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Could this be the biggest monetary policy meeting in years?
Could the upcoming Federal Open Market Committee (FOMC) be the most watched monetary policy meeting in a long time?
It certainly has a lot weighing on it.
Stocks are at record highs, pushed higher by a certainty that the FOMC will cut short-term interest rates for the first time in a decade this week. The two-day policy meeting kicks off on Tuesday, with a policy decision announced on Wednesday.
While Chairman Jerome Powell signalled a cut in July, its unclear what the policy could be for the rest of the year. And is a cut even necessary? While the consensus is that a cut is coming – the only quibble is 25bps or 50bps – the recent economic data looks strong. As our Chief Markets Analyst, Neil Wilson, explains:
“Is a cut justified? I would point to underlying core CPI at 2.1%, retail sales +3.4% in June and a 50-year low in unemployment as perhaps arguments to the contrary. Increasingly there is a sense that the Fed is no longer data dependent, but being held to ransom by the White House and the market.”
But what can we expect from the meeting?
The answer is, it depends…
Confirmation of a cut from the FOMC, if paired with signals of a more dovish policy in the long term could send greenback diving.
On the flip side, if the markets are surprised and a cut doesn’t happen, expect stocks and commodities to tumble and the dollar to surge.
At this stage, despite stronger-than-expected data, growth momentum is weaker. While a recession has been avoided, a cut is still the safe bet. This policy meeting could define the direction of global monetary policy for years to come and provides a lot of opportunities for traders. One thing’s for sure, the announcement on Wednesday is not one to miss.
Gold & bitcoin firmer, stocks and dollar softer
Stocks and the US dollar were softer whilst gold and Bitcoin continued to drive higher as markets look ahead to the G20 meeting.
Stocks have eased as markets look ahead to the G20 meeting – optimism is fading a little and we would expect investors to perhaps take some risk off the table ahead of the meeting, particularly given the recent bump. Bear in mind also this is a weekend meeting that implies gap risk.
The S&P 500 eased 5pts yesterday to finish on 2,945. Asia has been softer overnight. Futures indicate European shares are lower today since there is really little fresh catalyst for bulls before we learn more about the Trump-Xi meeting in Osaka and what this means for global trade, tariffs et al.
US trade supremo Robert Lighthizer spoke to Chinese Vice Premier Liu He on Monday, at least paving the way for talks to take place in Japan. The FTSE 100 might struggle to hold the 7400 level today.
The US has hit Iran with more sanctions. No sense of de-escalation, but also no material worsening in the situation. The tensions offer short-term support for oil still with Brent steady around $64 and WTI shade below $54.
Gold firmed again overnight as we see the path to more gains being cleared. Gold hit a fresh six-year high amid a perfect blend of supporting factors. Four things are really driving gold – falling yields, a weaker dollar, a soft macroeconomic outlook and geopolitical risks rising in the Middle East.
Prices hit $1438, breaking resistance on $1433 before paring those gains to trade around $1426 at send time. Looking to break $1446 next.
Gold has huge negative correlation with real yields, which have come right down. US 10yr around 2%, now back to where they were in 2016 – if it goes lower, we would expect further gold strength. The surge in negative-yielding debt is undoubtedly key to the rally, and can be viewed as similar to the rise in gold prices and negative yield assets in 2016.
The dollar remains on the defensive. The dollar index has dropped further to trade around 95.50.
Sterling can’t catch much bid – GBPUSD remains off its lows around 1.2750 but is failing to make real inroads versus the greenback as Brexit uncertainty weighs heavily. Short positioning has eased but this remains a crowded trade.
We have the no-deal exit risk of course – Boris Johnson has said he is prepared to take Britain out without a deal come October 31st. But we also have General Election risk – chatter about a no-confidence vote being supported by a dozen or so Tory rebels could lead to the government falling and inevitably an election. Boris Johnson could end up the Lady Jane Grey of Downing Street if that were the case. This introduces risks of a) Brexit delay and ongoing political uncertainty, b) a hung parliament with no clear route out of Brexit, and c) a Corbyn-led Labour government that would be very risky for UK assets and equites.
The euro is faring better, with EURUSD up to regain the 1.14 handle, trading at 3-month peaks.
Bitcoin firmed again, cementing the gains above $11k. I would reiterate the comments from yesterday – it’s a hard market to stand in front of when it builds momentum like this. The buzz and the hype has returned. You can talk about Libra, or the halving next year, more and more institutional interest and so on, but ultimately this is a bubble again. Look for $11,600, the highs from Feb last year as offering the big test.
Trump’s Mexican standoff rattles investors
A Mexican standoff is one in which there is no strategy that exists that allows either side to gain victory. Donald Trump may take note.
Any hopes May would end on a high were dashed as the White House slapped tariffs on all goods from Mexico. Tariffs of 5% will take effect Jun 10th, and could rise to as much as 25% by October. The intent is to ratchet pressure on Mexico to stop illegal immigration to the US.
Coming at a time of a breakdown in talks with China, it’s another blow to bulls and we should consider further downside risks from escalation. The worry is who’s next on Trump’s list – the EU may be next.
