Trade Conversation Remains High on the list of Supportive Factors.

Equity markets received a boost after a report that U.S. Trade Representative Robert Lighthizer and senior U.S. officials are heading to China next Monday for an across the table trade negotiations between the world’s two biggest economies.
Stephen Innes
Trade Conversation Remains High on the list of Supportive Factors.

While trade conversation remains high on the list of supportive factors for equity market this week, investors risk barometers are completely dialled in on the amplitude of the US Federal Reserve next easing cycle as the looser the policy, and the higher equity markets will soar. As is typical during the Fed Blackout period, investors usually shy away from front running policy decision which has been made even more complicated this week as questions are swirling if the ECB will hint at switching the QE tap back on.

The S&P 500 is straddling 3,000 points in anticipation of the Fed lowering interest rates, but if Fed guidance confirms they are easing for precautionary rather than recessionary reasons the market will easily extend on current gains while the looser the policy measure will dictate just how high equity markets take flight.

After a decade of unparalleled easy money policies, still, the global economy struggles with growth and absentee inflation. Lacking a more suitable contingency plan global central banks are set to engage in concerted policy easing yet again, with rate cuts all but inevitable in the US, China, and Europe. And asset purchases could be re-kindled in the Eurozone and other economies where interest rates are already at historic lows such as Japan, New Zealand and Australia. In the UK, Brexit is still the driving force, but rate cuts are highly likely, with a return to QE on a hard Brexit all but a lock.

Get ready for a deluge of central bank easing and lower interest rates forever.

Oil Markets

After an inanimate start to the New York session, oil market gradually climbed the price ladder on improved risk sentiment after reports of a planned trade meeting between the US and China and word from U.S. Central Command which said the United States might have taken down a second Iranian drone. Both events triggered a sizable short-covering rally after the markets have been struggling under the weight of a trade war-induced global consumption slump.

And for good measure, oil prices moved even higher after the American Petroleum Institute reported a substantial crude oil inventory draw of 10.961 million barrels for the week ending July 18, compared to analyst expectations of a much smaller yet still heavy -4 million barrels draw.

Indeed, oil markets were in desperate need of good news as with Libya lifting it “force majeure” and traders growing more price benevolent to middle east tension, investors will rejoice in this significant fundamental fillip although the Strom Barry inventory overhang and indications of another gasoline build will likely curb to some degree the markets topside ambitions as traders will look to the more definitive EIA report later in the week.

Gold markets

Gold got a boost from rising no-deal Brexit probabilities, which also significantly increases the odds of QE on the continent. However, the rally gave way to improved US-China trade news flows and a high degree of investor caution knowing that substantial speculative length has built up above $1400 and that gold markets reaction function will be asymmetric to the Fed’s post rate cut messaging.

While gold investors will continue to rebalance positions ahead of the FOMC, likely keeping markets in current ranges, but with QE apparently back on several central bank’s roundtable discussions, even the hint of non-conventional easing should continue to provide a solid footing for Gold prices to springboard if the Fed affirms the markets dovish suspicions.

ECB and the Euro

The market continues to swing between 4 and 6 basis points of cuts into today’s ECB rate decision, which has caused many to chase the EURUSD market lower Traders had expected ECB today’s rate cut probability to lessen into the meeting although price action last week was telling us that traders wanted to be short Euro into the meeting but not quite this short. However, the weak EU economic pulse and a higher probability of no-deal Brexit, traders are mindful that Draghi could unleash both a precautionary and recessionary policy bazooka of sorts.

Traders expect the Euro to continue to fall under the weight on negative-yielding bonds while nothing entirely new here; it will ensure EURUSD rallies are capped which has likely emboldened some pre-ECB short Euro position-taking.

While a rate cut today is bearish for the Euro in its own right, but the cut will increase the odds for an imminent QE significantly, and this is what could drive the Euro significantly lower.

Brexit and the Pound

The Pound continues to labour as Prime Minister Johnson makes a no-deal threat that much more credible suggesting Sterling isn’t about to escape the Brexit pressure cooker anytime soon. No-deal Brexit probabilities will nudge above 50 % in the weeks while the calls for an early election have already moved above that level. Indeed there is an active “Boris offer” to the Pound as no-deal Brexit uncertainty is causing investors a high level of angst especially with political and monetary policy uncertainty at the extreme levels when it comes to the UK.

Brexit supporter and UK economist Gerald Lyons is the front-runner with the bookmakers to become the next governor of the Bank of England. Lyons is a former advisor to Johnson, has spoken in support of Brexit, believes the UK government has room to borrow (as does Johnson) and thinks the 2% inflation target must remain.

But lending a modicum of support for the plundered Pound overnight, Bank of England Chief Economist Haldane says he would be very cautious about considering cutting rates barring some sharp economic slowdown. He says that despite Brexit the underlying pace of UK growth is a fraction below “cruising altitude”, and that as best the BoE can tell there is little slack in the UK economy. He says the market path of interest rates is not an accurate reflection of the most likely route of rates.

The Ringgit

The USDMYR is trading near our weekly top side range as the USD has been stronger than expected. However, most of the weakness was playing out against the Euro and Pound on a combination of easy ECB policy and increased no Brexit Fears.

But ECB easing is not detrimental for “carry- trade” and reach-for-return opportunities which will come on the back of accommodative central bank policy, which is not necessarily negative for Asia EM FX

With oil prices stabilising well off recent lows and the US and China preparing for face to face discussion the Ringgit hasn’t really fallen out of favour but instead is falling prey to broader USD rebalancing acts ahead of two key central bank events this month, ECB and FOMC.

This article was written by Stephen Innes, Managing Partner at Vanguard Markets LLC

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All

Top Promotions

Top Brokers

IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US