Lots of noise, but little substance, best describes the price action on financial markets overnight, as the street chased its tail ahead of Fed Chairman Jerome Powell’s speech at the Jackson Hole Symposium this evening.
Equities, the U.S. dollar and gold and oil all eased slightly after Federal Reserve Presidents George and Harker both said they saw no need for further rate cuts at this stage. The timing was a little unusual, in my opinion, coming just a day before their boss makes his pivotal remarks at Jackson Hole. Conspiracy theories aside, I will reiterate that the danger is that Mr Powell disappoints markets and isn’t nearly as dovish as the street is hoping.
Most of the angst was reserved for the U.S. bond market though, with Mssr’s George and Harkers hawkish remarks sparking a sell-off of the 2-year bills to 1.62%, pushing their yield above the benchmark 10-year note at 1.60%, the dreaded inversion. To put the accompanying howls of an imminent recession in context, we are talking about a two basis point inversion. Everyone calm down, please.
One thing to reiterate going into tonight’s speech is that markets seem very clearly positioned for some very dovish guidance from Mr Powell on U.S. interest rates. It is a dangerous assumption to make and the corrections across various asset classes if he disappoints, could make for a very emotional finish to the week’s trading session.
What has really caught eye overnight though, was far from Jackson Hole. The British Pound (GBP) rallied 1.10% from 1.2120 to 1.2250. At the almost forgotten G-7 in Biarritz, Germany’s Angela Merkel and France’s Emmanuel Macron held out the tiniest of olive branches to Brexit-bound U.K. PM Boris Johnson. As tiny and unlikely to avoid Brexit as they were, the effect on the GBP was immediate and aggressive.
Readers may remember that earlier in the year if was expounding the dangers of being optimistically long GBP above 1.3200 hoping that P.M Theresa May and the U.K. parliament’s Brexit efforts wouldn’t turn into an Only fools and Horses Christmas Special. The rest is history with the GBP trading to nearly 1.2000.
The price action overnight could be implying we are entering a same-same, but different situation with regards to Brexit driven short positioning on the Pound. The street seems to have resigned themselves to the fact that some sort of hard Brexit is now inevitable and positioned itself accordingly by selling all the Sterling it can. I can’t argue with that thesis, but should even a tiny glimmer of a soft Brexit emerge, the short squeeze on Sterling could be a mightily impressive one, setting of 2019’s most significant whipsaw price action. It may be a story for the coming weeks, but beware the “Boris bounce.”
Equities
Wall Street eased slightly overnight as treasury yields rose and on the Fed official comments, and U.S. Manufacturing PMI fell for the first time since 2009. That was partially offset by yet another supposedly beleaguered high street retailer, Nordstrom, producing a sparkling set of quarterly results.
The S&P 500 fell 0.05%, the Nasdaq fell 0.35%, and the Dow Jones rose 0.20%. Wall Street had a definite wait-and-see look about it ahead of Jackson Hole. We would expect the same scenario to play out in Asia as well as the world waits for Friday’s main event.
Currencies
The dollar eased slightly overnight with the dollar index edging 0.12% lower to 98.18. The British Pounds 1.10% rally on Brexit hopes was the overnight session’s highlight in an otherwise quiet day.
Asian markets will content themselves with much the same, happy to await hoped for clarity from Mr Powell tonight in Jackson Hole to give themselves something to get their teeth into on Monday.
Oil
The sell-off in the short end of the U.S. yield curve pushed oil prices lower as markets flip-flopped on headlines ahead of the Jackson Hole speech tonight. Brent Crude fell 0.60% to $60.00 a barrel while WTI fell 0.50% to $55.40 a barrel.
After such a strong come-back from last weeks sell-off and ahead of Mr Powell’s speech, some profit-taking and position adjustment were of no surprise. That theme should continue into Asia with a quiet day predicted with plenty of sellers happy to lighten positioning on rallies today.
A disappointment by Mr.Powell could well have an outsized negative effect on oil markets, which are banking on very dovish guidance from him.
Gold
Gold held steady around the $1500.00 an ounce mark overnight in subdued trading ahead of tonights Jackson Hole speech. Gold’s technical picture remains constructive in the medium term with key support remaining at $1480.00 an ounce today.
Asia will follow New York’s lead, and trading will remain subdued. The week is unlikely to finish that way though with much brisker price action expected after Jackson Hole. Gold is well placed to benefit from a Powell disappointment on the easing front, although if the Chairman comes to the party, gold would likely end the week testing support.
