Markets
The S&P 500 stabilised on Thursday, finishing the session up 0.2%. Better-than-expected US data (retail sales, Empire State, and Philly fed) probably helped sentiment in US stock markets, though it seems to have been largely ignored by the bond market. Bond markets continue to scream at the Fed supported by President Trump who continues to muscle Powell lower " we don't care about the data if you don't cut rates you are making a huge policy mistake” ahead of the annual central bank soiree in Jackson Hole Wyoming. From a risk sentiment perspective, the Fed has no other option than to comply with the market's pricing for fear of a total risk meltdown.
The Fed
The three items the Fed has continuously underscored are global growth (and related softness in US manufacturing and capex), trade uncertainties and muted inflation pressures are all weak hence the reason why the bond market is ignoring the backwards-looking data. Sure, core CPI surprised but the story is the opposite on the FED PCE favoured inflation indicator where weakness in the PPI points to a PCE deceleration this month.
Oil markets
Oil continues to trade-off general risk sentiment and less so off any immediate oil specific supply considerations and precisely the gnawing concerns about the waning global economy, which is singularly driving the global risk-off attitude. Sadly, for oil markets, this week’s depressing run of economic data out of China and Europe drives home that doom and gloom scenario.
The robust US economic data released overnight is providing some degree of comfort as it suggests a less gloomy US domestic outlook and will walk back some of the more immediate recessionary concerns. But what's positive for oil markets is that the data is unlikely to change the perspective for a Fed interest rate cut in September as the Feds urgent concerns are about the contagion effect from the slowing global economy.
Market positioning, which is fragile at best due to the August vacation liquidity drain, will remain extremely vulnerable and prone to a constant stream of trade-related headlines ahead of US-China trade talks due to re-start next month.
Markets appear to be looking past this week inventory builds as the reports are mostly in line with the 5-year average, while the strong underlying seasonal product demand suggests the market could return to inventory draw sooner than later.
But it's the unpredictable nature of the US-China trade headlines that will keep traders hoping which suggesting the markets will be held hostage to risk aversion across several channels making for treacherous trading conditions.
Gold markets
Investors are increasingly turning to the safe-haven appeal of gold as tensions rise over the state of the global economy. Despite some decent US economic data released overnight, the global economic outlook continued to deteriorate this week with substantial setbacks on both the European and Chinese economic fronts which will continue to weigh on markets topside ambitions.
However, given the overbought positioning, investors could exercise a degree of caution ahead of the usual Friday position housekeeping which it typically categorised profit-taking and end-of-week book-squaring. But extended dips will be easily absorbed by the markets as there remains an unquenchable demand amongst cross-asset traders between $1490- $1500.
We continue to favour trading from a long gold position (buy on dips) provided $ 1480 holds, which will the uptrend remains intact if that continues to hold. This view is supported by -15 bp of interest rate cut priced into the ECB September policy meeting and -34 bp of interest rate cuts priced into the FOMC September policy meeting.
Nonetheless, the market remains fraught with trade headline peril as evidenced by yesterday's skittish price action where China policy markets borrowed a page out of the Trump trade war manifesto by escalating and then backpedalling trade war rhetoric.
Currency Markets
The Euro
A weak tone in EUR continues to resonate this morning. Besides the dreary run of German economic data which is flat out negative for the Euro. The market is paying close attention to an ECB Rehn's interview to the WSJ, which traders are taking as UBER Euro negative. In no uncertain terms, he stated the ECB September policy package needs to be significant while arguing for a " substantial " bond purchase and the need to exceed market expectations from a shock value perspective.
But if we take that in context with the robust US economic data overnight which walked back some of the markets Fed Fund dovishness, for those so inclined to sit in the strong dollar side of things, it makes for a very comfortable short Euro position heading into next week EU PMI's which will unquestionably be weak.
But we suspect the Euro to continue sliding ahead of the ECB September meeting which continues to argue for a push lower into the mid 1.10's
The Malaysian Ringgit
Not a great deal of focus on the Ringgit now as the volatility in the CNH has very much dissipated. But the gloomy global growth outlook and the uncertain outlook for Oil prices continue to hobble the Ringgit.