Lather, Rinse and Repeat

US markets

The S&P500 slipped 0.3% Tuesday amid mixed Q2 earnings reports from three major US banks. Goldman Sachs reported better-than-expected earnings per share, Wells Fargo reported better profits but also rising deposit costs, while JP Morgan reported revenues that were broadly in line with expectations. US treasury yields lifted 2bps to 2.11%. Oil was down 3.3%.

In the case of good news is taken as bad. After initially rallying on better than expected retail sales, factory output and housing reports, US equity markets faltered surrounded by speculation that the stronger run of US economic this month could mean a less dovish Fed. But now there are even some doubts leaking into to the picture that if the Fed does cut in July, it would be of a one and done variety.

Also, President Trump reminded investors just how fragile and uneasy the post-G-20 trade war truce when he reiterated that he could impose additional tariffs as the US becomes increasingly frustrated by the lack of follow-through on China’s G-20 pledge to purchase more US agricultural products  in exchange for the loosening of the US ban on Huawei 

 It seems we are in this never-ending cycle of one step forward and two steps back as any sign of progress are met with a hardened position from China which is making investors pessimistic that the list of soft-pedal commitment can even get agreed. Indeed, resolving the G-20 concessions is getting bleaker by the day as traders are slowly shifting t back to a queasy, uneasy trade war mode.

Oil markets

Its been a muddled picture on oil markets this week as traders have turned short on bullish catalysts and long on uncertainty

Oil prices tanked as Hurricane Barry blew over, and easing in Gulf tension while President Trump stoked trade war fears al the while a smaller than expected API crude draw will provide little solace for oil bulls today

The Gulf of Mexico hurricane premium has all but evaporated after crews returned to platforms in the GoM after Tropical Storm Barry passed.

U.S. Secretary of State Mike Pompeo confirmed that Iran is open to discussion around the nuclear pact.

This report confirms a similar story that broke after the E.U. misters meeting on Monday which suggested that Iranian leaders have stressed the Islamic republic will come back into full compliance if European powers ensure it can sell oil on global markets. However, it’s much more impactful coming from the US Secretary of State which at a minimum suggests that both Iran and the U.S. have at least talked.

But with the Iran risk factor fading this removes one of the oil markets tenants of support which will have traders turning the focus back to trade war, global growth concerns and surging US shale production.

Speaking of which, President Trump reminded market just how fragile and uneasy the G-20 trade war truce is when he reiterated that he could impose additional tariffs as the US becomes increasingly frustrated by China hardening stance.

Finally, while there was a relatively muted response to China slowing Q2 GDP, the economic drag from slowing consumption continues to weigh on sentiment.

Gold markets

Its all about the dollar strength today as the Gold markets have traded about 10$ softer as both the EUR and GBP sold off aggressively as investors now turn to Fed-speak for some level of support.

But the stronger US economic news will put to rest any thought of a 50bp cut from the Fed in July and will undoubtedly dampen Gold's bullish ambitions over the near term.

Also weighing on prices was an easing in Gulf tension, which seemed to offset President Trump's threat of placing additional tariffs on China.

But I think Gold traders need to be defensive of the markets shifting view on the USD, especially against the EUR as the ECB is expected to move into full out dove mode., even as the Fed speak is expected to reiterate a dovish messaging.

 

Currency markets

The USD is trading higher despite Fed Chair Powell reinforcing his dovish messaging overnight, suggesting the FOMC are focusing on risks and uncertainty rather than the current state of the economy. But with 100 bp of cuts priced into the curve over the next two years, we could see a bit of that rate cut premium unwind on the strong run of this month US economic data.

Besides, there are other factors currently working in the USD dollar favour. Traders have turned their focus on the ECB easing cycle, hard Brexit concerns and the fall in oil prices has triggered a retreat from commodity-linked currencies.

The Pound

Downside GBP is back in focus amid fresh fears of a 'no deal' Brexit. But with markets still underestimating a hard Brexit and a potentially dovish BoE the Pound will remain extremely vulnerable in a dynamic shift to a 'no-deal' stance from Brussels before the autumn.

The Euro

Downward pressure on the Euro was starting to pick up as the market turns focus to the ECB who are teeing up ten bp depo rate cut in September and December. As if traders needed a reminder just how dire things are in the EU economy the ZEW survey remained the market just how bad both the current state and the outlook for Germany’s economy is
This report accelerated the Euro sell-off overnight.

The Japanese Yen

After the stronger data prints in the US overnight, the markets started to finally take back short options, which caused USDJPY to bounce higher. Amid speculation, the data could deter the Federal Reserve from cutting interest rates aggressively this year.

The Malaysian Ringgit

Falling oil prices and a broadly stronger USD supported by the run of better than expected US economic data has seen speculative long MYR bets pull back. Traders have dialled back their dovish Fed bets which have improved USD sentiment across the board.