London Capital Group | Sep 17, 2019 06:57
The drone attack on Saudi Arabia’s Aramco over the weekend rose geopolitical tensions and hammered the risk appetite. Investors are escaping equities and moving capital into the sovereign bond markets.
The US 10-year yield retreated to 1.82%, as British and European yields eased on Monday.
Gold is left behind the actual flight to safety. An ounce of gold slid below the $1500 mark and met limited buying interest below this level as investors favored buying sovereign bonds amid last week’s slump in prices.
Nikkei (+0.04%), Hang Seng (-1.01%) and Shanghai’s Composite (-1.02%) traded on mixed sentiment, as the ASX 200 (-0.06%) saw some support by healthcare and energy stocks.
WTI and Brent crude stabilized near $62 and $68 a barrel respectively on fears that the recovery on Aramco’s production site could take up to weeks and even months. The supply shortage in Saudi Arabia should keep oil prices sustained above the pre-attack levels for the weeks to come. We could see a floor building near $60 in WTI crude and near $65 in Brent. Meanwhile, the expectation that the trade talks between the US and China could lead to a temporary agreement should give an additional boost to energy prices.
The FTSE 100 closed 0.63% lower on Monday, despite the 2.71% rally in energy stocks. FTSE futures (-0.30%) hint at a soft start on Tuesday, on the back of limited risk appetite, or the lack thereof.
The pound gave back gains as discussions between Boris Johnson, and the outgoing EU President Juncker were little constructive. Although the leaders decided to intensify talks, the UK will likely remain in no man’s land with the absence of ‘legally operational solutions’ to reach a comprehensive Brexit deal in the foreseeable future. Meanwhile, the UK’s Supreme Court will discuss the case against Johnson’s most controversial suspension of parliament. If the MPs are allowed to return, expect a decent rally in the pound.
Otherwise, the pound’s recovery should remain topped near the 1.25 mark against the US dollar. The downside correction could stretch to 1.2390, the minor 23.6% Fibonacci retracement on September rebound. But Cable will remain in the bullish consolidation zone above the 1.23 mark, which stands for the major 38.2% retracement.
The EURUSD fluctuates near the 1.10 mark, awaiting the ZEW survey results for September in Germany and the Eurozone. A soft read in German expectations could further weigh on the single currency and justify a renewed attempt below the 1.10 mark against the greenback. But the 1.0930 support should remain intact ahead of the Federal Reserve’s (Fed) policy decision.
The DAX is expected to open 15 points higher at 12395.
FOMC meets as markets and Trump push for lower rates
The FOMC starts its two-day policy meeting today. The FOMC is under a decent political pressure as President Donald Trump explicitly and relentlessly pushes for significantly lower, and ideally negative interest rates. Hence, the Fed is sandwiched between a deteriorating economy due to Trump administration’s aggressive foreign policy, dovish market expectations, and a demanding president. Therefore, the Fed is broadly expected and somewhat forced to lower its interest rates by 25 basis points for the second straight meeting to meet all expectations.
But this month’s accompanying statement could be less dovish to prevent the market from taking the lead and pricing in another rate cut immediately after the meeting, again.
On the other hand, despite a fairly dovish stance, it seems that the Fed struggles to control the short-term interest rates, as the overnight repo jumped to 4.75% according to ICAP and settled more than 20 basis points higher within the session. Hence, the Fed may want to come up with new and creative policy tools, similar to a reverse operation twist considered by Bank of Japan (BoJ), to control the short end of the interest rate curve, to support the longer-term rates and to relieve the pressure on institutional returns.
In Japan, the BoJ may hold fire at this week’s monetary policy meeting, relying on the recent yen depreciation past the 108.00 marks against the US dollar.
FTSE 100 to open 3 points higher at 7324
DAX to open 15 points higher at 12395
Disclaimer: The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please note that 79 % of our retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing money.
Written By: London Capital Group
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.