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Trader thoughts - the long and short of it

As with most other markets, US shares were simply biding their time until the Federal Reserve announced its monetary policy adjustments Wednesday afternoon in Washington DC.

Source: Bloomberg

Wall Street slowly retreats after Fed steps up its policy pace: The results were more hawkish than was previously established and the mortality of a speculative drive that has derived much of its buoyancy from the backdrop of extremely accommodative policy became more apparent to more traders. So far, the slip from the S&P 500 and Dow is modest relative to the volatility experienced over the past four months, but it puts greater pressure on the two-week upswing. Slowly but surely, the market will realize how much of its confidence and enthusiasm were built upon the implicit assumption that the central bank will disarm volatility and provide funding for a leveraged speculative reach. Yet, if further troubles like added pressure on trade wars intensify along the way, they can prove more effective catalysts where the connection of monetary policy to speculative appetite is more of a ‘fuel’ than a ‘spark’. And, despite the slightly more spirited pick up in declines this past session, the 5-day ATR on the S&P 500 is still the lowest since January 10.

Euro may fall as the ECB disappoints QE wind-down expectations: With the Fed rate decision now behind them, the policy announcement from the ECB now commands undivided attention. Comments from central bank officials ahead of Thursday’s meeting – particularly those from chief economist Peter Praet – suggested a substantive discussion of the strategy on QE asset purchases would be had. The markets read this as necessarily implying that they will be phased out. The consensus view seems to envision a gradual tapering of uptake after the current EUR30bn/month effort runs its course in September, aiming to end purchases by year-end. However, the ECB may be more reluctant to dial back accommodation than investors anticipate. Eurozone economic growth has slowed, political headwinds have strengthened and base effects from last year’s euro rally are disinflationary. That may translate into a more timid posture. While Mario Draghi and company are unlikely to expand QE, they may delay announcing its demise or even extend the existing program through December as an intermediate step before committing to a longer-term approach. On balance, anything short of a clear signal that the process of ending QE will commence after September or before is likely to weigh heavily on the euro.

Fed grows even more hawkish, how much contrast can global policy support? The Federal Reserve managed the difficult task of impressing hawks with a monetary policy update that reached beyond an already hawkish anticipation. As heavily expected via Fed Funds futures and swaps, the central bank raised its benchmark rate another 25 basis points to a range of 1.75 to 2.00 percent. This second hike for 2018 was paired with an upgrade to the rate forecasts in the Summary of Economic Projections (also referred to as the ‘dot plot’) whereby the group is now projecting four total rate hikes in 2018 while the median rate for 2019 was also nudged up from 2.875% to 3.125%. As remarkable as a jump as that is to see on the top line, it is worth mentioning that only one vote seemed to purposefully move from projecting 3 to 4 hikes. The other two forecasts were raised from 1 hike in 2018 to 2 out of necessity. A broader concern to arise from this progression of tightening is when it may unnerve speculative conviction. There is remarkable speculative reach in the market that implicitly or explicitly depends on extremely accommodative policy. Further, the wider the divergence between the Fed and its peers without a commensurate swell in its economic advantage; the more pressing the questions of how global monetary policy will impact sentiment will grow.

Pound’s loyalty to BoE or Brexit still unresolved: Yet again this week, the Sterling was left strung between two key fundamental themes: the course of Brexit and the appetite for yield surrounding the BoE’s policy course. For rate forecasts, the round of May consumer inflation data offered no serious pressure on the central bank to abandon or accelerate its policy normalization. The 2.4 percent headline CPI figure doesn’t provoke any strong need to react, nor does the 2.1 percent core. That gives Governor Carney and company more leeway to keep their focus on their more troubled forecasts for Brexit fall out. On the topic of the country’s divorce from the EU, Prime Minister May fought off pressure from that would have forced negotiation to stay in the Single Market after the split as well as a the power for Parliament to force the government back to the negotiation table if they rejected the Brexit deal. These don’t resolve the pressure of this economic and financial split, but it does make the list of possible outcomes smaller which in turn makes speculation more manageable.

Aussie Dollar finally faces internal volatility from jobs data: The Australian Dollar has suffered a week of chop as the currency has struggled for its fundamental footing between unflattering roles as a wayward carry currency and an export-leveraged economy amid trade wars. Given the lack of clear progress for risk trends even after the Fed decision and the blurred headlines on who the United States is currently branding friend or foe with trade, it is no surprise that the Aussie dollar is not committing to a clear bearing and momentum. That said, the upcoming Aussie jobs figure can offer at least temporary clarity for FX traders. This series has a robust history of generating volatility for the currency with the appropriate level of surprise. That said, don’t expect it to single handedly jump start any serious trends unless it somehow manages to alter rate forecasts.

Gold seesaws after FOMC rate decision, crude oil gains on EIA data: Gold managed to edge up despite a hawkish policy announcement from the Federal Reserve. Prices initially plunged as the central bank signaled a clear hawkish shift in forward guidance, sending the US dollar higher alongside Treasury bond yields as the priced-in rate path implied in Fed Funds futures steepened. The euro turned higher as the spotlight turned to the ECB however, sending the bellwether EUR/USD exchange rate upward. That echoed as a broader reversal of the greenback’s fortunes, erasing most of the benchmark currency’s post-FOMC advance. Gold prices seesawed in the opposite direction. Crude oil prices shot higher after EIA inventory flow data showed US stockpiles shed 4.14 million barrels last week. That topped forecasts calling for a more modest 1.09 million barrel outflow and an API projection signaling a slight build.

US/China trade war worries may push ASX lower for a second day: Australian shares fell yesterday. Materials names led the way lower with a loss of 1.18 percent. The overweight financials sector also suffered, shedding 0.63 percent. SPI futures are pointed cautiously higher ahead of the opening bell Thursday but optimism may sour as markets weigh a looming US trade action against China. The East Asian giant is Australia’s largest trading partner. A trade war between it and the US may disrupt supply chains that Australian exporters depend on, hurting growth and souring earnings prospects. US President Trump said he will move forward with tariffs on US$50 billion of Chinese imports and Beijing pledged to counter with retaliatory measures to be announced by the end of the week. Australian employment data is also due to cross the wires, but it may be overshadowed by the macro narrative absent an improbably dramatic deviation from consensus forecasts.

Market’s Data:

SPI futures moved -30.9 or -0.51% to 6023.53.

AUD/USD moved 0 or 0% to 0.7573.

On Wall Street: Dow Jones -0.47%, S&P 500 -0.4%, Nasdaq -0.11%.

In New York: BHP -0.88%, Rio -0.07%.

In Europe: Stoxx 50 0.11%, FTSE 100 0%, CAC 40 -0.01%, DAX 30 0.38%.

Spot Gold moved 0.25% to US$1299.23 an ounce.

Brent Crude moved 0.94% to US$76.59 a barrel.

US Crude Oil moved 0.44% to US$66.65 a barrel.

Iron Ore moved 0.64% to CNY472.5 a tonne.

LME Aluminum moved 0.04% to US$2302 a tonne.

LME Copper moved -0.45% to US$7222 a tonne.

10-Year Bond Yield: US 2.97%, Germany 0.48%, Australia 2.78%.

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