Market Jitters Remain

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Includes: BAR, BNO, CROC, DAUD, DBO, DBRT, DGL, DGLD, DGP, DGZ, DJPY, DNO, DTO, DWT, DZZ, FXA, FXY, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GTU, GYEN, IAU, JYN, OIL, OILK, OILX, OLEM, OLO, OUNZ, PHYS, QGLDX, SCO, SGOL, SZO, UAUD, UBG, UBRT, UCO, UDN, UGL, UGLD, UJPY, USAI, USDU, USL, USO, USOD, USOI, USOU, UUP, UWT, WTID, WTIU, YCL, YCS
by: Dean Popplewell

By Stephen Innes

US stocks toppled again on Wednesday in a choppy and messy fashion after a dispirited US Treasury auction revived concerns about a hawkish Fed, unnerving investors already spooked after the rapid climb in US Treasuries apparently ignited a jump in the CBOE Volatility index.

A deplorable auction with meek demand pushed yields on 10-year US Treasuries to 2.84 percent, up four basis points, with traders now eyeing Monday's a four-year high of 2.88 percent.

The market is now hedging against the Fed potentially leaning more hawkish, which explains the uptick in USD and US yields.

There was a glimmer of hope earlier in the NY session that equities markets were finding a happy medium, but the equilibrium shattered as optimism gave way to more selling when Federal Reserve doves see the inflationary lightbulb flicker.

Fed Evans, who dissented along with Kashkari on the December rate hike, has also embraced Kashkari's new hawkish tone post Friday's earnings data. While his baseline remains a hold in rates until mid-year but with one crucial condition: "In contrast, suppose inflation picks up more assuredly, as many expect. Then, we still could easily raise rates another three or even four times in 2018 if that were necessary. And I would support such a faster pace if the data point convincingly in this direction."

Of course, this hawkish Fed discourse has elevated market chatter this morning, centering on how the Trump Administration could react if the USD parades higher on a more hawkish Fed. It certainly makes for exciting international intrigue to the debate in the wake of comments from ECB member Nowotny, who charged that the US Treasury is deliberately putting pressure on the USD.

Oil Prices

Oil prices have been getting battered by forces beyond the nodding donkey of late. The weaker narrative has been underpinning prices, but with the market shifting to a more hawkish Fed description, the US dollar slide has come to a blunt halt and is now weighing negatively on oil prices. Notwithstanding, the unforeseen disorder in the broader financial system has seeped into the oil markets.

With oil prices, WTI fell abruptly after the U.S. government reported crude stockpiles rose by 1.9 million barrels. But it's the deluge in US production that remains the most significant menace to OPEC production cuts. The bottom line is US crude production should keep hitting new highs throughout 2018, after reaching an all-time higher of 10.25 million barrels per day. 11's are not that far away.

Gold Prices

A stronger US dollar and higher US Treasury yields have depressed demand for gold overnight. And with equities souring and prices continuing to melt away, gold markets could be susceptible to a stock market rebound.

The shifting Fed narrative that is gathering a hawkish following could be the most significant thorn in the gold bulls' side.

Currency Markets

Japanese Yen

The yen will be traded like a puppet whose strings are manipulated by equities and fixed-income price movements.

Australian Dollar

The risk-off moves from Monday's equity plunge were enough to liquidate short USD, and with continued broad de-risking assignments still being played out, I suspect the Aussie bulls with remain in timeout corner until we get back above .7850 and a fraction of risk appetite returns. When you view every possible trade scenario as an ambush, it's probably best to tread cautiously.

Malaysian Ringgit

The re-emergence of the Federal Reserve Board hawks and oil prices looking very susceptible to ramped-up US shale oil production continues to weigh negatively on the MYR.

But indeed, the uptick in market volatility has tamed investors' appetite, so bullish signals are far and few between.