Overall risk sentiment remains weak after reports of attacks on two oil tankers in the Gulf of Oman. US equity markets closed higher due to rally in energy stocks, US yields fell, while oil and gold prices bounced. Classic safe-haven flows. The US has accused Iran of the attacks increasing the tensions in the Middle-East. However, we are living in extreme times where the natural pricing of markets are no longer relevant. New that would have sent markets on a hair raising, roller coaster ride saw crude volatility and price increase only marginally. Central banks dislocating extreme monetary policy, which has shifted toward expansion, in recent months, continues to backstop risk. Given this view, we see the current pullback in risky assets as a short-term move. Further support is likely to come from next week Federal Reserve meeting and press conference.
The FOMC is preparing arguments for interest rate cuts in September. The Fed will have a tricky time to highlight downturn due to escalating trade war and soft macro-economic data, at the same time not spooking the market. This shift will herald the way for global monetary policy turn. The market has already priced in a 25bp cut and probability of a recession in the coming 12 months stand at 30%. Yet hearing the Fed articulate, the strategy will affect the markets. The net result is likely weaker USD, especially against EM currencies and a further improvement in equities. Moving forward, it will be fascinating to see if Fed Chair Powell can stop President Trump from driving the USA into recession. Arguably America’s two most powerful institutions going head-to-head in the months to come.
