The Fed fallout Continues

US markets laboured with the S&P testing the psychological 2900 at one point.

The road to the US Trade deal is still slippery, and with the FOMC and the US markets heavyweights’ earnings behind us, investors are gradually pivoting to the always perilous global growth narrative.

The robust US earnings season masked many ongoing concerns. The poor state of global trade, EU economic struggles and the latest round of wobbly global PMI’s, to name a few. But with  investors now pondering if China’s fiscal policies and tax cuts are enough to right the ship, it could be a damning foreshadowing of things to come.

US equities continue to ignore seasonality factors, but with the VIX shorts running at all-time highs, I suspect being long equities at current peaks could start to feel more uncomfortable by the hour.

Oil markets

In little over a week, most of near term bullish catalysts that propelled Brent above $75 bpd have evaporated as the markets have come to the conclusion that the worlds mega producers Saudi Arabia, Russia and the USA can quickly fill the void from the losses of Iranian supply.

While the US inventory glut is a considerable concern so is the fact Russia continues to miss agreed upon decreased production quotas. But as significantly, there is the suspicion that both China and Turkey will be obstinately uncooperative with sanctions while India, the other oil import behemoth, has been reaching out to the US with tact and diplomacy asking for some flexibility permitting them to continue importing Iran barrels.

Also, Venezuela did not descend into total anarchy as the revolt against President Nicolas Maduro has tentatively fizzled, suggesting there is no urgent threat to added supplies from the home of the world’s largest oil reserves. But the potential regime change in Venezuela is a substantial positive for oil supply on a multi-year perspective

All of which are leaving oil traders a tad depressed as the market is now searching for a floor instead of chasing a ceiling.

Gold Market

The Fed was much more hawkish than the markets expected and the fact most members are still confident inflation will move back to target suggests no imminent rate cut for 2019

Predictably the dollar is stronger and weighing on gold sentiment, but with markets pivoting to the dangerous global growth narrative coupled with nascent signals of an impending stock market correction, gold should find a bid. So, over the long haul, there stays a strong case for gold to move higher even more so if risk sentiment wobbles and haven demand picks up.

Just as the global growth recovery and an improvement in risk sentiment dented gold sentiment last month, the opposite will most certainly hold. But the key for this trade will be the performance of the US equity markets or the lack of performance that is.

Currency Markets

Not sure if there is anything noteworthy to be said about the strong USD, the greenback reaction function to a more hawkish than expected Fed is obvious. But it is time to prey on the most vulnerable near-term link in the chain, the Aussie Dollar

The Australian Dollar

With no insurance rate cut on offers from the Fed’s and the RBA meeting next week with domestic inflation bellicosely below target.  I think the RBA is ~70-75 % likely to slash their cash rate 25bps to 1.25% on 7 May. And with the AUDUSD barely hanging on to a majorly significant level the path of least resistance should be lower.

This article was written by Stephen Innes, Head of Trading and Market Strategy at SPI Asset Management