A Positive Monday for a Change?

With both the May US jobs report and the threat to impose tariffs on Mexico in the rear-view mirror, the focus shifted to the outcome of weekend’s G-20 meeting of finance/central bank officials in Japan.
Stephen Innes
A positive Monday for a change?

G-20 Finance and Central Banks

While there were positive signals around a subtle shift in the communique language with  U.S. Treasury Secretary Steven Mnuchin and Chinese central bank governor Yi Gang meeting,  the real main event will take the stage at the G-20 leaders’ summit later in June, where Trump and President Xi Jinping are due to meet in Osaka.

Avocado toast for everyone!

Investors were provided with another treat after the market closed Friday when President Trump said he would not levy tariffs on Mexico. Frankly, I’m not too surprised as we reduced long gold positions on Friday as in our view last-minute deal looked very likely after Mexico started to deploy national guards at the border.

The summers jobs slump

Suddenly, now, jobs matter? The release matters because the Fed had more than ample chance to push back on front end rate cut pricing last week and it chose not to. So the NFP opens the door to rate cuts so let the July speculation begin.

But one jobs report is unlikely to sway them to cut rates in a couple of weeks. But, if a trend begins to emerge, it will force their hand later this summer. But I think the Feds will hold off until September based on a  four-month cumulative miss of NFP relative to expectations which are not harmful comparable to historical standards and nowhere near some of the outrageous rate cut forecasts in the market.

While the race to the bottom on Fed rates has taken the market by storm  –while  I can get my head around an insurance Fed cut in July, but why  June is in the discussion is baffling especially ahead of the G20.

G20, good or bad,  it will provide some clarity on the muddied  US-China negotiations, and If nothing good comes out at G20, the Fed can credibly cut in July and blame global uncertainty and the  persistent downside inflation overshoot.

U.S. Markets

If there is one constant that keeps the S&P ticking, it’s the  Federal Reserve cheap money, which is a very well defined and long-established pattern, so with July -Sept and Dec priced in I’m not sure there is any need for analysis.

With the race to the bottom on Fed rates enveloping the markets, it should provide sufficient boost juice to keep the S &P   trending.

Oil markets

After a brutal week for oil traders, Friday closed on an optimistic tone after Saudi Energy Minister Khalid al-Falih said OPEC was close to agreeing to extend a pact while his Russian counterpart Novak said both Russia and Saudi Arabia have decided to take coordinated action.

Indeed this is about as clear and unambiguous of a signal you are going to get from OPEC  and with a production cut extension now sounding more likely than not, it should be incredibly supportive for oil prices.

Also with the Mexican stalemate averted and no harmful shockwaves from this weekend G-20 meeting, risk assets should open with a bounce in their step and oil could trade favourably as WTI and Brent will continue to track the broader risk environment higher.

Gold Markets

Gold rallied hard boosted by the summer Jobs slump, lower U.S. yields and a weaker dollar, yes, a  holy trinity for Gold traders, but gains were pared by easing of trade concerns after comments from the U.S. Administration and by profit-taking suggesting that  Gold could react negatively to the actual easing in trade tensions on Monday open.

The Malaysian Ringgit

The de-escalation in trade tensions is supportive for the Ringgit which has been bolstered by the markets aggressively repricing the Fed curve lower.

The Japanese Yen

With the market brimming in long downside gamma, at minimum, USDJPY should remain sticky around 108 but with trade, tension easing we could see a definite unwind in long JPY hedges.

The Euro

Given the heavy short EURUSD positioning a massive short squeeze ensued on the weaker NFP, but with the EURUSD closing below 1.1350, it’s not like the markets are entirely embracing the EURO despite three rate cuts now priced into the 2019 Fed rate curve.

D.M. Currency Markets

Putting on my contrarian hat for a moment.

I think the ECB has nothing left in the tool kit, so a weaker EURO  is needed to do the heavy lifting and help support a flagging E.U. economy. The problem the ECB faces is that the USD most always weakens into an expected rate cut. So why shouldn’t this time  be different ??

They are not alone as most global central banks are facing the same dilemma as the ECB  but unlike the FOMC, their policy war chest is bear. So in this context, the Fed has ample room to successfully tweak the economy through traditional policy as opposed to other D.M. central banks that may have to resort to unconventional policy or even helicopter drops further debasing their currencies.

This article was written by Stephen Innes, Managing Partner at Vanguard Markets LLC

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