Caution is the word of the day and traders have decided to move on the side-line ahead of the key speech by the Fed chairman, Jerome Powell at the Jackson hole. Traders over in Europe are a little disappointed on the back of the Fed minutes and this is pushing the stocks lower today. What is also impacting the sentiment is the fact that the policymakers are sharply split and are not certain for the course of action with respect to interest rate cuts.
The Fed minutes didn’t show that the Fed is going to adopt an aggressive path in relation to cutting interest rates. The view about cutting the interest rates during the next month was diverse among the members. Looking at the minutes, it appears that the Fed’s base case scenario in relation to the trade war (between the US and China) is still based on a deal.
Capitulation in gold
Once again, flight to safety is the main trade and this is the reason that the Treasury yields have started to move lower again. The flight to safety is mainly dominated in the government bonds because the yellow metal is trading in negative territory. This is shocking to some element because the dollar index isn’t that strong and it is up only by 0.03 percent. This tells me that there is more to this story.
Gold trading range has narrowed substantially over the past few days and a narrow trading range is associated with capitulation. I still hold my view that this capitulation is likely to be the upside. Now, this can happen tomorrow when Jerome Powell provides more colour to the Fed thinking.
The big question for the Jackson hole
So the question is what could be coming out of the Jackson Hole which can either support the markets or break the stock rally altogether? Speculations are that Jerome Powell is going to show his flexible side: meaning, a message which will say that we are open to adopt an act as per the market conditions. This can certainly involve a period of prolong interest rate cuts. Remember the previous view has been that do not expect the current interest rate trend to last long.
Oil Traders need support from demand curve
As for the oil market, the price has retraced from its recent high. It appears traders are disturbed about the excessive supply, we saw this during the inventory data released on Wednesday. There is no doubt that the hopes are pinned for the demand curve to recover because the Fed may cut the interest rate coming next month.
Given the market conditions over the last few weeks, there is a possibility for this scenario to become reality and this is the reason the oil price may actually close higher towards the end of the week, and if this happens, it would be first back to back weekly gain, something not seen for the last 2 months.
