Back To The Drawing Board

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Includes: BIL, BNO, CLTL, DBO, DBRT, DEUR, DFVL, DFVS, DJPY, DLBL, DLBS, DNO, DRR, DTO, DTUL, DTUS, DTYL, DTYS, DWT, EDV, EGF, ERO, EUFX, EUO, EWM, FIBR, FTT, FXE, FXY, GBIL, GOVT, GSY, HYDD, IEF, IEI, ITE, JYN, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, PLW, PST, RISE, SCHO, SCHR, SCO, SHV, SHY, SPTL, SPTS, SZO, TAPR, TBF, TBT, TBX, TLH, TLT, TMF, TMV, TTT, TUZ, TYBS, TYD, TYNS, TYO, UBRT, UBT, UCO, UDN, UEUR, UJPY, ULE, URR, USAI, USDU, USL, USO, USOD, USOI, USOU, UST, USTB, UUP, UWT, VGIT, VGLT, VGSH, VUSTX, WTID, WTIU, YCL, YCS, ZROZ
by: Dean Popplewell

By Stephen Innes

Despite a hawkish Fed hike last night, the USD failed to rally. Without reading too much into the usual FOMC exercise in verbal gymnastics, the USD couldn't find a grip above near-term resistance after US 10-year Treasuries could not break above 3% when Chair Powell reminded markets the economy is far from overheating - which suggests the Fed will remain very much data-dependent, with inflation metrics on top of the list, reinforcing an all too familiar Fed narrative. But with the ECB looming this afternoon, traders were happy to book profit knowing all too well that they are probably in for the usual topsy-turvy session when Draghi and Co. take centre stage. The ECB is more challenging to handicap, and there is the chance, however remote, for a hawkish surprise.

Equity markets

The US benchmarks closed near session lows. Equity markets don't like rate hikes, especially when the FOMC guidance comes in a bit more aggressive than expected. But with the June 15 US-China trade deadline looming, that too is contributing to a bit of risk-off momentum in early APAC trade as traders are nimbly shifting into some haven hedges, JPY-Gold and US bonds.

Oil markets

WTI has surged over 60 cents on the back of the DoE weekly inventory data. After the API data on Tuesday, the market was pricing in a minimal build, but was slapped with a massive draw that was conclusively more bullish than the API print. According to the tale of the tape, higher crude runs, increased exports and lower imports were more than enough to offset a further 0.1 million barrels per day increase in estimated crude oil production to a record 10.9 million barrels per day.

The unexpectedly large draw has caught the markets by surprise, causing yet another positioning whipsaw. But as we have seen all week given the uncertainty over likely production increases and record US shale output, the top side remains in check.

Lots of discussions centred on the review provisions on the OPEC agreement and whether Russia and Saudi will use this mechanism to phase out production cuts. Even more so after the OPEC June report said inventories had fallen by 26 million barrels below the 5-year average. The original OPEC/Russia production cuts were supposed to get inventories back to the 5-year average. As they say, the devil is in the details.

Interesting timing, as we could find out more on this issue after tonight's Saudi Arabia vs. Russia World Cup match as the Saudi Crown Prince and the Russian President meet in Moscow to watch the game.

Gold markets

The weaker US dollar and falling equity markets are providing a boost to gold prices. While the FOMC added another dot to the policy equation, but with the committee remaining ever so data-dependent, suggesting a 4th rate hike in 2018 is far from a lock, the USD dollar gave up all its overnight gains and some. The equity market hates higher interest rates, and so should gold markets, but we can see some decent bids this morning as investors are nimbly entering some haven hedges as tomorrow's US-China trade deadline looms ominously. Indeed, the stakes are running high.

Currency markets

Well, it's back to the drawing board courtesy of the elusive US inflation narrative.

EUR: Too difficult to handicap, and with the EUR anchoring at 1.1730 overnight after a "hawkish" Fed hike. And to guard against a possible hawkish shift from the ECB, traders are unwinding EUR shorts.

JPY: No joy on the upside after US rates yielded when Powell highlighted the lack of inflation as worrisome. And with risk aversion factoring in ahead of tomorrow's important US-China trade deadline, the slate is clean waiting for a better read on trade and tariff and US interest rates.

MYR: While USDMYR came close to testing 4.0 after a hawkish FOMC, USD profit-taking eased the pressure, but currency traders now face an uncertain ECB.

Expect another lazy day on the local bond markets as investors remain on the sidelines ahead of the ECB, and remained glued to macro moves in the global interest rate environment. But volumes remain tepid ahead of this week's festive holiday, which could see an added flurry of risk reduction ahead of tomorrow's testy US-China trade deadline.