Steve’s AxiBlog June 10

Asia Wrap: The FOMC tonight promises to be a significant one for markets

The FOMC decision tonight promises to be a significant one for markets. Risk-on positions have been reduced, and we could see more equity hedges put on in case the Fed signals it is now done for the time being. If that is the message (even if packaged in still very dovish language), there might be more profit-taking in stocks, curve steepeners, and a short dollar position squeeze.

FOMC Primer

There’s not much of a conviction heading into the FOMC; sure, some are intrigued after the stellar US jobs report, while others view it as a non-event.

I always think the FOMC is an absorbing set-up – especially these days. After all, the Fed orchestrated this market recovery and are now set to offer its latest thoughts, estimates, and, hopefully for market sentiment, an actionable go-forward plan.

Pre London Open

Not much to glean so far in Asia as topical discussion remain squarely centered on the Fed and volumes are very low, but a few shops are getting their last licks in ahead of the FOMC

Currency markets are finding their mojo again after Bizzaro ran roughshod over FX markets yesterday. There seems to be a consensus-building that despite the improvement in the US jobs data, the Fed will avoid at all cost taking a victory lap given we are on the precipice of entering the end of the beginning phase for the global recovery

Investors to focus on the Fed | Big movers to watch this week | Stephen Innes | 9 June 2020 ( AXI Week ahead video prodced Tuesday morning in Asia

8 AM Bangkok Stocks markets

US stock markets are up almost 45% since the March lows, which is easily the most significant rise in the shortest time ever. The current sell-off (across all assets) seems a little overdone in the context of the ongoing bullish narrative. Nonetheless, there’s profit-taking and squaring of positions leaking into the fray in front of the FOMC.

Given the ridiculously impressive risk recovery, it’s not surprising to see small wobbles and bobbles sidelining investors, giving the market a breather and a chance to consolidate.

Without stating the obvious, Wednesday’s FOMC decision will determine whether the pause extends a little longer or not. If the Fed doesn’t take any further action, risk sentiment might cool its jets for longer. 

While uncertainty ahead of this week’s FOMC meeting is likely to keep bullish ambitions at bay, it doesn’t feel like investors need much of an excuse to sit on their hands.

7 AM Bangkok

Gold and Forex Markets

The upward momentum in risk appetite faltered yesterday, prompting substantial weakness in currencies such as the AUD, NZD, NOK and CAD. There was no apparent fundamental catalyst for the reversal other than the possibility of the S&P500 completing its round trip on Monday, reversing all the losses seen earlier in the year, which may have prompted some profit-taking.

The astonishing round trip recovery in US equity markets may have shone a light on the time mismatch between the market’s forward-looking pricing structure and how the real economy is currently performing, or the vigorous mood on Wall Street versus the still-distressed reality on “Main Street”. It was a day of reversal (surprisingly it’s taken this long) but is probably a testament to the impressive amounts of the dollar the Feds have doled out to the FX markets.

6 AM Bangkok

Oil markets

Iraq has asked some Asian refiners to consider forgoing prompt shipments of its Basra crude, raising speculation that OPEC’s second-biggest producer is trying to comply with pledged output cuts. The country, along with some others, was recently taken to task by Saudi Arabia and Russia for pumping above their quotas.

The principle of compensation is a bullish game-changing factor as the hope that this rule will make the persistent under-compliance of the past a distant memory. Countries that show under-compliance during May/June – including Nigeria, Angola, Kazakhstan and Iraq – will now commit to a date when production will be brought into compliance and, more importantly, ‘repay’ excess production by over-compliance in the Jul-Sep period.

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