London Capital Group: WTI rallies 2% and gold falls 1%, but global stocks reflect worries before G20 summit

Jun 26, 2019

Asian equities edged lower, after Wall Street closed in negative territory for a second consecutive day regardless of the solid expectations of a Federal Reserve (Fed) rate cut next month. At his speech in New York on Tuesday, Fed Governor Jerome Powell reiterated that the downside risks increased due to a greater uncertainty on the trade front with China and the incoming data further raised concerns about the health of the global economy. Although Powell’s dovish stance strengthened the case for two-to-three rate cuts within the next twelve months, all industries gave back gains in New York, including energy and mining stocks. The US 10-year yield held above the 2% handle.

At this point, the dovish Fed expectations appear to be fully priced in the asset prices and the actual risk-off environment mostly reflects tensions between the US and Iran, and worries before the upcoming US - China meeting in Japan. We can now guess that the latest sanctions on Iran may have successfully closed the door for any discussion soon. On the Chinese front, the US delayed next round of tariffs on $300 billion additional Chinese goods before the G20 meeting, but the probability of a trade deal between the two countries remains slim given that both presidents seem unwilling to compromise on their respective demands.

Oil traders don’t seem upset with the waning economic activity as long as OPEC and its allies commit to trim production to match the weakening demand. OPEC+ will meet on July 1-2 and is expected to extend their lower production regime. WTI crude (+2.06%) advanced past $59 a barrel, the 200-day moving average. Brent traded above the $66 mark. Energy stocks outperformed in Sydney.

Gold bounced back from $1440 on Tuesday. The precious metal retreated to $1403 in Asia and the overbought market conditions would normally suggest a deeper correction. Yet risk-off traders will likely top up their long positions before the G20 summit. As such, solid support could be seen into the $1400 handle.

The US dollar recovered against the majority of G10 currencies, except Aussie and Kiwi. The Reserve Bank of New Zealand (RBNZ) maintained its policy rate unchanged at 1.50% at today’s meeting. The bank didn’t rule out the possibility of a further rate cut this year. The decision was broadly expected.

The EURUSD fell to 1.1353 and Cable bounced back from 1.2784 on broad-based US dollar recovery.

Data-wise, the preliminary data for US durable goods orders in May sticks out in today’s light economic calendar. Today’s figure could suggest a softer contraction of 0.2% last month, compared with a decent 2.1% drop printed a month earlier. A satisfactory data could increase the US dollar appetite, without weighing on dovish Fed expectations given that a July rate cut is taken as granted.

Finally, the Bank of England (BoE) Governor Mark Carney and several MPC members will testify on the economic outlook and inflation before the Parliament’s Treasury Committee today. Although Mark Carney continues wearing his rose glasses when it comes to the Brexit scenarios, he has acknowledged that the market doesn’t necessarily share his optimistic view, with Boris Johnson preparing to take the reins of the Brexit negotiations. Johnson’s commitment to leave the European Union with or without a deal by the October 31st deadline worries soft Brexiteers. His rival Jeremy Hunt warned that this insistence could lead to a general election, followed by a defeat for the Conservative party. Such political uncertainties could heavily weigh on the pound sterling. Hence, a softer pound could increase the upside pressures on British inflation and bring the BoE to consider hiking rates, yet from a different path.

European and UK stocks are set for a softer start on Wednesday. The FTSE 100 is expected to drop 17 points at the open. Gold mining stocks could feel the need of a rectification amid the sharp downside correction in gold prices.

Opening calls

• FTSE to open 17 point lower at 7405
• DAX to open 30 points lower at 12198
• CAC to open 20 points lower at 5495