Markets, the Matrix and Black Diamonds | Daily Market Commentary with Jeffrey Halley
There is a definite feeling that markets have entered a holding pattern ahead of Jerome Powell’s opening remarks at the Federal Reserve’s Jackson Hole symposium this Friday. The sense of calm belies an underlying excitement on the street about what the Fed Chairman will say, although in all honesty, the news that The Matrix Part 4 will start shooting next year, raised my temperature more.
The street and the President, are anticipating that Mr Powell will signal that the Federal Reserve is about to embark on a reinvigorated wave of easing, following its global peers. Jackson Hole is one of the scariest places I have ever skied, and the danger is that Mr Powell sticks to the green runs and keeps well away from the black diamond ones.
The U.S. data of late simply does not support the need for an aggressive easing cycle. Despite the U.S.- China trade tensions making their presence felt in European and Asian data prints, this has simply not happened with the United States to any significant degree. Similarly, with Q2 earnings mostly reported, corporate America, by and large, is motoring along nicely, although I acknowledge that many companies’ forward advice paints a murkier picture.
If Mr Powell chooses safety first and sticks to the green runs, there is the potential for U.S. bond yields to retrace higher, lifting the dollar and havens such as gold and possibly putting pressure on equities. That said, if he throws caution to the wind and goes for the frankly terrifying, black diamond drop-off from the cable car at Jackson Hole, we could see an aggressive rotation in equities and oil, and out of precious metals. Let’s hope he doesn’t break a leg doing it.
Thailand’s balance of trade at 11 am SGT, may give us more insight into the spill-over effects of the U.S.- China trade dispute on the region, following on from a weak GDP and stimulus package announced earlier in the week. Today’s highlight will undoubtedly be the FOMC minutes released early tomorrow morning Asian time. The discourse may reveal that the last rate cut was a heavily debated item and that some members were perhaps quite reluctant. It may give pause and food for thought to Jackson Hole uber-bulls.
Overall there is a sense of lingering calm ahead of Friday’s speech, with trading somewhat directionless intraday as markets circle in a holding pattern. Headlines and rumours will drive short-term volatility with traders fitting price action to the narrative rather than vice versa.
After an impressive come-back from last week’s panic selling, equity markets took a breather overnight as positioning gets lightened ahead of the FOMC Minutes and Jackson Hole. The S&P 500 fell 0.80%, the Nasdaq fell 0.70%, and the Dow Jones fell 0.65% with yields also falling across the U.S. curve. The latter is somewhat counterintuitive and intriguing and suggests that the U.S. bond yields continue to attract yield-seeking investors regardless of movements in other markets. (Yields move inversely to prices in the world of bonds) A casual look around other G-10 bond markets give you all the answers you need.
Both Australia and Japan have followed suit in early trading, falling around 0.70% following Wall Street’s lead. We would expect this theme to continue across the region today in the absence of any other news.
Bond inflows failed to support the dollar overnight as traders lightened long positioning overnight. With the dollar at 2019 highs, it does seem a prudent strategy ahead of the event risk in the latter part of the week. In a zero-interest world though, the greenbacks carry shines, and thus any sell-off in the bigger picture could be temporary.
The adjustment overnight and the holding pattern look to global markets suggests that Asia will be content to circle overhead also. Regional currencies may rise slightly to reflect the downward adjustment in the dollar overnight against the majors.
For once, oil had a quiet session overnight as black gold was capped by higher than expected U.S. API crude inventories and supported by a generally weaker U.S. dollar. Brent crude rose 0.35% to $59.60 a barrel while WTI closed flat at $56.20 a barrel.
Energy markets have a definite wait-and-see look to them, and while Asia may see some light profit-taking selling after the rally of the last few days, it is unlikely either contract will move too far away from their North American closes.
Gold appears to have become a purely inverse dollar play for the time being. Gold falling when the dollar rises and vice-versa. It implies that markets are now positioned in gold how they want to be ahead of Jackson Hole.
Gold continued its flip-flop price action around the $1500.00 level overnight. A falling U.S. dollar saw gold rally 12 dollars to 1508.00 for a 0.80% daily gain.
The $1480.00 region continues to be important near-term support with resistance around $1535.00 an ounce. Given gold’s 100% beta to the dollar this week, those two levels will probably cover any price action ahead of Friday’s Jackson Hole speech.