All is quiet during the FED blackout Period

The S&P500 rose 0.3% Monday, with indices throughout Asia and Europe little changed. News flows have been light to start the week, but with the Fed in a blackout period, the usual stream of comments by senior Fed officials has already been noticeable by their absence. Traders have a love-hate relationship with Fed speak, but during blackout periods, we miss the vagaries, and downright opaque nature of their comments as markets usually do little more than twiddle their thumbs during this Fed downtime.

While the ECB will attract some attention Thursday, but it is the Fed decision and policy guidance that will be most critical for the markets risk on view.

Oil market

While Oil prices remain supported by middle east geopolitical risk; the market’s reaction has been muted due to the ascendency of United States Shale production in oil markets new world order, which is tempering supply risk premiums despite the geopolitical risk thermometer hitting warning level. As such traders remain cautious about loading up on supply risk premium until there is a far more feverish reading.

While the U.K. demanded the immediate release of the Stena Impero, but Britain’s Defense Minister has since said the aim is to de-escalate tensions to avoid a more severe incident reinforcing the notion that no one is looking to take this conflict to the next level as the market quickly write of and aggressive posturing on both sides of the conflict as more bark than bite.

The Boris factors

However, with Boris Johnson a lock to win the leadership contest and become Prime Minister on Wednesday evening, there is a significant risk of a longer-term shift towards a more hawkish stance on the Iran issue. The U.S. administration will waste little time pressure the new UK PM to toe a stricter line on the nuclear accord.

While a diplomatic solution to the US-Iran dispute remains a bridge too far at this stage, while there is a lot of “smoke”, but without ” fire”, traders remain tentative.

Gold market

Gold traders remain extremely cautious knowing full well that substantial speculative length has built up above $1400 and that Gold markets reaction function will be asymmetric to the Fed messaging.

However, rate cut expectations should put a floor under prices. Gold also received support from geopolitical developments, centring mostly on the middle east. However, geo-risk was offset as US-China trade relations showed some sign of improvement as will this morning agreeing on the U.S. debt ceiling

While the 100% chance of a 25bp Fed rate cut should continue to buck up support, Gold will struggle to rally until the FOMC passes as investors will be more likely to reduce rather than add to their long gold position risk

Currency Markets

ECB and the EURO

Traders remain in wait and trade mode utterly lost without their daily dose of Fed speak. But the markets are now dialling in on the ECB. But the lack of volatility not to mention sluggish volumes on the EURUSD suggests most of the pre-ECB hedging has taken place. Smart money is on the ECB altering its forward guidance by unmistakably guiding the market with follow up rate cuts of 10bp each in September and December while introducing tiering to lower the charge that banks pay on some of their excess cash as a possible way to offset the side-effects of its ultra-easy policy.

The Yen

Dovish Fed view supports long USDJPY position as it will lower USD funding cost while the pro cycle cut will boost both U.S. growth expectation and U.S. equity markets.

The Pound

Even with the Euro struggling under the weight of negative yields, but given the numerous inches of newsprint column space given the Brexit headlines over the weekend, traders rotated out of short Euro into short Pounds today given the apparent path of least resistance ahead of the ECB which is all but priced into the Euro.

The Ringgit

The Ringgit remains supported by the deluge of central bank accommodation which provides an essential veneer for Asia EM FX. Currency volatility remains mute while a meeker USD and diminishing debt fears have reassured investors and carry trade inflows remained in the fore despite the omnipresent trade war risk.