Despite the anticipated Central Bank Policy Panacea equity Investors are getting increasingly Uncomfortable

The weaker PMI’s are clear signs that the global economy is headed for trouble and its a big ask for consumer consumption, supported by Federal Reserve and the Pboc stimulus, to save the day and keep global growth alive.

Also weighing on the liquidity infused US equity market rally is the good news is bad effect. US economic data, with core durable orders rising the most since February 2018, and 4-week average jobless claims falling to their lowest since April, only reinforces the view that a deep-rooted Fed cutting cycle is not justified. Less stimulus is bad for US equity markets.

Oil markets

Bewildering best describes my view on oil markets these days. Boots on the ground have been threatened, tankers attacked, drones shot down and the US5th fleet stationed on high alert, yet traders remain indifferent about packing on more middle east risk premium.

The lack of supply risk bid drives home how just how negatively impactful slowing global growth is having on the near-term oil demand forecasts.

Also weighing on prices and likely a contributing to the post-EIA inventory report sell-off’s reported by Reuters: Talks are progressing between Saudi Arabia and Kuwait about resuming production from the shared Neutral Zone, where around 500kb/d of production has been shut-in for several years.

The first thought is this could add to OPEC spare capacity, but it’s very doubtful the additional capacity will be brought onstream until OPEC compliance is met not to mention there is a definitive decline on Global inventories.

While the central banks will continue to provide monetary stimulus attempting to boost the economy, historically, these efforts have been bullish for oil, but it’s a tall order to expect a significant economic pump as its questionable if minor rate adjusts from already low levels will be able to reverse the downtrodden global manufacturing slump.

And hoping for weaker USD on a Fed cut to make oil more affordable in Asia could be little more than wishful thinking as Asian central banks are also in rate cut mode to stimulate the economy and weaken their currencies to support export growth.

Overall, I don’t have an extreme view one way or the other. Oil remains supported by OPEC compliance, a tentative supply risk bid and the prospect of Fed and Pboc stimulus while bullish wagers will be held hostage to the soggy global growth outlook.

Gold

Gold wobbled after US dollar rose while ECB easing intentions don’t appear to be playing much of a factor as the Gold’s reaction function is dependant on the FOMC.

However, Gold prices reacted forcefully overnight to robust US economic data, which boosted the USD. US durable good orders rose the most since February 2018, and 4-week average jobless claims fell to their lowest since April.

But more significantly for Gold markets, which have been supported by the prospect of lower real interest rates, the stronger data set suggests that the current market pricing for a deep-rooted Fed cutting cycle is not justified.

A short take on the ECB

President Draghi for once has failed to live up to his billing but don’t overthink it; the ECB is teeing up QE. With the language suggesting the ECB are concerned about igniting inflation, and with the PMI and IFO reading tracking to doom and gloom, a new round of QE and a rate cut at the September meeting is more likely than not.

A strong argument could be made to justify the ECB pause, although in the aftermath of the PMI and IFO markets were positioning for a cut sooner than later. But it made little sense for the ECB to make their move before the Fed who could easily dwarf the ECB firepower if they too made a significant policy pivot which would not only overwhelm the ECB’s bombshell effect would diminish the shock value if they did unleash a bazooka type policy yesterday.

Don’t fall into the trap of misreading the ECB as anything but uber dovish.

EUR

Although we didn’t get a Draghi dovish delight the ECB pause did give traders another opportunity to sell EURUSD again. The Euro is struggling under the weight of negative yields and deteriorating soft and hard economic data. I don’t sense a considerable risk of staying short Euro into the FOMC. After all, how much stronger can the Euro get while living life at the ZLB

JPY

To the relief of Bank of Japan members, the USDJPY is trading up half a big figure from yesterday levels tracking US yields rather than equities.

RBA vs RBNZ

RBA Governor Lowe says they are strongly committed to achieving 2%-3% inflation and that they are unlikely to consider rate hikes until CPI is seen returning to their target. Lowe has thus ended speculation that the central bank would abandon/lower the current inflation target. For them to get inflation back up, it will require various forms of continued easing until further notice, which is about as unambiguously dovish as it gets, and the markets sold the AUD for 20 pip. But it’s only a matter of time before RBNZ Governor Orr joins in with similar guidance, sending NZDUSD much lower.

The outlook for the AUD and NZD has turned decisively bearish as until this week both have been riding the coattails of the dovish Fed since the June FOMC meeting, but with the market settling in on 25 basis point Fed cut and with last night US core durables orders rising the most since February 2018, and 4 week average jobless claims falling to their lowest since April, this fortifies a growing consensus that a deep Fed cutting cycle is not justified which lends support to the USD

This article was written by Stephen Innes, Managing Partner at Vanguard Markets LLC