The Fed holds the keys to the Markets “risk on” View

Humphrey Hawkins Testimony (day1)

The Fed holds the keys to the markets “risk on” view. And supporting that notion, the FOMC have regime-shifted away from policy supported by the Taylor rule utilized in its economic forecasts, and instead moved to a ‘risk management’ structure. It has become progressively semblant since the June policy statement risk management is at the core of the Fed thinking which was confirmed by Fed Powell testimony that focused on various global economic and policy risks that could adversely affect US economy and cause weak inflation to become even more commonplace.

US markets

The S&P surged to a record high briefly crossing the 3000 threshold as equity markets reveled in the afterglow on the Powell signaling the start of a mini easing cycle. And rightly so as one of the principal drivers of soaring stock market valuation is the thought of easy monetary policy will bolster the US economy, which isn’t struggling, and spur on an even more scintillating stock market rally for the remainder of 2019.

All in all, the start of an insurance interest rate cut cycle is an excellent outcome for risk assets.

Oil markets

What a bullish Crude draw!!

Oil prices soared 4.5% a barrel on Wednesday to their highest level in more than a month after a very persuasive and weighty EIA oil inventory draw of 9.5 million barrels, not only confirming but eclipsing the hefty American Petroleum Institute’s estimate of 8.13 million barrels draw and at the same time, outstripping the key five-year average of -4.9 million barrels.

And adding to the momentum while providing a significant short-term fillip to prompt contracts US offshore driller cut nearly a third of offshore Gulf production as a tropical storm is bearing down on major US oil production hubs.

While there nothing like an early start to the hurricane season to support oil prices, but looking under the hood of the EIA data, it paints an even rosier picture for US oil markets. Imports down, exports likely up and refinery utilization at yearly highs.

The adjustment figure (the difference between refinery inputs and the demand implied by production, net imports and stock changes) fell by 812k barrels per day Shipping data suggests a ~700k barrel per day suggesting an increase in real exports while the EIA ‘s estimated exports were little changed.

Of course, the not so little nudge from the Chair Powell helped oil market push higher as well.

Gold market

Chair Powell’s made a strong case for a July rate cut amid rising risk which is heavily skewed to the downside. By signaling the start of a mini easing cycle, the US dollar was slammed mercilessly while gold was greenlighted to push higher.

It made little sense that the Fed would lead the market down a rate cut garden path, especially after taking a dovish turn at the June FOMC policy meeting.

Gold has been our most committed view despite some market doubt and skepticism leaking into the equation due to the strong Payroll report. But as Fed Chair Powell confirmed the Payroll was not influential in their view. Again, suggesting a shift to a risk management regime as opposed to a Taylor rule infused policy guidance, which is an extremely dovish pivot.

Although there will be a few bumps on the way, but given the level of skepticism in the first gold rally cycle, we think there will be an even greater rush for gold in the coming weeks and months. So gold prices could stay on an upward path as central banks pivot to an easing stance, the US dollar turns gradually weaker with a more dovish Fed and the burden of negative yielding debt rises.

Currency markets

The US dollar was battered and bruised on the more dovish than expected Chair Powell testimony as traders who were prepositioned for a return of the USD G-10 carry trade packed up shop and ran for the hills.

While the EURUSD will struggle to fill the NFP gap as the markets remain very much focused on the ECB’s dovish monetary policy reaction function, whereas current price action suggests G-10 trader want to play out this move against USDJPY which could leave it especially vulnerable in coming days.

From my seat, I’m still looking to sell EURUSD on moves to 1.1260-75 as I expect the ECB to start laying on the dove thick and heavy and in no uncertain terms.

The Ringgit

The Malaysian Ringgit is set to benefit today on two fronts. Chair Power cemented the Feds dovish shift while the 4.5 % surge in oil prices is too massive of a move to ignore!

More Risk positives

FOMC minutes

And confirming this dovish Fed shift he FOMC minutes made and a clear and unambiguous case for rate cut amid rising risks, risks weighted to the downside.

Repo facility

The June minutes show that staff briefed the FOMC on the possible role of a standing Fed repo facility. Given the plentiful spikes in overnight funding, this type of facility would foster more fluidity in the markets and might also incentivize banks to “shift the composition of their portfolios of liquid assets away from reserves and toward high-quality securities.