U.S. equity investors continue to glaze over the economic realities and instead remain entirely mesmerised by the allure of central bank policy accommodation.
The S&P 500 continues to nudge against record high this week while 10y yield flirts with 2.0% and gold shoot higher although off recent highs but is still +$140 costly than a month ago. Indeed, this new world order of risk neutrality is certainly worth one's weight in gold.
However, risk parity represents investor vacillation to the max, and if there is one thing financial markets hate its a delicate balance between risk-on and off, suggesting something will give shortly.
Over the short run, “risk-on” sentiment should prevail on the back of the deluge on central banks easing.
The Fed is critical to the 'risk-on’ fever, but if there was ever a time for FOMC policy credibility stand out, now is the time to shift easing policy into high gear.
The onslaught global economic misery continues to blot out any bullish relief from escalation tension in the middle east.
When it comes to “misery”, it knows no limit, an in damming news for the global economic outlook, mainland media says China reportedly considering cutting infrastructure project capital. This headline had traders screaming out “Sell “at the NYMEX Asia open, but this news needs closer inspection,
But surely rising middle east tension must undoubtedly put a floor in this current self-off, one would assume?
Risk market is putting much weight on NFP, so I would suspect oil will trade, in the absence of any market catalysts at the whims of pre NFP position squaring.
Scraping the barrel on the bullish side of the equation
When British special forces seizing a supertanker off Gibraltar, in a most apparent sign of rising middle east tension, failed to lift sentiment, you know things are bad.
The EIA report put oil under pressure, but the four digits drop in the U.S. rig count (reported early this week because of the July 4th holiday, along with Trump issued a stern warning to Iran over its enrichment plans. Failed to put a significant dent in this week’s sell-off.
However, when bullish signals fail to lift the oil markets spirits, we should be very concerned this downtrend could run much further than expected.
It has been a quiet session, but the bias in gold remains to the topside, in both cash and options.
Gold lifted $8 at the Asia open British special forces seized a supertanker off Gibraltar carrying Iranian oil to Syria which could intensify tensions in the middle east. As there are this dovish central bank climate Gold and not your tradition fiat currency hedges (JPY or CHF) remains the market reaction function, and the number below support as gold demand is eclipsing JPY as the market go- to risk-off hedge as global centeral bank turn dove.
What constitutes a haven when CB's turn ultra-dovish? Gold from any perspective has outshone the JPY as a defensive strategy.
Fr 01/04/2019 1294.28 1298.60 1276.74 1286.05 108.51
Fr 05/03/2019 1270.68 1282.62 1268.68 1279.11 111.10
Tu 06/25/2019 1419.72 1439.21 1411.96 1423.44 107.20
Dovish monetary policy and expectation of QE have triggered an absolute tsunami of cash flowing into European peripheral debt.
It seems that Christine Lagarde is indeed the dovish choice who will eventually take actions that are motivated more by politics than economics.
So, while these bond flows remain somewhat supportive over the near term. However, the Lagard pivot could ultimately be perceived as Euro negative.
Aussie shorts are getting no joy although this morning news out of China considering cutting infrastructure project capital, has raised a few eyebrows, which could negatively impact iron ore demand. So, while we try to figure out this headline, we will stick with our current game plan.
AUDUSD remains in positive territory this week despite dovish RBA inclination, but the markets are short and getting no joy so with strong equity market performance even more so if we see Gold pushing higher again as the historically tight AUD-Gold correlation could see a push towards the 200-day moving average at 0.7098 as short positions cover.
If the RBA holds to form given the, have been responsible for half of all hawkish surprises by G10 central banks this decade. While its possible they won't cut but what is more probable is that short Aussie positions will get a case of nervous nellies, and we could see some wavers or shortstop loos order triggered between 7730 and 7780especially if the market shifts rates positioning to all-out dove most post NFP, which I expect them to do even on a consensus report.
The Malaysian Ringgit +
Fair winds for the Asian Carry!
With the chase for yield returning to global markets, a friendlier yet still fragile U.S.-China truce and currency volatility in compression mode duration trades into Indonesia, Malaysia, and the Philippines and Thailand continue to resonate. A dovish Fed offers all the Above central bank's policy wiggle room, and this makes the bonds even more attractive.
The most unambiguous risk is of the FED are not so dovish and fail to meet the market expectation. Currency markets have priced in 3 X .25 bp rate cuts on 2019.
Let me preface this by suggesting that assume no 300 bln in extra tariffs keeping us in risk natural state on the trade war front; I think inflows will pick up especially on improving currency sentiment and remain soft bullish on the Ringgit (amongst the other mentioned above.
However, if the Feds do not wax dovish or inflation magically appears out of nowhere, I would not want to be on the receiving end of the magnificent Bond market unwind tsunami of 2019.
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