Picking Up The Pieces Post FOMC

US President Trump said to suggest he is going to call China President Xi tomorrow, which should be soothing news for a lot of cross assets none more so than Chinese equity markets. Keeping an eye on this one!

US Markets

US stocks ended the day lower as the Fed is expected to stay the dot plot course for the foreseeable future, but nothing too unusual from what usually happens to equity markets every time there is a US interest rate hike. The modest wobble suggests little more than profit taking as there is nothing in the Feds policy statement to raise a red flag about US economic growth. Investors will be sponging up these dips even more so if the US-China trade tensions de-escalate. Of course, back channels were always open, but with the President offering to reach out to XI, this is indeed a very positive sign and likely in response to China very measured approach to the US tariffs. Notably, in keeping the yuan as stable as can be.

Oil Markets

The DOE data for last week largely confirmed the silhouette offered up by Tuesday’s American Petroleum Institute survey, with unexpected builds of 1.9 million barrels in US commercial crude stocks including 0.5 million barrels at the Cushing, Oklahoma delivery WTI hub while refinery crude runs dropped 901,0000 bpd. But one bullish surprise in the broader data set was that distillate inventories fell 2.2 million barrels last week on a drop-in refinery production.

But oil markets rebounded after Rick Perry quashed any notion of tapping SPR, suggesting that selling of strategic reserves would "have a fairly minor and short-term impact” Frankly, using this emergency response tool as a means of controlling oil prices was a bit of a stretch, given the storied history when the SPR’s were released in the past.

History of the SPR releases

Not to mention the sale would probably end up doing little more than widening Brent-Crude spreads since the SPR sales would effectively make US oil cheaper and not necessarily the rest of the words supply.

Without sounding like a broken record, oil prices remain in the bulls domain amid concern that US sanctions on Iranian crude oil exports will result in much tighter physical market conditions once they take effect in November. While the US oil inventory data counts, the fact that the markets could still be underestimating the supply crunch from Iran sanction has many oil investors running with the bulls.

Gold Markets

Gold prices fell after the US Federal Board raised interest rates despite the nonplussed initial reaction from G-10 currency traders. There was way too much hand-wringing leading up this FOMC that much of the key focal points were somehow lost in translation.

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What should have been an easy exercise based on the fact US economy is firing on all cylinders suggesting the Fed’s need to stay the course on interest rates, however in the absence of inflation there is no need to nudge the yield curve higher.

But for Gold prices, the song remains the same, with no haven demand, Gold ETF (SPDR Gold Shares (NYSE:GLD)) inflow stagnant and no real shift in investment allocation portfolios, most Gold dealers and market speculators are left watching the US dollar for direction. Until something breaks on the big dollar look for $1190-$1210 range trade to persist

Currency Markets

My currency colleagues in NY left the office with a migraine after getting whipsawed on FOMC double talk.

Canadian dollar

Not everyone is happy on the trade war front as the loonie has slipped to 1.3038 as US President Trump makes it clear he is unhappy with Canada. Holding little back, the president was quoted *TRUMP: IF CANADA DOESN’T makes a deal with the US, WE’RE TAXING CARS.

Trade of fade? I still expect a deal to go through but with the crowded trade mentality kicking in as traders find themselves long CAD at the much lower level, there some position trimming likely on stop losses weighing on the CAD sentiment this morning.

New Zealand dollar

The birds the word, as expected the RBNZ kept everything on hold today, given minimal expectation was going into this meeting the KIWI has traded neutral. Other than the usual RBNZ OCR “gap trap” at 5 AM due to the lack of liquidity over the ” date change,” the kiwi is trading flat so far.

Japanese Yen

There was a bit of a wobble into the NY close. Long USD/JPY is a very subscribed trade, and signs the yield curve was flattening, traders were more apt to book profits towards the end of the overnight trading session. But with important support level holding firm and the Fed painting a slightly rosy outlook for the US economy, it appears the markets continue to favour USD/JPY higher over the short term.

Euro
I keep looking for some Italian budget concerns that are frankly not there as the risk of a euro collapse on the back of the Italian budget is almost entirely priced out. Back to the basics on this trade.

EM Asia

Malaysian Ringgit

The MYR is struggling on the back of equity outflows as the Ringgit continues gravitating towards the top of the near-term range 4.12-4.15 despite oil prices recovering. Again, volumes are very low as traders are looking for some spark.

Indonesian Rupiah

The Bank Indonesia is likely to hike, but in context of consecutive trade deficits in July and August, the IDR remain in currency speculators weakest links in the chain.

Philippine Peso

The BSP will hike by 50bps, in line with consensus expectations. The BSP is likely to keep its hawkish tone even after the September rate hike to ward off inflation.

Original post

Written By: MarketPulse