A Summer Of Mayhem Gives Why To September Economic Realities

The US economy just hit a significant air pocket and just like in an aeroplane experiencing a rapid drop, it’s not a question about stabilisation but rather how long and how intense the fall will be.

Up until now, one doesn’t get the impression that equity markets have been overly concerned about the global manufacturing sag. Instead, investors opt to live life vicariously through the lens of the central bank put. However, If the European Central Bank or the Federal Reserve Board disappoint on the market’s dovish expectations, investors could very well run for cover.

As for the bond markets, the ISM data confirms that the current mood in the bond market is unlikely to shift. Traders will continue to wax recessionary fear until the cows come home suggesting that any back up in yields will likely to be shallow at best.

Oil markets

Oil markets remain in a constant state of duress due to US-China trade stalemate all the while an unyielding President Trump threw down yet another trade war gauntlet warning China that they will have a much tougher time securing a trade deal if they wait until after election 2020 and he wins.

Also, last nights storm modelling showed that Hurricane Dorian was set to turn up the Atlantic Coast, potentially leading to widespread damage to millions of people in coastal communities and shutting down travel in the South East for some time.

So, while the US-China fracas continues to undermine oil prices, the beast of a storm exacerbated the expected seasonal declines in Gasoline prices which too was threatening crude futures lower.

Then markets went full tilt and completely unglued when the dismal US ISM data rang the recessionary alarm bells as the potential negative impact on global growth and energy demand sent oil prices tumbling head over heels.

Market participants are becoming increasingly worried about recession risk. Moreover, given that tariffs present a significant threat to U.S. growth and in turn, the health of the global economy

With all the doom and gloom, why is there any support

Hurricane Dorian wind intensity has backed off and is currently at Category 2, so while the storm damage will be significant it’ not expected to be as damagingly impactful, the tracking metrics anticipated only 12 hours ago.

While it is starting to look like a one-way street in oil markets short squeeze hurdles can quickly appear from anywhere, especially with the markets so precariously exposed to trade-war driven headlines, both good and bad.

At some point, the fall in oil prices will start to curb US productions not to mention to price drop has triggered a plethora of headlines suggesting the shale revolution is about to come to a hasty end.

Finally, The Federal Reserve has been very reliant on survey data to monitor how lousy trade tensions are, and the ISM release is one of the three pillars behind their decision to cut interest rates at the last Federal Open Market Committee meeting.

So, with the US manufacturing index unceremoniously plummeting into contraction, there is some thought this could force the Federal Reserve to pull multiple rate cut levers this month, which could be seen as supportive for risk assets.

Gold Markets

Risk assets took another knock after a wave of risk aversion gripped markets.

Gold markets remained incredibly resilient in the face of stronger USD as the US-China stalemate continued to support Gold sentiment.

However, the first significant risk wobble occurred when any remnants of bullish sentiment in the UK went running for the hills as the UK political crisis escalated. However, what was different in that the sell off is that is wasn’t just contained to UK assets rather Japanese Yen volatilities spiked, suggesting the markets are getting overly jittery about the UK discourse.

However, for Gold traders, this week is as all about analysing the deluge of US tier one economic data to form monetary policy expectations for the September 18 FOMC meeting.

However, there was very little analysis needed after the US ISM data tanked as Market participants are now becoming increasingly worried about recession risk.

Tariffs present a significant threat to U.S. growth and in turn, the health of the global economy.

The thought of lower US interest rates is indeed music to gold investor’s ears.

Currency Markets

Australian Dollar

He RBA kept rates unchanged as expected and maintained a dovish stance on an “if needed” basis. Yesterday by being a case of the RBA have some difficulty sprinkle the right amount of fairy dust on the markets, wanting to maintain a dovish bias but cautious not to sound off even more economic alarm bells.

Chinese Yuan

USDCNH retraced this week’s price action as the markets appeared to turn to profit-taking mode ahead of 7.20 level. Misplaced or not there’s some thought that the Pboc many want to aggressively defend this level over the near term fearing a break could trigger a test of psychological 7.25 level which could prompt waves of capital outflows.

This article was written by Stephen Innes, Managing Partner at VM markets LLC