil facility in Saudi Arabia which is perhaps the most crucial production complex for global oil supplies. Moreover, it is estimated that the shut down will remove an astounding 5.7 million barrels of oil from the markets as emergency repairs commence, which is roughly half of Saudi Arabia’s immense oil production.
The damage assessment will be crucial to gauge the interval of this weighty unscheduled market disruption and consequential duration for higher oil prices. Saudi Arabia official has indicated this morning that they expect to restore one-third of lost oil production by the end of the day.
While underscoring the severity and the attacks market destabilising effects given that spike in Oil prices will have a substantial adverse influence across a breadth of asset classes, President Trump as authorised the release of oil from the Strategic Petroleum Reserves, if needed, in a to be determined amount sufficient to keep the markets well supplied
Let the blame games begin.
Although Iran has denied involvement in the crippling attacks, Secretary of State Pompeo pulled few punches and in a guilty until proven innocent approach charged Iran of being complicit in the attack. Moreover, with President Trumps past willingness to pursue a maximum pressure campaign on Iran, any thought of possible talks between Trump and Iranian leadership on the sidelines of the UN General Assembly meeting later this month has also gone up in flames as have the idea of a measured removal of Iran sanctions.
A game-changer
Middle East supply risk premiums rocketed higher, and Brent crude prices spiked 18 % at the open., Abquaia sat at the epicentre of the Saudi energy ecosystem and was thought to be secure from terrorists’ attacks. However, the proliferation of drone technology and its apparent ease of access to rebel factions possesses a clear and present danger to not only the global oil supply chain but the Middle East stability in general.
Besides, this terrorist attack could also be decoded as more than an Iranian backed Houthi rebel “lone wolf " act of lunacy especially when coming on the heels of Ayman al-Zawahiri (al-Qaeda leader) calling on radicals to strike Western (and allies) targets on the anniversary of 9-11.
While the repairs to Abquaia and oil supplies restored within a week, the relative ease of which this attack was staged suggest that other global oil supply chain focal points are also extremely vulnerable to terrorist attacks suggesting that Global Risk Premium could remain elevated for some time. Indeed, we could be dealing with a significant game-changer for oil markets over the short to medium term as security levels continue to flash red.
Gold markets
Gold prices jumped higher at the COMEX open as Global Risk Premium ratcheted higher after the terrorist attack at the Abqaiq oil facility in Saudi Arabia. Gold traders will be keeping an eye on oil prices today, which will be the most concise gauge of geopolitical risk sentiment as investors woke up to a much less safe world this morning.
On the fundamental side of the equation, Friday's higher bond yields on the back of better consumer sentiment and robust US retail sales are thought to have triggered more long position liquidation on Friday. Also, with the markets shifting away from a no-deal Brexit, and gold investors are finding less support from UK political malaise.
Markets
The theme of higher rates continued last week with the 10Y UST yield having now climbed 30bp on the month. Positive talks out of China again supported the moves in the bond markets.
This week brings the highly anticipated round of central bank meetings with the limelight focusing on the Federal Open Market Committee (FOMC), but don’t forget the Bank of England (BOE) and indeed not The Bank of Japan (BoJ) as dovish smoke signal billowed over Tokyo last week.
Past Peak Tariff?
The unwind of the bearish price action from over the summer has been nothing short of frantic with the S&P 500 back to within a stone's throw of all-time highs; while core yields have been selling off. USD/CNH is now within earshot of the critical 7.0USDCNH level. Moreover, the JPMorgan (NYSE:JPM) GBI-EM Index has pared most of its losses from late July, all of which suggests the market believes we are past peak tariff.
While the direction of travel makes sense but are markets moving too quickly ahead of the economic realities?
China Data Dump
Much of the higher frequency data out of China this week is of the backwards-looking variety suggesting the market may continue to focus on developments of the US-trade negotiations to assess their growth and rates view beyond this quarter. Moreover, with the Fed rate decision on September 18 hogging the lions share to the limelight, market participants may only give a cursory glance to Monday so-called "China Data Dump, yet it will still provide market participants with a valuable evaluation of trade war carnage.
The Federal Reserve
The Federal Open Market Committee (FOMC) rate decision on Wednesday will be the global markets focus of the week. Currently, the market is pricing in a long-held, and unanimous view for a cut in the Fed Funds rate by 25bps to between 1-3/4% and 2%. The FOMC meeting will happen on Sept. 17-18.
However, as usual, much focus will be on the following press conference by Chair Powell, where market participants will focus on how the Committee signals the potential for future actions and whether the Federal Reserve Board ( Fed ) shifts its narrative from a tentative 'mid-cycle' easing to one closer to the markets dovish expectation.
Regional Central Banks
The dovish ECB and an expected Fed interest rate cut will offer regional central banks more policy wiggle room to trim interest rates.
Central Bank of China (CBC, Taiwan) is widely expected to keep policy rate steady but could align forward guidance to meet the market expectation of a 12.5bps rate cut by year-end, however much of that debate may fall on how fair trade war winds blow between now and then.
Bank Indonesia (BI) to deliver another 25bps policy rate cut when it meets on September 19, one day after the Fed. BI has turned explicitly more dovish since last month's cut and is likely to do most of the heavy lifting in support of growth, given limited 9space
The Bank of Japan (BoJ) is expected to continue to lean dovish, but given the recent smoke signal from Tokyo, The Bank of Japan is growing more open to the idea of cutting short-term interest rates, so in a departure from past BoJ meetings in 2019, this upcoming policy decision could be a market-moving event.