U.S. Markets
U.S. equity markets remain very cautious ahead of Fed chairman Jay Powell testimony. And rightly so as one of the principal drivers of soaring stock market valuation is the thought of easy monetary policy. But the fact that U.S. equity markets are consolidating with even a slight bid tone to them today suggests that a 25 bp cut is not going to disappoint the equity investor base.
With CME Group's (NASDAQ:CME) FedWatch Tool pricing in a 96 % chance of a cut, it's unlikely the Fed would risk ignoring the markets signaling especially after taking a dovish turn at the June FOMC meeting which sparked a broad risk-on rally and overshadowed concerns about slowing the U.S. and global growth.
After all, there is that small thing called a "credibility issues "so why on earth would the Fed want to lead markets down the primrose path?
Oil Prices
Oil prices gushed higher after The American Petroleum Institute (API) reported an enormous crude oil inventory draw of 8.129 million barrels for the week ending July 4, and well above analyst's expectation. It would be the fourth straight weekly drop if confirmed by EIA. Weekly inventory data from the EIA will probably be more persuasive than usual this week, as investors look for continuity in this bullish inventory trend.
But the API report is significant "beat"" and could provide a decent springboard for prices which veered higher earlier in the session.
Oil prices nudged higher throughout the day supported Russia production compliance and escalating tensions in the middle east.
Russia's OPEC+ compliance is always a sticky issue for traders but reports that Russia's oil production in early July is down to its lowest in nearly three years is very price supportive.
Iranian military officials commented that Britain seizure of an Iranian oil taker of the coast of Gibraltar would not be "unanswered," and provided a small bid to the markets. There's likely a bit of desperation setting in with Iran's production falling to a three-decade low. But eventually one of these "symbolic "moves are going to backfire or even possibly trigger a policy mistake.
With the market sandwiched between the lingering bearish effect of the U.S.-China trade shackling oil demand and bullish headlines about tensions in the middle east, oil prices will remain volatile.
Gold Market
Gold bulls are living life dangerously as gold remains on the defensive due to the combination of a firmer USD and slightly higher yields which continue to thwart Gold's upward ambition. Traders have turned into better sellers of Gold post-NFP, and if not for renewed trade concerns which helped spark a short covering rally overnight, we could be trading lower today. House economic adviser Larry Kudlow U.S. Administration had agreed not to impose any new tariffs, but China was expected to move ahead with "good-faith", it's the "good-faith "comment that is open to much interpretation.
USD
Chair Powell's July 10 testimony should signal that the FOMC agrees with 25bp July cut priced in the futures market.
As for the USD, a 25 bp is unlikely to argument global capital flows which remain heavily skewed towards the U.S., and what external investments made but U.S. managers into Asia will most certainly be hedged back into the dollar.
Traders are starting to position for the long USD carry trade that is expected to return in fashion as the chance of a 50bp Fed cut has all but evaporated. But are biding time waiting for Chair Powell testimony to completely rule out any surprises before stepping in the USD accelerator.
GBP
Cable is nudging towards the year's low of 1.2440. If a 'no-deal' Brexit starts to be priced meaningfully, 1.20 is in scope for GBP/USD. Traders prefer to remain short GBP over the short term.