Trader thoughts - the long and short of it

US equities certainly experienced their fair share of volatility after the FOMC decision to hike rates was announced, but there was no reliable conviction to charge investors’ on a bullish or bearish path.

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Source: Bloomberg

Wall Street Uncertainty Arrives for Fed, Stays for Trade Wars: Benchmarks like the S&P 500 and Dow are still at significant discounts to their highs a few weeks back, and the immediate outlook is distinctly unstable. Of particular concern are the tariffs the US intends to trigger on China and the rest of the world. There is a lack of clarity on who will be affected by the steel and aluminium taxes announced two weeks ago – and the inclusion of certain countries can almost guarantee a painful trade war. An economic skirmish between China and the US seems inevitable, but the stakes and the former’s intentions on how quickly to escalate remain unclear. With this degree of uncertainty, a view of optimism and speculative reach smacks of more than simple complacency.

US Dollar down as Fed takes cautious stance: The US Dollar fell against an average of its major counterparts as the Federal Reserve delivered a widely expected interest rate hike while offering guidance that was a bit more cautious than markets anticipated. Most notably, the projected number of interest rate hikes this year remained unchanged at three increases in all. Still, the outlook for 2019-20 was upgraded by a cumulative 50 basis points. Tellingly, the greenback’s uptrend from late-January lows has survived the downtick. If it is held on a daily closing basis, the benchmark currency may return to the offensive as markets digest what looks like a hawkish policy pivot, if a more modest one than feared.

BoE Rate Decision is No FOMC, Competes with Brexit: The Bank of England will offer up its own monetary policy decision Thursday, but the expectations for the UK authority are the near antithesis of the anticipating leading into the Fed decision. According to swaps, the probability that the MPC will hike rates 25 basis points to 0.75 percent is a sparse 17 percent. It isn’t exactly fair to weigh currency’s rate forecast against the Fed’s outlook, but the outlook for a rate hike from the BoE in 2018 at all stands at a hefty 90 percent – that is more hawkish than most. Yet, picking out a commentary in an attempt to assess rate decisions further down the line brings far less market-moving risk than the near constant influence of Brexit headlines seems to exert on the Pound. With the two-day summit of EU leaders starting later today, there is much more at stake for FX and global investors.

Markets Prepare for Tariff Headlines: The details on the United States’ steel and aluminium tariffs announced two weeks ago have plagued investors’ confidence since the US President confirmed he would pursue the most punitive option suggested to him: 25 percent on imported steel and 10 percent on aluminium. Yet, the impact this could have had on the market on the day it was signed was delayed by the inclusion of a 15 day grace period whereby countries could lobby the US for exemption or less extreme terms. That extension is due to expire Friday, and there is little optimism that has been built up in reassurances from either the US or its peers since. We may not have to wait until the very end of the week to find confirmation of an escalating or de-escalating trade tension though. It was reported by EU President Donald Tusk that he expects word on the EU’s standing on the metals tariffs Thursday. Also distinctly concerning are rumours that the US will announce separate tariffs on China for intellectual property and technology Thursday. What will the opening salvo of a global trade war look like? We may soon find out.

Energy names lead Australian shares higher: Australia’s benchmark S&P/ASX 200 stock index edged up Wednesday, adding 0.23 percent. Energy names led the way higher, adding 1.17 percent on the back of higher crude oil prices. They rose as OPEC-led producers mulled amending the goals of their coordinated output cut scheme in a way that would prolong it. Meanwhile, API reported that US inventories unexpectedly shed 2.74 million barrels last week. Financials rebounded after six consecutive days of losses. Materials names also retraced higher after suffering the largest drop in over two weeks Tuesday. SPI futures are flat ahead of the opening bell.

FOMC outcome buoys commodities: The US Dollar’s retreat in the wake of the FOMC policy announcement buoyed raw materials prices, which are typically denominated in terms of the benchmark currency on global markets. Gold raced upward as front-end Treasury bond yields declined and the priced-in 2018 rate hike path implied in Fed Funds futures flattened a bit. Not surprising, that boosted the appeal of anti-fiat and non-interest-bearing assets. Crude oil hit the highest level in nearly two months, adding to a five-day winning streak. Improving risk appetite amid fading fears of accelerated US tightening and EIA statistics echoing the API call for an inventory drawdown amplified USD-derived strength.

Aussie Dollar nearing two-year trend support: The Australian Dollar rose against nearly all of its major counterparts this past session – with significant technical progress made in pending reversals for AUD/USD, EUR/AUD and AUD/JPY. The motivation of this charge looks to be less a reflection of material, fundamental improvement for Australia’s markets and more a speculative effort to rebalance over-extended moves. The Aussie Dollar has had throttles these past weeks and months, easing up on the speculative exposure before a heavy global fundamental wind (trade wars) arrives is natural repositioning. We will have February jobs statistics today whereby a surprise can earn a volatility response. The trend, however, is more likely in the realm of Australia’s position on exports in a more troubled world for trade.

Market Data:

SPI futures moved 13.89 or 0.23% to 5950.27.

AUD/USD moved 0.0084 or 1.09% to 0.7767.

On Wallstreet: Dow Jones 0.4%, S&P 500 0.3%, Nasdaq 0.1%.

In New York: BHP 2.51%, Rio 3%.

In Europe: Stoxx 50 -0.32%, FTSE 100 -0.32%, CAC 40 -0.24%, DAX 30 0.01%.

Spot Gold moved 1.69% to US$1333.5 an ounce.

Brent Crude moved 3.34% to US$69.67 a barrel.

US Crude Oil moved 2.83% to US$65.34 a barrel.

Iron Ore moved 1.19% to CNY468 a tonne, SGX Iron Ore moved 0.04% to US$70.49 a tonne.

LME Allumnium moved -0.57% to US$2076 a tonne.

LME Copper moved -1.44% to US$6755 a tonne.

10-Year Bond Yield: US 2.89%, Germany 0.59%, Australia 2.7%.

 

Written by: John Kicklighter, Chief Strategist and Ilya Spivak, Market Strategist, DailyFX

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