A fight with its neighbour and largest trading partner was not on the agenda. With all eyes fixed on China, and with Nafta 2 agreed and all apparently all hunky dory on the Mexico front, the caprice of Trump has caught investors off guard and will weigh on investor sentiment.
Trump has weaponised trade and economic might of the US. We have to assume that talks with China are going nowhere, and that this therefore – in the absence of being able to find a new stick with which to beat Beijing – is Trump finding a new ‘enemy’ to attack.
It’s early yet but following yesterday’s steadying of the ship, futures in the US are off south again and a retest of the 200-day moving average on the S&P 500 seems assured. Dow futures are printing a 24k handle and are on course to close sharply lower for the month. Sell in May and go away turns out to have been accurate this time. You’d have anyway wanted to see a much firmer rally yesterday to suggest the bottom had been found.
Futures show European equities are retreating on this fresh trade threat and it’s set to be a down day. FTSE 100 key support at 7150 and may well get taken out today.
FX: Peso hit
Needless to say the Mexican peso plunged on the news and will now be sensitive to news flow on any escalation of tariffs, or likewise, any detente. USDMXN has broken up through 19.64 and is trading very near the highs of the year from Jan. Peso bears will have the 20 handle in their sights.
Japanese auto stocks were hit as they use Mexico as base to import to US. Mazda, Nissan, Toyota among the sharpest fallers. This is likely to have some read across for European carmakers in today’s session.
Havens that had briefly retreated amid yesterday’s more upbeat session, are once again bid. USDJPY has fallen through support to find the 108 handle. Gold has rallied through $1294 even as the relative safety of the dollar left greenback just a few pips from two-year highs.
GBPUSD has held the 1.26 handle but, having broken through this level and below last week’s lows, the pound is now sensitive to further downside squeezing as uncertainty over the next prime minister and the direction of Brexit persists.
Overnight data is not helping risk today. China PMI figures slipped to 49.4 against 49.9 expected, signalling contraction in factory activity again. The PMI data suggests China is feeling the heat from the trade war and tariffs. Caixin PMI is due Monday and May show an even steeper contraction.
The whole picture is bearish for oil. Crude prices are at three-month lows. US inventories yesterday showed a smaller than expected drawdown at just -282k versus -860k expected. Stockpiles are at their highest in two years. Speculative long positions continue to be cut. Supply uncertainty is losing out to demand uncertainty. Simply put, with OPEC and co curbing output, there is ample excess capacity in the market should it be needed, so supply worries can be overstated. Traders are also betting Permian offtake constraints will lessen as the year goes on. Copper’s also been slipping and is retesting the Jan lows. Commodity markets are telling us there’s trouble in the global economy.
Uber losses hit $1bn but this was at the lower end of guidance, whilst revenues came in at the top of the guided range at $3.1bn. Top marks for that, but fundamental questions remain over top line growth in bookings.
Quarter on quarter bookings growth of a mere 3.4% is a worry, and shows how tough this market is becoming. Costs rose 35% from a year ago, whilst grids booking revenues were up 34%. Monthly active users jumped to 93m from 91m. Nevertheless these were solid results in line with management expectations, which should give investors some confidence
Little help for rangebound yen likely from Bank of Japan commentary
The Bank of Japan releases its Summary of Opinions and monetary policy meeting minutes this week. Policy normalisation is moving at a glacial pace, so the safe-haven yen is unlikely to find support on the latest comments from policymakers.
Central banks around the world are tilting towards the dovish end of the spectrum. This is epitomised by the futures market’s pricing in of a rate cut from the Federal Reserve this year. However, when it comes to caution, the Bank of Japan is the archetype – it was the first to implement quantitative easing and continues to pump trillions into the economy while tinkering with the yield curve and keeping rates negative.
The plan is unlikely to change any time soon, especially now that global conditions appear to be weakening. There is little certainty on a macro level to suggest the BOJ’s work is anywhere near done, even if the fears of a worldwide recession that tanked markets at the end of 2018/beginning of 2019 were overdone.
This leaves the yen facing more of the same; a narrow trading range against its major peers.
USD/JPY edges higher as fears over US growth fears ease
The US dollar has been slowly pressuring the yen lower over the course of the past few months. Strong US data has helped ease fears over the need for the Federal Reserve to pivot too severely into dovish territory.
EUR/JPY rangebound as ECB and BOJ battle for dovish crown
The EUR/JPY pairing was almost slap-bang in the middle of its multi-week trading range at the time of writing. While the European Central Bank could bring quantitative easing back into play later in the year, which would be yen-supportive, the long-term outlook remains that it will be the weakening of overseas policy outlooks that push JPY higher in the near-term, not the machinations of its own BOJ.
Yen unable to take advantage as Brexit uncertainty keeps pound floored
GBP/JPY is just a pinch overbought on the Relative Strength Index. The chart above shows how the pairing has settled into a narrow channel over the past few weeks. Brexit uncertainty is keeping sterling on pause, however the yen is unable to capitalise on this due to the lack of optimism surrounding Japanese monetary policy.