Hold the Press, the Monetary Policy Printing Press That Is!

While suggesting external economic stress around trade uncertainty have risen making a stronger case for a Federal Reserve pre-emptive rate cut ” If you see weakness, it’s better to come in earlier rather than later,” he didn’t precisely come across as a policymaker eager to pull the rate cut lever, at least by 50bp in July anyway.
Stephen Innes
Hold the press, the monetary policy printing press that is!

But in perhaps a defining inward-looking view of the FOMC policy framework, at least on the dove scale, St Louis Fed James Bullard, arguably the most dovish FOMC member told Bloomberg TV

He favours a 25-point reduction as “insurance” given below-target inflation and slowing growth and walking down some of the more dovish views in the markets

So, with the markets showing signs of being as taut as tightly coiled spring, the release valve popped as Powell and Bullard’s comments did little to appease concerns over growth and trade discord. Equities fell, Treasuries advanced, and with the USD strengthening against the Euro, Gold fervid rally came off the boil. Traders are dealing with so many crosscurrents, and with positioning very much stretched, they were very prone to the Fed’s shaking the trees.

Trade Talks

Reportedly the U.S. is willing to suspend the next round of tariffs on an additional $300 billion of Chinese imports while Beijing and Washington prepare to resume trade negotiations, people familiar with the plans said

Still, The U.S. won’t accept any further conditions on tariffs as part of reopening negotiations and suggesting that the U.S. will keep existing trade tariffs in place to ensure China compliance. So, we are back to the issue of bridging ubiquitous Trust Gap between both superpowers, and that, I suspect, is a bridge too far for the foreseeable future.

Oil Markets

Oil prices went ballistic after the API The American Petroleum Institute reported late Tuesday that U.S. crude supplies dropped by 7.5 million barrels for the week ended June 21,

Oil prices have been squeezing higher on escalation tensions in the Middle East. But with late-day draws showing up in the API report, this is a strong signal for the energy market. The report goes a long way to alleviating both demand concerns and with back to back weekly draws, especially today eye-catching draw and could put to rest memories of those grim reaper counter season builds that weighed on prices earlier in the month.

Gold Market

Gold positioning was flushed as the bullion plummeted to $1412 as both Powell and Bullard walked back some of the market overly zealous dovish inference. Despite equity market falling, Gold sensitive to both US interest rates and the USD was clear, but I suspect the length of speculative positions had a lot do with the rapid selloff. But with uncertainty over the outcome of the US trade talks still in the balance, Gold was quickly bought on the dip. I indeed uncertainty around this weekend G-20 continues to drive the Gold bus as the meeting between Presidents Trump and Xi will arguably have the most significant impact on shaping Gold near term direction given the meeting outcome will have a far-reaching effect on all risk assets.

Currency Market

It was a strong night for the USD, helped by Fed Chair Powell seeming less decided about a rate cut in July, and arch-Dove Bullard saying that he didn’t see the case for a 50bp reduction. From when I got in 5 AM Singapore, gold was down 70bp, and GBP down ~60bp as Britain’s Conservative Party leadership candidate Boris Johnson said he favoured a hard exit date of Oct. 31.

Oil was a standout performer, up 1.5%, and if the rally continues, it might help the oil currencies outperform the USD but so far nothing but worth taking a risk if oil holds this morning.

Asia FX

We could expect Asia currency to struggle a bit today for the knock effect for rising Iran tension and both Power and Bullard walking down the dovish market expectations.

More on that after the China Fix as we remain on “Yuan Yuatch.”

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

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