US markets
Major U.S. indexes closed mostly lower Tuesday ahead of the Federal Reserve Board rate decision, as airlines, transportation and shipping companies are feeling the squeeze from higher oil prices. But higher energy prices are stoking the inflationary fires, and that pass-through effect is pushing US bond yields higher, which tends to lessen investors appeal for stocks.
FOMC
The market has completely priced in today’s Federal Reserve Board rate hike so that the focus will fall on the Fed’s forward guidance and Fed Chair Jay Powell’s press conference. Over the past few weeks, we’ve seen some interesting quantified arguments from traditional Fed doves suggesting the Feds will need to move off neutral to a more restrictive monetary policy. So, I expect the real focus of the meeting will be on the “neutral rate” with comments from Brainard and Evans indicating that the Fed may continue hiking into a restrictive territory.
On the flip side, elements of the markets remain policy pessimists concerned about adverse effects of the trade war and preaching fiscal fatigue as we enter mid-2019, and as such are looking for a Fed pause in 2019. As I told my Trading desk, I’m hawkish, but only 51%, implying that I have no idea what to expect from this newly minted sitting Fed. But this red-hot US economy does suggest the Feds will continue to drain the punch bowl, but if the Chair Powell shows any support for hiking into the restrictive territory, the dollar will surge immediately.
While everything remains little more than a crystal ball hypothesis when it comes to this FOMC, but one thing we can be sure of is that Fed Chair Powell will stay as far away from politically charged topics such as China Trade and the President’s constant meddling in Fed policy.
Through the looking glass
Trump’s address to the UN was the highlight of the overnight session while not the overly market is impacting, as everyone had pretty much expected his comments to be tinged with Trump “Through the looking glass,“ as predictably his most prominent wrath of Trump targets were China, for its trade policies; OPEC for fixing oil prices; Syria for chemical weapons; Venezuela for socialism and corruption.
Oil markets
Trump’s UN address did not sway the rally in oil prices one iota, but crude conceded a chunk of yesterday’s gains after the American Petroleum Institute reported an unexpected 2.9 million barrels increase in US crude stocks for last week. But indeed, it will be a substantial bearish surprise for the market if the more certain DOE Weekly Petroleum Status Report at 10:30 AM EDT on Wednesday confirms a similar inventory build.
But for the most part, oil prices remain in the bulls domain amid concern that US sanctions on Iranian crude oil exports will result in much tighter physical market conditions once they take effect in November. While the US oil inventory data counts, the fact that the markets could still be underestimating the supply crunch from Iran sanction has many oil investors running with the bulls.
Gold Markets
The precious complex is marginally higher with gold consolidating either side of the $1200 level. But with Gold ETF (SPDR Gold Shares (NYSE:GLD)) inflow stagnant and no or a real shift in investment allocation portfolios, most Gold dealers and market speculators are left watching the US dollar for direction. And since even the most astute G-10 traders are struggling for dollar direction, gold remains mired in no man’s land, smack dab in the middle of the well worn $1190-$1210 range.
Currency Markets
Japanese Yen
With the 112.75-65 near-term support channel holding up overnight USD/JPY looks well positioned to move higher. But everyone will be watching the wires today as the FOMC will deliver a rate hike. I’m expecting entirely no shift in forwarding guidance but listening carefully for any bullish inference on the “neutral rate” with comments from Brainard and Evans indicating that the Fed may continue hiking into a restrictive territory.
Malaysian Ringgit
Market remain focused on the FOMC where a hawkish tail risk could weigh negatively on the Ringgit. Despite surging oil prices, one glance at the US 10y is trading up at 3.10% should be convincing enough to tread gingerly, not only in the Ringgit but EM Asia in general but expect USDASIA, and the MYR to consolidate into the FOMC.
Support comes in at 4.12 resistance 4.15