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Stephen Innes

US equities were flat through as pre FOMC position jockeying dominated Tuesday’s session in the US, albeit at near-record highs. The S&P500 closed a tad lower, down 0.1% while US treasury yields slipped 1bp. Several earnings reports trickled in without a common thread, but for the most part, investors appear more than content frolicking amidst a trade talk calm happy to wait for the Fed.

The S&P 500 is blasting through to record highs, risk sentiment consolidates here until the market gets its first look of the FOMC forward guidance and if the data is bottoming, which is what equities appear to be pricing into the valuation. Several lead indicators are suggesting the business cycle is about to turn. Microsoft has sold over $30 billion in products while Google is reportedly on track to reinvest $25 billion in capital expenditures. So not everyone is holding back on CAPEX.

All of which is fantastic news but with stocks making all-time highs, investors are going to have to make some big calls heading into year-end, especially if the macro data continues to lag. Amidst all the confusing signals, it could be a hectic last eight weeks of the year. Lots of equity investors have performed admirably this year, and they might be less inclined to add on risk for fear of given back gains to the markets in the face of economic uncertainty.


The leader of the Labour opposition party in the UK is satisfied that a no-deal Brexit has been taken off the table with the EU’s January 31 extension, leaving it almost certain that the election will take place. The precise date is yet to be confirmed, with the UK PM still negotiating with opposition parties, though some point between December 9 and December 12 looks likely. But it could be one of the most highly contested elections in recent UK history.

The market seems to be making assumptions about the outcome of the UK general election. Indeed, all the polls point to a solid victory for Boris Johnson, but we have been down this road before, and history should remind us that when it comes to UK elections, strange things can happen.

Oil Markets

After spending the NY morning session grinding higher recovering overnight profit-taking losses, Oil prices slipped once again after the American Petroleum Institute reported that inventories in the Cushing Oklahoma WTI storage hub rose 1.22 million barrels last week, which confirmed similar data discovery earlier in the week published from Genscape Inc.

The API inspired sell-off has been relatively minimal; however, as the more substantial position clear out occurred on the Genscape report the day prior. But price action over the past 48 hours does illustrate just how quick traders are to revive fears about sluggish demand amid the thought of more abundant supplies. This emerging trend to book quick profits is apparent even though at this time of year, the five years average build for this week is +1.1 million barrels.

Investors may have loaded up on futures contracts a bit early expecting the falling in US rig counts to factor into the inventory reports, so perhaps the reports were giving rise to profit-taking after a solid run last week. Focus now turns to the more definitive US Department of Energy inventory data.

As for the upcoming OPEC meeting, I do realise its still weeks away, but it will be difficult to avoid the deluge of OPEC jawboning and Russia’s contradictory and self-serving headlines as they try to hash out a more favourable slice of the OPEC production pie.

But unless US production falls off the table or there’s a significant tariff rollback, both highly unlikely, an additional production cut appears most likely in the cards. And when combined with tighter enforcement of the current agreement, overall compliance should limit near term sell off all things being equal on the trade talk front.

Gold Prices (Marco context)

Treasuries were confined to narrow range, as some investors moved to the sidelines ahead of Wednesday’s FOMC meeting. A rate cut is expected, but the Fed is widely seen as reluctant to go further, which continued to weigh on gold prices overnight.

The Key for gold prices over the near term could be how much further US Bond yield push higher as we move through the mini reflation trade coupled with more positive headlines on US-China trade talks which continues to propel risk markets higher.

Of course, sitting in Asia where we move to the slow beat of the Chinese economy, it’s a struggle to buy into the latest bout of “risk-on”. But with US-China trade conflict the critical near-term narrative for risk markets and with Washington and Beijing coalescing around Phase one of the trade deal, its challenging to remain optimistic about golds near term direction. But if we do get a recovery in gold prices, it would not be the first time this year the yellow metal has rallied against all the odds.

Given the steady diet of “risk-on” narrative this week, the deluge of economic data will be crucial to hold sentiment in check. The Fed is fully expected to cut today, and all eyes will be on clues for any future moves.


The Bank of Japan is between a rock and a hard place as their policy kit is out of ammunition under its current framework and a further easing, although they will continue to wax dovish, are likely to have limited impact on growth.

Outside of the move on the Pound and Euro on back of cables coattails currencies have consolidated ahead of the FOMC. But with vols dropping precipitously it suggests traders are not expecting any brash USD moves as the Fed is likely to remain in 100 % data-dependent mode.

The Aussie raced higher in tandem of local bond yields but has fallen prey to profit-taking as traders are embarking on their pre FOMC position square dance.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

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