Lots of Positives for Traders to Run with this MorningI should have listened to my old boss from my bank day’s and loaded up on more US treasuries. But at least I did let my inner gold bug out of the jar this week so that I can take some solace in that extended position.
First, to avoid a price collapse amidst extremely bearish demand forecasts, OPEC’s three largest producers have committed to extending OPEC supply discipline while OPEC and its allies have agreed to a meeting which should put to rest some of the more fervid conspiracy theorists.
And in more great news for Oil bulls as what appeared to be a developing counter-seasonal uptrend in U.S. oil inventories reversed when the Energy Information Administration reported a more seasonal friendly decline in both oil and gasoline inventories. The 3.1 million barrels decline in U.S. crude warehouses was a more significant decline than forecast and outpaced the API number. Indeed, these unique seasonal builds in inventories were certainly sullying the landscape.
And of no lesser importance, especially during the driving season as gasoline builds are unfailingly seen as an oil markets grim reaper of a sort, the EIA also reported a draw in gasoline inventories after two weekly builds.
So, when fused with yesterday’s confirmation that Presidents Trump and Xi have agreed to meet at G-20, undeniably a game changer when it comes to the near-term outlook for oil markets, and further backstopped by the chorus of central banks apparently on a mission to out ” dove ” each other, oil prices are finding much better traction over the past 24 hours.
The geopolitical situation in the Middle East remains fractured and at this point appear unlikely to mitigate for the foreseeable future so we can still weave a convincingly bullish story that supply-side risks are not priced into the equation.
Oil price volatility is likely to persist, but the upcoming OPEC meeting should serve to provide the markets with a reasonable backstop and will offer some much-needed respite for prices.
My inbox was brimming this morning with questions about just how dovish I thought the FED was.
Astoundingly, the FOMC managed to out-dove a dovish market without sounding economic alarm bells. Yesterday we suggested Chair Powell faced an agonisingly painful task crafting a sufficiently dovish signal without spooking the markets; frankly, he navigated it ease while gaining a whole new level of respect for being able to communicate central bank policy clearly and concisely. and not sounding off any economic alarm bells while conveying precisely what the markets were craving. Specifically, that is an absolute sense of urgency when it came to economic expansion, their openness to drop interest rates on the first sign of weakness.
The question now will be whether they cut 50bp in July or only 25bp. The big concern for the Fed is that the market will be gunning for 50bp, which would turn 25bp into a disappointment.
And perhaps acknowledging a policy mistake by over-tightening last year. The closely watched Fed funds dot plots dropped to 2.5% from 2.8% as the US two-year yields are taking cues from this signal and other than a G-20 trade deal I’m not sure what will stop the Bond rally as it looks too early to suggest a bottom is in.
Gold moved convincingly higher post FOMC as the remarkably dovish Fed messaging sent US bond yields lower after the Fed acknowledged the slowdown in inflation by trimming its estimates for this year and next to 1.8% and 1.9%, respectively, from the 2% it had forecast in March. But with global central banks tripping over one another on the race to the bottom, the opportunity cost of holding a non-yielding asset like Gold looks even more attractive. So, at this stage of the game other than a G-20 deal, which the prospects of are likely holding back Gold prices from pushing even higher, it’s hard for me to see what will stop this rally and even that might not be enough to temper unyielding gold demand.
Remain bolstered by cheap money but will likely turn a bit cautious ahead of the G-20, but remain on solid footing buttressed by the return of the central bank doves en masse.
My currency views are a bit shot on the uber-dovish Fed shift, so I’m waiting for much higher lives on the Euro before re-engaging EURUSD shorts.
With the Pboc keeping the Yuan on a stable footing. A more dovish Fed than expected to blend with lingering risk euphoria from the rescheduled Trump -Xi meeting I think for now we will see the CNH rally into the G-20 meeting with an outside chance we could test 6.85 USDCNH resistance. The shifting tide on the Yuan should play out positive for several off highly correlated Yuan and trade risk-correlated currencies like the SGD, TWD, MYR, KRW and of course the AUD. in the G-10 space
This article was written by Stephen Innes, Managing Partner at Vanguard Markets LLC