Iran's worst-case scenarios have been put on the back burner as President Trump has wisely opted to place "Major" sanctions on Iran on Monday as opposed to a military strike. So, for now anyway, Pandora remains in her box, and the world is a safer place today.
Lots of opinion on this one but it seems that choking off Iran's ability to sell oil to the world is not having the desired economic effect of forcing them back to the negotiating table to agree to a more stringent nuclear accord. But instead, Tehran is showing few signs of backing down preferring to escalate by vowing to reboot its atomic production into gear.
And while I can't help but think Iranian tensions will get worse before improving, with the immediate crisis over the drone abating and as capital markets step back from falling over the cliff, it will trigger risk adjustments at Monday's open as traders unwind some worst-case scenario hedges.
Oil Markets
The geopolitical escalation in the middle east is an unequivocally bullish short-term signal for oil markets, but with the immediate crisis moving to the back burner; focus will shift toward the OPEC summit, G-20 and of course U.S.-led oversupply concerns which suggest US inventory data will drive the bus this week.
Without going into too much detail and why we prefer playing the edges of oil markets price action rather than the middle ground. It's is the proclivity of risk asset to play the short term mean reversion this year and we expect that to be the case again this week.
The unwinding of Iran risk premiums should see oil prices fall at the open. But backstopping prices I continue to view a Fed rate cut in July as a pro-cycle pre-emptive cut which should keep risk assets supported, however with U.S.-led oversupply holding the reins, the market remains nervous about counter seasonal builds in both oil and gas inventories and should act as price topper.
Gold Markets
Gold continues to trade well despite equities rallying to all-time highs and while I do think one of these markets will eventually prove to be wrong, but for the time being, the race to the bottom in fixed income market remains supportive for both.
Falling global yields and unwinding of long USD positioning has made gold attractive to a broader range of investors. And these new waves of buyers continue to support gold prices amidst a growing list of catalysts which continues to suggest Gold demand could continue to swell.
While the de-escalation in middle east tensions could take some of the shine off of Gold at Monday open, but if the market continues to factor in a more trade-friendly atmosphere coming out of G-20, Gold prices could remain heavy, and we could see a correction lower.
But, with strategic buyers backing up the tuck on market dips coupled with the unyielding China appetite, these pillars of support will continue to bolster the market for the foreseeable future.
A couple of "canaries in the gold mines" cross-asset traders are looking at besides the repetitive low yield rate mantra, which frankly this Gold market rally transcends.
Large USD-JPY moves have historically signaled dollar correction, both bullish and bearish. So, a move below 107 will be super supportive for Gold as it will signal a more significant long USD unwind is taking place.
Options markets are trading at a furious pace. Key One-month implied 's popped to around 14% after languishing in neutrality around 10% for most of the year. One-year risk reversals are picking up momentum, while the easiest of all to digest is that the difference (or spread) of call options of puts has remarkably returned to pre-2012 levels.
From the Fog of war to the Fog of currency war we go
A couple of excellent reads shaped my currency views last week and likely saved this USD bull a bit of money.
As far as a flat-out currency war is concerned, I don't think that will happen but none the fewer discussions are now shifting from a conspiracy theory lark to a possibility.
But what should be visible to everyone now is that the US administration will most certainly be looking for currency concession from both China and the Eurozone when trade negotiations resume And while I don't think this will lead to a massive US dollar sell-off but dollar bulls like myself will need to temper our expectations.
The Euro
The EUR/USD sent off a bullish signal by closing above the 200dma (1.1351 Friday) as trader emerged from their low volatility cocoon no longer content to pick up nickels in front of a steam roller by staying long USD for the carry.
But with the uber-dovish Fed still firmly ingrained on traders’ minds and the Fed speak so far failing to walk down the market post-FOMC dovish lean, the USD should remain on the defensive.
But nothing is ever easy in currency trading especially as Draghi and Trump take turns batting the Euro around.
The Eurozone is in dire need of a weaker euro as the sense of policy urgency builds.
Looking at October EONIA pricing which stood around -10 bp on Friday but went as deep as -14/15 bp after Draghi's Sintra speech I would expect those level to be revisited this week which could stake some of the steam out of the USD unwind.
But with the Fed dovish shift steering the ship, buying dips should remain supported at least down to EURUSD 1.1325
Dollar-Yen
Since the break of 107.75, it has been a way street, and the market remains mainly offered on pullbacks and could stay that way until the market can close convincingly above 107.75. And while I expect a tentative unwind of risk premium at the open, I’m paying attention to critical levels when liquidity returns at the Tokyo open before making any rash judgment.