Risk off remains in Vogue

US equities fell back again Tuesday, the S&P500 down 0.3%, with nothing particularly new on US-China trade negotiations to signal traffic. The price action on treasuries was more obvious, however: 2s10s have inverted again, with ten-year treasury yields once again falling below 1.5%, down 6bps to 1.47%, and two-year treasuries down 2bps to 1.52%
Stephen Innes
Risk off remains in vogue

While headline tennis continues, there remains a high degree of scepticism regarding the sincerity of Trump’s comments or even if the Chinese are willing to recommence with negotiations.

Bond traders have long memories and are not willing to let go of Trump’s inflammatory tweet on Friday where he labelled the Fed and president Xi as enemies of the US with the same brush stroke.

Risk-off remains in vogue as trade disputes continue to flare. Suggesting any risk assets recovery will remain extremely fragile, However, besides trade tensions, in the absence of any growth momentum from a macro and micro perspective, this too suggests that risk asset upswings will continue to falter.

Oil Markets

No shortage of supportive fillips.

The mammoth Crude inventory draw has at least for the time being put to rest those US recessionary doom and gloom fears that have been hanging over oil markets like a dark cloud.

Oil futures climbed as much as 3.9% after the API reported crude stockpiles fell a staggering 11.1 million barrels. Moreover, if confirmed by the government data on Wednesday would be the most significant decline since June.

The API also reported a draw in gasoline and distillates totalling about 2.8 million barrels which are especially comforting to investors as we are entering the last long weekend for peak U.S. driving season.

The market was caught completely wrong-footed playing the “fade the hope” trade while pricing in a more conservative 3 million barrels API draw.

Earlier in the session, prices received a boost after Iran’s Foreign Minister Javad Zarif threw ice water on the prospects of any meeting with the U.S. This comes a day after President Donald Trump floated the idea of easing restrictions on the Islamic Republic.

Iran’s more hawkish stance quickly priced out the bearish possibility of future sanction waivers, particularly for India and Japan who were a massive consumer of Iran grade crude.

Joint Ministerial Monitoring Committee (JMMC) of the OPEC and non-OPEC countries reported that the July 2019 overall compliance level was 159 per cent and was 22 percentage higher than prior. The report provides further evidence that Saudi Arabia was serious about stepping in to defend the oil price and their decisive action continues to support oil prices.

However, why do I feel we are little more than a Trump tweet away from reversing out these gains. Maybe because this is what tends to happen week in and week out, suggesting despite the colossal inventory draw, the rally remains extremely fragile to trade war risk

Gold Markets

Gold market continue moving to the beat of bond markets

Gold continues its move higher in the wake of Chinese media signalling that no trade deal progress has been made and President Trump tweeting criticism of the Fed. The gold market continues to see participation from the macro side, and despite positioning being at the all-time highs, Gold as a percentage of USD and global funds’ total AUM remains off the highs reached during the previous bull-run. There should be ample room for strategic gold positions to continue to grow.

If trade tensions remain high, Gold can count on this issue as being outright supportive. Also, if US yields continue to fall, which is likely, particularly real US 10Y yields, this too will provide considerable headroom for Gold to climb higher.

Dovish Fed expectations and concerns about the potential for FX intervention, which should neutralise the strong dollar negative effect into Gold markets, are likely also adding to its appeal.

The recent outperformance of Gold over cyclical commodities is the most stretched since early 2016. The net long positioning in Gold is also at multi-year highs, but this seems to matter little to Gold investors as the higher prices move so does golds glittering appeal which continues to add to Gold’s growing demand

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

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