The looser the policy, the better the risk opportunities

Markets

Markets are looking for direction this morning after Friday's liquidity induced equity market rally fizzled after the  FED NY walked down their bosses (Fed Williams) dovish comments.

But investors should take some comfort in the first sign of trade goodwill post-G-20 after China's official Xinhua news agency said on Sunday "Chinese importers have started an arrangement of purchasing U.S. agricultural products." as even a small win on the trade war front is considered an enjoyable success by investors.

But with the markets wholly captivated by the looser the policy, the better the risk opportunities, investors could remain singularly focused on the Federal Reserve, and the European Central Bank policy decision and communications as global equity markets continue to have their ups and down based on the perceived degree of accommodative central bank policy.

Over the next two weeks, the ECB (July 25) and FOMC (July 31) will make their policy decisions, but it is the Fed decision, and policy guidance will be most critical for the markets risk on view.

While equity markets attempt to font run these decisions leaving them very susceptible to walked down policy statements, but this doesn't mean future gains are spent. Indeed, with the Fed, ECB   and other central banks easing for precautionary rather than recessionary reasons; market gains should extend. But fundamental in this view as that the FED and ECB must deliver more easing and lots of it!

With the weekend news flows clearly emphasising a 25bp Fed cut, the market will probably read more into these headlines. So, despite the short-term positive trade war headlines, markets will likely trade with a more risk cynical bent this week as the less dovish Fed narrative continues to sink in.

ECB is priced at 50% chance of a 10bps on Thursday making it flat out coin flip at this stage. But as the Fed probabilities of a 50 bp cut evaporate, so will the ECB likelihood.

Oil Markets

Oil prices got a small boost this morning after Libya's state-owned National Oil Corporation declared force majeure on Sharara crude loaded at Zawiya port due to an" unlawful" closure of a valve. Sabotaging the oil supply is nothing new as Libyan militias on all sides of the conflict weaponise oil supplies for their political ends. But given the short-term nature of these saboteur type disruptions, the event is unlikely to shift market focus from weaker worldwide demand.

It was a tough week for oil markets following a large product build and Trade war concerns resurfacing following comments from U.S. President Trump early last week.

 However, after unwinding some supply risk premium early last week on signs Iran may be willing to negotiate with the U.S. on the nuclear deal, those premiums were quickly repurchased as Oil prices spiked  Friday after Iran seized two tankers in the Strait of Hormuz, stoking the flames for a  Middle East escalation.

Brent bounced off Thursday's lows but is still well of the highs from the start of last week as growing bearish sentiment outweighs positive factors related to possible geopolitical risks to supply.

While towering billows of smoke emanate from Middle East supply-risk factors, but in the absence of an actual "fire", traders remain cautious about loading up on supply risk premium in this bearish market. 

Gold markets

The good news is that Gold touched the highest levels since 2013 after dovish comments from FOMC member Williams. The bad news is his comments were walked down by the Fed, NY.

The impact of this clarification, combined with a recovering USD, triggered heavy profit-taking in Gold on Friday amplified by the end of week book squaring.

But helping to keep a floor under prices was Gold ETF flows that continued to surge this month while the latest CFTC data paints a similar picture.

 Clearly, as real interest rates remain low or continue to fall, Gold's appeal as a diversification strategy amid the backdrop of global economic uncertainty has increased substantially as global growth fears, and the calamitous political situations on both sides of the pond continue to build.

However, caution remains warranted this week as speculative length has built substantially above $ 1400 and news flows are definitively signalling a 25 bp cut Fed cut in July so it will likely come down to Fed forward guidance in Chair Powel's post-FOMC press conference.

Gold's reaction will be asymmetric to the Fed messaging post-July rate cut.

If we do get what appears to be an unlikely 50 bp cut Gold could quickly rise to $ 1485 but if  Chair Powell's statement fails to deliver on the markets forward dovish looking expectations Gold prices could sink below $ 1400 and possibly test $1385 if the Fed is viewed more hawkish than the markets lean.

Currency Markets

The Euro

ECB is debating a revamping of their inflation targets to a more "symmetrical" approach which securely increases the likelihood of an even more accommodative monetary policy for a more extended period and potentially hints to a larger "policy package" upcoming from the ECB.

As with equity markets, FX traders are font running this decision., albeit more gingerly as currency vols remain very depressed. 

The Euro still struggling under the weight of negative yields, on any definitive policy statement that the ECB is preparing to switch QE back on. It will send the Euro tumbling lower. The problem with that view, however, is the politics of QE are very tricky.

The Pound

The selling pressure on GBP looks set to continue as "no-deal" Brexit to this long-running Article 50 process are showing few signs of abating.

The Yen

The Yen continues to ping pong between US monetary policy and global trade tensions.  So USDJPY will continue to be driven by global rather than domestic issues. So this weekend's election created little stir. All of which suggests we could remain anchored to the 108 level ahead of the Fed as the market has fully priced in the pro-cyclical 25 bp rate cut from the Fed.

The Ringgit

The Ringgit remains supported by the deluge of central bank accommodation which provides an essential veneer for Asia EM FX. Currency volatility remains mute while a meeker USD and diminishing debt fears have reassured investors and carry trade inflows remained in the fore despite the omnipresent trade war risk.