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Oil Markets move from One Extreme to another While Gold Insurance bid remains Alive and Well

Stephen Innes
US market received an unexpected bounce from surging oil prices as energy stocks topped the list of winners. But investor sentiment remains supported by the one constant that keeps the S&P 500 ticking, the allure of the Federal Reserve easy money policy.

Oil markets

Oil traders were kept hoping overnight as markets swung violently from one extreme to another as only hours after plumbing the depths, Brent prices soared after reports of torpedo attacks on two tankers carrying Japanese cargos in the Gulf of Oman.

There are no coincidences when it comes to terrorism, and in retrospect given that Japan is the U.S. biggest ally in Asia, it’s not difficult to connect the dots especially with Prime minister Abe wrapping up a high stakes negotiation with Iran trying to broker a deal between Tehran and Washington.

This blatant act of terrorism was a not so subtle reminder of the enormous supply tail risks in and around the Strait of Hormuz as the strategic oil supply choke point remains a prime terrorist focal point to disrupt the flow of seaborne oil exports from the Middle East.

Despite U.S. secretary of state Mike Pompeo laying a  browbeat-on  Iran, a military escalation is unlikely and given the market’s tendency to quickly sidestep lone wolf or small group terrorist attacks, oil prices have come off the boil as traders pivot back to the task at hand. Which is accurately positioning around the hugely bearish  massive U.S. inventory builds amidst the deteriorating global economic backdrop as we head towards  the colossal risk events of the year, OPEC meeting and the G20 summit

Gold Markets

Rising geopolitical risk amplified by US-China trade uncertainty all but ensure the Gold insurance bid remains alive and well-suggesting Gold should be on everyone’s radar if not in everyone’s portfolio.

Last week’s U.S. employment report validated by the higher than expected weekly employment claims overwhelming suggest tariffs are a potent threat to U.S. growth and by proxy the global economy. And while I disagree with the markets overzealous U.S. rate cuts prognostications,  but what we do know is if tariffs escalate there will be a need for the Fed if not all global central banks to act.

And even if some positivity emanates from G-20, after the US President weaponised tariffs to support his immigration agenda against Mexico, who can say with any degree of certainty that he won’t redirect his trade angst at another target to support his political ends. These mounting uncertainties suggest Gold will continue to find a bid on dips if not continue to be hoovered by strategic buyers.

While there is no imminent danger of a U.S.   recession,  as Gold would be trading at $1400 if that was the case,  but if a trade war does escalate post-G-20 and the President follows through with his tariff threat on China, the odds of a U.S. recession increases exponentially and will swell Gold demand.

Gold remains under-owned by historical standards, and as more cracks appear in the bedrock supporting the global economy, Gold’s glittering appeal will continue to surface. After all, panning your pay-dirt from bedrock cracks can prove extremely rewarding.

And while I was guilty early in the week of reading far too much risk positivity when the Mexican tariff threat eased while arguably distracted by the machinations in Oil markets, Gold continues to provide investors with emotional support and safe harbour in an endless stormy sea.

Hong Kong

The proposed Extradition Bill amendment has led to concerns about capital outflows. But make no mistake this is a massive deal for HK as if the bill is passed it will most certainly, erode the rule of law and autonomy which has been the pillar of Hong Kong’s financial prosperity.

Currency Markets

The Euro

Given the EU zones trade ties with China, the Euro fell after the IMF suggested that escalating trade tension pose a risk to the Eurozone. Frankly, that was a  sugar coat as escalating trade tension will represent the most significant threat to Germany as domestic recessionary fears will spread like wildfire across the Eurozone.

With the ECB tool kit empty they need the Euro to do the heavy lifting suggesting the ECB  could dive back into the murky QE water or even take more radical policy measure to weaken the Euro. I still favour or 1.100 over 1.15

The Dollar

And while USD bears are getting animated about the prospects of Fed cut, they could suffer a significant post FOMC hangover as the Fed is unlikely to be as revisionist as market pricing suggests.

The Malaysian Ringgit

As expected, the MYR remain hostage to stable Yuan sentiment ahead of G-20.  But with the pre-G-20 negotiating window all but shut, I think traders will get increasing fidgety and price in the worst-case scenarios as we near the summit, so we continue to favour a weaker MYR in the run-up to G-20.

EM Asia FX View

Worsening trade tensions should lead to a Fed rate cut, and in turn, this will provide more policy wiggle room for EM Asia central banks to be more aggressive with their macro policy buffer.

Given the struggling regional economic backdrop, we’re anticipating a stronger monetary stimulus response for China and Korea and continue favour long USD positions against both currencies.

Given the Ringgit’s approximately 60 % correlation to the Yuan weakness we see the Ringgit moving closer to the 4.25 level on trade war escalation

Although we are not positioned in the IDR or PHP yet, we think the Philippines peso and the Indonesian rupiah could be crunched if the BSP and BI both expedite their rate cut cycles matching the Fed on the escalating trade war scenario especially if the Fed does comply with the markets aggressive three rate cut prognostication.

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

This article was originally posted on FX Empire

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