Liquidity Trade ??

With global economic engines still clattering and in desperate need of some high-grade Central Bank stimulus, investors are still pinning their hopes on central bank policy.

Frankly, with the calamitous state of affairs in global capital markets, the Feds will likely consider a significant policy pivot to make up for the last FOMC policy debacle while other central banks which are out of policy wiggle room consider more non-conventional policies around QE, equity buying or even the possibility of helicopter money by the ECB and other central banks who are currently running deep in negative territory.

After a number of surprise rate cuts by various central banks over the past couple of weeks, and given the latest trade war infused market carnage, investors will certainly be hanging on Powell’s every word for any indication of how the committee is leaning concerning its rate decision on September 18th.

Jackson Hole

Last weeks frenetic gyration in risk assets will be put through the rinse cycle again this week as the Fed’s Jackson Hole event comes front and centre. We’ll also get the latest FOMC meeting minutes to absorb while another round of Eurozone PMI’s will be used to measure the pulse of global growth.

But indeed, all eyes will be on Jackson Hole this week which will hopefully go a long way to pacifying these turbulent markets. Fed Chair Powell is offering opening remarks on Friday which could be pivotal heading into the next Fed meeting on September 18. And considering the global economy is dealing with a considerable downdraft and a US yield curve inversion shocker, the Fed may very well have to abandon the insurance metaphor as hefty doses of monetary (and potentially even fiscal) will go a long way to stabilising market sentiment. The question now in the context of the latest market meltdown is the absolute scope Jay Powell is willing to move away from the insurance cut mantra. The market wants to hear one thing and one thing alone, and that is the FOMC committee are unambiguously transitioning towards an easing cycle.

Now and again something significant does come out of the central bank soiree, and with Germany debating fiscal policy there might be some coordinated economic +monetary policy academic paper or proposal in focus as most of the G-10 Central Banks conventional policy arsenals are at or nearing exhaustion.

Indeed nothing like a good dose of policy easing to correct the market ills and grease the wheels of global capital markets

Oil markets

Oil managed to mostly recover from Thursday’s lows after US President Trump’s mention of a planned call with his Chinese counterpart Xi Jinping.

At today’s open prices remain supported by a softening of US trade war bombast ahead of a planned US-China trade call which could open the door to another face to face. Also, Oil markets are getting a boost from expectations of an explicit dovish policy pivot from Jay Powell.

However, risk asset will remain prone to negative trade headlines and a more profound yield curve inversion if this week’s Eurozone PMI’s produce another shockingly weak survey.

Oi Prices finished the week on the ups but given the whippy intraday day moves which are expected to continue as trade-related headlines come in fast and furious, even picking outlier trading ranges is getting tougher by the headline which is making for treacherous trading conditions. And likely contributing to the oil markets lower liquidity profile.

But with so much doom and gloom built into oil markets via US crude inventory build and weaker macro indicators, the US-China trade overhang desperately needs to be resolved for markets to recover.

Gold Markets

Given the policy uncertainties that may or may not unfold later in the week from Jackson Hole, Gold could consolidate further before eventually resuming its upward momentum, a sturdy build in positioning notwithstanding, for no other reason that every central bank remains in contention for the Yellow Jersey in the race to zero

After some aggressive price action last Wednesday and Thursday, the yellow metal failed to make new highs, which could say a bit about the speculative length in the markets.

With that in mind, given the position builds, it likely triggered some relatively hefty weekend inspired profit-taking as the dollar remained on solid ground and equity markets bounced off weekly lows as risk sentiment has been steadily improving after US President Trump’s mention of a planned call with his Chinese counterpart Xi Jinping.

The main Headline risk for gold remains the easing of US-China trade tensions, while support will come from dovish signals from the Fed, and talk of central banks QE or anything that sounds like helicopter money by the ECB or the BoJ which should continue to underpin market sentiment.

On Friday, Gold prices held up in Asian and European trading before weakening in US action. Gold’s initial strength came for the usual assorted worries about the global economic slowdown and deteriorating trade conditions, but prices edged lower amid dwindling bid side liquidity as the day wore on.

End of week book-squaring and profit-taking looks to have contributed to the decline as did a short-covering rally in US equities after a turbulent week helped to encourage Gold profit-taking as well.

Bond Markets

The U.S. economic data does not suggest a coming recession, but this does not mean the U.S. economy is immune from the knock-on effects of a slowing global economy, but contagion will probably take the long road from China. So, the U.S. inversion makes more of a statement about growth in the rest of the world. And the UST 2/10’s inversion is likely getting amplified by the overload of negative-yielding debt in Europe, suggesting Bunds are causing the moves in U.S. treasuries, rather than the other way around. This view is supported by the Granger causality test as global inflation expectations shift lower, Bunds tend to drive U.S. treasuries likewise.

Currency Markets

G-10 safe havens should remain in demand or at least hold steady as traders are reluctant to hold risk positions which remain vulnerable to headlines, Tweets, comments and flows if there is any risk appetite left in the markets it’s supported by little more than the “who blinks first” narrative as U.S. and China are set to restart trade talks.

Yen and CHF demand will be triggered by trade headlines; however, traders could get discouraged from buying more CHF and JPY for fear of a strong SNB or BoJ reaction.

I’ve been trading USDJPY from the long positions, but it is starting to get complicated again as short term money is staying short buying into all the US recessionary cheerleading.

The Euro

Weak Eurozone data and a dovish ECB suggests an imminent test of the mid 1.10’s, but the prospects of Germany increasing deficit spending triggered EURUSD short-covering which dampened the markets downward momentum considerably heading into the weekend. Deficit spending suggests a more pragmatic mechanism free from the drama of helicopter money and less harmful for the Euro.

USDASIA

The markets feel way too heavy long USD for my tastes, so I joined the markets which went into risk reduction mode ahead of the weekend. Given the markets remain long USD positioned across the Asia basket, I suspect the market will remain capped unless USDCHH moves higher and or if the US-China trade talks deteriorate. So, the markets will need some persuading to add more USDCNH top side risk. So we could expect a relatively muted Asia FX market response today.

The Ringgit

The Ringgit closed the week on a positive tone after the surprisingly sturdy Q2 GDP print which saw the USDMYR fall below what was a healthy 4.18 support level. The BNM has also liberalised their FX rules to allow more hedging by foreigners.

So, with that positive domestic economic backdrop, pressure coming off the Yuan and risk tentatively stabilising and supporting oil prices, it should temper the negative views toward the Ringgit but will fall well short of a bullish shift in attitude.

Mad World

The world does appear to have gone utterly mad, but if you think the oval office couldn’t outdo themselves, think again. I finally got a chance to read over all of last weeks reports and the Washington Post sums this up perfectly, “President Trump has pushed top aides to investigate whether the U.S. government can purchase the sizeable ice-smothered island of Greenland.

This article was written by Stephen Innes, Managing Partner at VM markets LLC