Steve AxiBlog June 11

On the latest Texas coronavirus outbreak, Governor Greg Abbott said, “everything remains largely contained” as the state prepares to lift more restrictions this week. So it’s back to the task at hand: weaving a roadmap through an entangled web of mismatched economic and market pricing factors 

US equities finished weaker Wednesday after a spike higher in sentiment on an overall dovish Fed statement. But with the FOMC statement coming out mainly in line and less dovish than expectations, investors probably thought it best to pare risk as the markets could turn to focus on the lag between Main Street problems eventually becoming Wall Street’s issues.

Concerns that the Fed was less dovish than expected or warranted are entirely misplaced. Reading between the lines, the central bank explicitly laid out a long road to recovery; it will keep the Fed funds low into the medium-term, which in any Fed playbook should be interpreted as super accommodative.

Provided there are no incidents or secondary cluster outbreaks, risk should come in spades. USD weakness underscored investors’ increased propensity for greater risk-taking in the run-up to the FOMC meeting. The enduring US dollar sell-off, which is expected to continue, reflects global, not local, factors including higher oil prices, carry trades unimpeded by US interest rates, an ongoing US equity market rally and higher US inflation break-even.

We should be trading the FOMC but the game plan was interrupted by 2,504 new coronavirus cases today in Texas.

We should be trading the FOMC, but the game plan has been interrupted by 2,504 new confirmed coronavirus cases reported today in Texas; this number dwarfs a previous record high of new cases per day. It could be more impactful on market sentiment than anything else today, specifically around equity and oil markets that have been trading favorably on hopes of a virus-free economic recovery. 
The dollar safe-haven appeal could re-emerge as traders may need to hedge for this being more than an isolated event, especially if the domino effect sets in and clusters start to appear all over the map so soon after economic reopenings. It’s not a good sign.
The USD’s reaction function after today’s FOMC meeting is difficult to determine with so many moving parts. US rates are lower for longer, but the S&P 500 has fallen precipitously on the less dovish Fed to expectations and the latest virus outbreak in Texas, which suggests the FX rally in “risk-on” currencies will struggle to an extent today.

Are strategically positioned oil traders looking through the volatile inventory data?

Oil prices spiked after the Fed indicated they would keep their firefighting gear at hand, but then came off hard after nudging within an earshot of WTI $40. As we saw in 2008/2009, the path from central bank deluges to asset price inflation is initially dangerous and rocky with many wobbles before liftoff.

Oil prices have recovered from the inventory induced slide levels but are well off intraday highs. Oil traders appear happy to look through short-term inventory machinations – even more so as inventories at the all-important Cushing terminals fell and softened the blow from the nationwide oil inventory builds.

Since the beginning of May, strategically positioned oil traders have remained content to pocket dips, and likely more so this week, encouraged by OPEC+’s substantial commitment and resolve after the weekend meeting which, on the surface, seems solid enough to form the foundation of more constructive pricing.

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