We are Well Beyond the Carrot and Stick Persuasion of the FOMC Cheap Money Policy

If anyone is questioning the Fed’s dovish pivot, take one look at the S&P 500 which suggests the Fed pause is delivering in spades.
Stephen Innes
Federal Reserve Building in Washington DC

The S&P took off again to close at record highs supported by a breathtaking series of earnings reports that indicate these record levels are more than justified and go well beyond the carrot and stick persuasion of the FOMC cheap money policy.

One of the big surprises that helped push sentiment along was the remarkable rise in new home sales as lower mortgage rates suggest US housing markets could be on a much better trajectory than initially forecast. Indeed those US growth concerns from Q4 2018 certainly feel like a distant memory from my seat.

Oil Markets

Oil traders eventually came up for a bit of air today despite the overriding bullish sentiment on the back of the US administration Iran resolve. But numerous critical barometers used to gauge market sentiment including both optionality and spreads continue to fire off bullish signals. Call premiums have ratcheted higher while the near contracts spreads have moved well into backwardation. This combination from a quantitative perspective generates a  strong buy signal. Opinions are noise market position is fact!

Yesterday’s price action was tentatively held hostage to the possible developing game of cat and mouse between OPEC producers the US administration. Saudi Energy Minister Khalid Al-Falih signaled OPEC was content to bide one’s time opting to gauge the decline in Iran oil cargos before raising output. But what he meant was “fool me once shame on you but fool me twice shame on me”. OPEC doesn’t want to get hoodwinked again by President Trump after they were blindsided by the President issuing Iran waivers the first time the US administration wanted to drive Iran exports to zero.

So despite Brent hitting a 6-month high, the market is trading a bit tentatively after all we have touched a 6-month high which after all is normal price behaviour.

But if the US is fully committed to their hawkish Iranian pledge prompt prices will reprice higher as Saudi Arabia appear tentative about increasing supplies while it is unlikely Shale can fill the void quick enough. So to what degree oil markets tighten, and how high oil price goes, will now mostly be dependent on the supply response from OPEC+ group.

However, necessity makes strange bedfellows, and you won’t find any weirder than the ones Saudi Arabia are keeping. On the one hand, they have coherence with Russia to reduce oil supplies while at the same time they now have a pact with the US to increase supply.  Ultimately something is going to snap.

Gold Markets

Gold prices plumbed a new 2019 low, weighed down by a stronger dollar and surging US equity markets. However, I’m chalking up today move through $1268 as liquidity event as in ” lack of necessary liquidity” after someone brought some serious weight to the market early in the NY session. But the market gradually self-corrected as bargain hunters entered the fray.

I would be lying if I didn’t say I was surprised by the lack of haven demand after Iran hard-line faction threatened to stop the flow of seaborne oil exports from the Middle East by blockading the Strait of Hormuz, a 21-mile-wide strategic choke point in the Arab Gulf.  If this isn’t a smoldering firecracker set in the middle east powder keg, I don’t know what is. Indeed chances of a blow-up remain high, and perhaps we will get a delayed lift off from the gold markets.

However, the all-embracing mood points to further downside as fast money and large speculator flows continue to sell while the physical has only shown a spark or two during this entire middle east Iran waivers fiasco.

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

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