A Pummeling in the Oil Pits Overnight

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 manoeuvre.
Stephen Innes
green steel chemical tanks or oil tanks stacked in row.

Oil Markets

Oil prices were pummeled mercilessly after the EIA reported US 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 driving prices 4 % lower as trade policy uncertainty and floundering demand forecasts continue to hang like an anvil around the market’s neck. But amplifying the move is the counter-seasonal uptrend in crude stocks which is showing little signs of reversing.

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?

US 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, but 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, their 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.


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 US CPI . which fell below-consensus estimate, basically fell 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 Jun18-19

US CPI and the dollar

Well, it does seem contradictory that the dollar improved on a lower than expected US 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 natural 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 equity market could tank. For me anyway, this risk is starting to look more appealing by the day.

Malaysian Ringgit

Al is quiet on the Malaysian front as local traders continue to take their leads for 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.

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

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.