U.S. Markets
U.S. investors were able to shake off an early case of global growth jitters heading into the July 4 holiday, as U.S. market eked out small gains. Confidence is running high that the U.S. Federal Reserve Board will cut interest rates in July amid signs of a slowing global economy and uncertainty over multiple trade disputes.
And while 25 bp reduction is a foregone conclusion, many investors are still hoping for a deeper cut but are keeping enthusiasm in check ahead of the critical U.S. jobs report due out Friday. It’s fair to say the hazards from rising U.S. protectionism are contributing to the massive global slowdown which the FOMC can’t comfortably ignore and warrants a significant policy response.
Whether this happens in July or later in the year, well that’s what should be for debate.
Oil Markets
Oil prices tanked as global demand concerns sapped the life out of any post-OPEC meeting optimism. If today’s more substantial than expected U.S. inventory draw can’t stop the oil markets leak, oil bulls could be in for a troubling day.
For the proper record, The American Petroleum Institute (API) reported another sizeable crude oil inventory draw of 5 million barrels for the week ending June 27, a more ambitious draw than analysts had predicted, at 2.454
The latest PMI drops suggest the markets are no closer to putting a cyclical bottom in place. Indeed the amplitude of the most recent PMI weakness outstrips the sphere that oil markets can comfortably ignore, this despite the supportive nature of OPEC+ production cut extension.
U.S. bond markets are moving back into a recessionary mode with 10-year UST yields falling below 2%, a damning signal for oil markets. Even the widely expected policy response from the Fed is doing little to calm investor jitters.
But compounding matters to no end, and I might start to call Pboc governor the commodity markets new Grim Reaper, in a speech at the Central Bank of Finland yesterday, PBoC governor Yi Gang sent more hawkish signals by tempering expectations for significant credit growth in H2 2019, following better G-20 results during the weekend.
If this is true, it's horrible for a market that was positioning for a fillip from a Pboc policy response and a noteworthy shift from his dovish remarks just a few weeks ago that there is "tremendous room" for additional policy stimulus in China.
Still trying to get my head around this one as to whether it’s a response to the better than expected G-20 outcome, (unlikely) or making sure the market doesn’t get the wrong messaging from next week's “Total Social Financing Data" as there was a lot of new bonds floats in June (maybe). Not sure about other traders but this apparent Pboc shift has flushed my near term oil outlook down the drain.
Gold Markets
Gold moved significantly higher overnight and continued rocketing higher at the Asia open.
The latest PMI drops suggest the markets are no closer to putting a cyclical bottom is in place. Indeed the amplitude of the most recent PMI weakness has triggered waves of recessionary fears as fixed income markets are back in the chase for yield triggering UST 10-year back below 2%. That's very, very bullish for gold.
While the 2-year UST is an excellent gauge for the market and Fed sentiment make no mistake, the 10-year is the all-encompassing bellwether for global market sentiment.
The IAEA said on Monday (and Iran confirmed) that Iran has breached the 300kg limit on low-enriched uranium storage set under the 2015 nuclear deal. Regardless if it’s a negotiation tactic, it's still a scary escalation in Middle East tensions and will add to the risk premium in gold markets.
The Pboc backpedaling provides "tremendous room" for additional policy stimulus in China is compounding global recessionary fear. Chunky ETF inflows even during the G-20 correction suggests that gold demand remains strong as investor anxieties skyrocket, again very supportive for gold
Currency markets
PBoC Governor Yi Gang sent a hawkish signal, tempering expectations for significant credit growth in H2. This signal is negative for global growth and with no other viable options to seek shelter investors are taking temporary respite under the U.S. dollar.
With risk assets tumbling, we will continue to see a bid under USDASIA as traders move away from the interest rate narrative and turn the focus back to growth differential. Global trade tensions resurfaced after the U.S. expanded a list of European Union goods that may be hit with tariffs. This is weighing on the Asia trade-sensitive basket (CNH–TWD–WON).
We expect the ringgit to be held hostage by all of the above and trade with a weaker bias compounded by tumbling oil prices. The Thai baht has lost a bit of its safe haven luster for locals as the central bank could cut interest to temper the baht's appreciation as it grows concerned about export contraction.
The yen is trading firmer on safe-haven appeal while the euro continues to languish in no man's land below 1.1300.