Back to the drawing board: A counter-seasonal gasoline glut and the IMF halts the USD dead in its track

US markets

Earnings season is proving to be a wake-up call as the mixed reports are causing investors to pare back risk at arguably toppish valuation levels as focus without fail reverts to the downtrodden view of the global economy and ultimately the US-China trade discord

Oil Markets

Oil markets are very heavy under the weight of a counter-seasonal build in gasoline inventories which is typically a harbinger of worse things to come.

Gasoline consumption is painfully weak given US consumers are in peak driving season, which will be invariably seen as the Grim Reaper of sorts.

Oil markets were clawing back losses following a renewed threat from US President Trump on possible China tariffs, and comments from US Secretary of State Mike Pompeo that Iran has indicated it would be open to talks before getting sideswiped by this gasoline glut. 

But if we put this data set in the context of a slowing China Q2 GDP, where consumption was the most significant drag, the numbers do suggest that the global economic slowdown is being echoed through weaker global demand data. Definitely a bearish signal for oil demand.

For the proper record, the EIA data showed that US crude inventories fell 3.1 million barrels, more than analysts’ forecasts for a decrease of 2.7 million barrels. But the data was probably skewed lower (more significant draw) because of Storm Barry.

Asia oil traders are faced with picking up the pieces after a significant US session sell-off which suggests traders will probably look before jumping off the cliff. In other words, they will tread cautiously, 

Gold markets

Gold rose after the IMF says the US dollar is overvalued which halted the EUR and GBP inspired USD rally in its tracks temporarily sending currency traders back to the drawing board. But the assumption Gold markets are making is the IMF comments will provide  President Trump with more ammunition to trigger a currency war. Or will they  ??

The IMF said the U.S. currency is overvalued by 6% to 12% based on near-term economic fundamental which merely confirms what all trade-weighted models indicate as USD remains one of the most expensive currencies in the market.

However, with the increased chatter around a possible currency war, long Gold is the easiest way to trade a multiplex currency conflict which has sparked a feverish bid under Gold prices. 

And even if we don’t get to a full out currency war, the constant stream of headlines that would suggest the Treasury and the Fed will likely cross swords in itself makes for a very compelling reason to own Gold as any signs of infighting between these two market influencing behemoths could potential destabilise global markets.

And while I’ve argued with my colleagues to no end that intervention will never happen at these levels, I always forget to add the Trump factor whose policies are motivated more by domestic politics than economic realities. If the President weaponised trade to get his way with Mexico, who’s to say he won’t weaponise the dollar to get back at Europe

Currency markets

The IMF comments stating the USD was overvalued stopped the US dollar rally in its tracks. The question is will it be enough to keep the Euro and Sterling bears at bay as a mix of rising 'no deal' Brexit more robust US data and focus on ECB policy has brought EURUSD back to the low 1.12s. and Sterling to the low 1.24's respectively

Of course, the IMF is reiterating what currency traders already know, but there could be an argument made with Christine Lagarde taking over the top role at the ECB she might not be so willing to turn on the QE taps as some had expected. Rather than the ECB relying on the Euro to do the heavy lifting during trying economic times they could l place more emphasis on Eurozone fiscal, political structural reforms.

The Great Fed debates

While the Great Fed debate around 25 bp or 50 bp has driven most of the news flows there is a hardcore market debate unfolding in rates markets as to whether the next Fed move will be "precautionary or a recessionary" July rate cut.

In the context of global markets and given just how loose monetary conditions are. Outside of the Fed and the Pboc, there is minimal scope for other Global Central banks to tweak short term rates to offset the weaker data.  While the deluge of cash has inspired a liquidity induced global equity market rally, but this means little if global growth continues to falter.

But the persistent downside risk for global growth beckons both the Fed and Pboc to step up stimulus. While the Fed measure is to ensure that the US economic momentum remains on an upward slope, the Pboc efforts are to shore up domestic demand after a significant consumption wobble in Q2. I,

As far as the strong start to the month for US economic data, we need to remind ourselves the Fed's easing bias is predicated on uncertainty, slowing global growth, and weak inflation impulse and that the  US consumer behaviour is not a central input in its new global risk management model.

In my view, both need to step up stimulus in a big way!