Fed Policy Debate Lies At The Center Of Market Apprehension

Those lazy days of summer are about to turn into the hazy, crazy days of summer given the abundance of risk narratives that lie ahead. Risk aversion reared its ugly head on Tuesday as headline risk reminded us that of what lies ahead and what key drivers will influence our trading decisions in the months ahead.

At the centre of the debate lies the Fed policy. It’s abundantly clear from the deluge of Fed speaks that the FOMC is preparing the field to move the goalposts. While the Fed message is clear, the market’s air of apprehension is thick as the recent run of US economic data does not entirely support the Fed’s current tack.

Another layer of complexity to the inflation narrative: oil prices have officially entered a bear market as oil plummeted 2% after reports of rising output from Nigeria and Libya, both OPEC members exempt from the production cut deal, made headlines. Traders are showing little fear of from an ineffectual OPEC, and with inventory levels adding to the bearish sentiment, the markets look headed for a test of $40.00 WTI.

The far-reaching effect of the oil slide was felt on US equity market as the Dow slipped from record highs weighted down by energy stocks. The Tech-laden NASDAQ was also laggard suggesting market jitters are setting on over tax reform. It’s clear the Republicans are trying to right the fiscal reform ship, but with so many issues to be ironed out (raising the debt ceiling for one), it remains a close call whether the changes will pass.

On the US special election front, in Georgia, Democrat Jon Ossoff or Republican Karen Handel are hoping to succeed the seat vacated by health secretary Tom Price. This run off will be viewed as a major sentiment driver for the Trump presidency.

China MSCI inclusion

The door is finally open and China’s locally-traded A shares will comprise just 0.7 percent of MSCI’s global emerging-markets gauge, with 222 companies added and the weighting will increase over time as China adds further market reforms. The MSCI inclusion bodes well over the long term if the Mainland regulators move forward with yuan internationalisation and regulatory reform. But investors are still cautious knowing the PBOC, and Financial Regulators continue to change the rules of engagement, so caution will likely persist.

The CNH has rallied this morning on the anticipation of increased capital inflows.

The Pound

It was a cruel overnight session for sterling bulls after Carney quashed any hope for a rate hike. There was some optimism for the GBP after the hawkish surprise of three MPC members voting for a BoE rate hike last week, but all that has faded. And with DUP talks faltering, the pound was utterly helpless as traders knocked it lower until some semblance of support emerged around 1.2600.

Japanese Yen

The yen is on the move in early trade as the risk complex wobbles on sliding oil prices but remains relatively resilient despite the abundance of risk aversion hitting the markets. The pair remains tentatively supported on dips feeding off the hawkish Fed hike from last week, but risk aversion continues to ripple through the market.

Original Post