The FOMC
There wasn’t much reaction to the FOMC minutes but one thing that is apparent is that the Fed dovish adjustments are a bit more than the market expected. But the main takeaway is that quarterly hikes are not the new normal which means the markets, and the USD will be hypersensitive to data and Fed speak even more so in 2019 when the Fed will give press conferences every meeting.
It's clear as day the FOMC is making an unambiguous dovish transformation to complete data dependency. And while the USD newfound sensitivity to data could be construed as negative, since the greenback does not have the Fed to anchor itself to, external drivers will now come to the fore where rapid stagnation in economic data amidst the rise in political risk could lead to downside policy adjustment in the UK and EU. So even if the Fed is nearing the end of their rate hike cycle, a nasty Brexit or even a sustained slowdown in China could still leave the USD in a commanding position. Not to mention if the US economy continues to fire on all cylinder in early 2019, the market may be more susceptible to a hawkish Fed surprise
Markets
But for today, the reality is Global markets are in a standoff amid ongoing trade uncertainties. While sentiment leaned more optimistic on headlines suggesting US-China pursue a new trade ”architecture“, without knowing what that architecture entails and not sure what Saturday G20 dinner will bring, markets are still driving blindfold.
But it was a noisy morning New York session as the markets were getting tugged every which way as uncertainties around trade, Fed policy and energy sector came to a head.
The Fed has thankfully put their cards on the table, but I can’t help but think investor sentiment is one of misplaced optimism when it comes to trade. Ultimately given the vast divide in political and economic ideologies between both global super economics, the trade and tariff concern are probably something that is going to persist through 2019 if not longer.
At least one good thing came out of today. The Fed’s new direction is clear as a bell.
Oil market
Oil prices rebounded through most of the day, from news the Russians may be willing to cut production in cooperation with OPEC, a day after President Vladimir Putin said Russia was “absolutely fine” with crude oil at $60 per barrel. Which predictably triggered a rip higher in crude but of course that leaves the markets still wonder how quick and how much. Indeed this back and forth debate remains the most significant speculative catalyst for oil markets
At mid-afternoon NY the reality check of sorts set in after the Energy Information Administration EIA suggested that continued shale resource development helped push U.S. crude oil and natural gas reserves to new record highs in 2017. With traders already anticipating a 1.0 mmbpd cut, which is arguably priced in. It will probably take a much deeper cut to jolt the market into a short covering rally. Otherwise, the market falls prey to the prevailing bearish sentiment that will continue to drive prices lower on the premise the reduction might not be sufficient enough to draw down surplus supplies.
But with all options on the table for December 6 – from no production cuts to as much as a joint 1.4mn cut, let the game begin!!
Gold market
It does feel we are building a significant base on the dovish Fed pivot, but theirs’s huge element unpredictably around this weekend Xi-Trump summit which suggests markets will trade in relatively tight ranges into the weekend.
Asian Currencies
Asia duration is in demand, and the high yielders are outperforming well as there nothing like a passive Fed and a struggling dollar to awaken dormant carry traders. But the reality we have seen this shift in carrying demand since Powell sent out some early warning signals last week that the Feds were considering a pause. When there is a widespread dollar capitulation, it’s not unusual to some outsized move as foreign portfolio investment demand ratchets higher triggering stop losses.
With oil prices basing risk sentiment stabilising and a dovish Fed pivot, the MYR rallied overnight on the back of bond demand. With the Feds new dovish transformation, this could take near-term pressure off the dreaded 4.20 level.
The Yuan
The renminbi lagged the regional momentum but it's a function of trader keeping risk very tight and directional risk close to home.