Financial market research and analysis

The drone attack on Saudi Arabia’s Aramco over the weekend rose geopolitical tensions and hammered the risk appetite. Investors are escaping equities and moving capital into the sovereign bond markets.

The US 10-year yield retreated to 1.82%, as British and European yields eased on Monday.

Gold is left behind the actual flight to safety. An ounce of gold slid below the $1500 mark and met limited buying interest below this level as investors favoured buying sovereign bonds amid last week’s slump in prices.

Nikkei (+0.04%), Hang Seng (-1.01%) and Shanghai’s Composite (-1.02%) traded on mixed sentiment, as the ASX 200 (-0.06%) saw some support by healthcare and energy stocks.

WTI and Brent crude stabilized near $62 and $68 a barrel respectively on fears that the recovery on Aramco’s production site could take up to weeks, and even months. The supply shortage in Saudi Arabia should keep oil prices sustained above the pre-attack levels for the weeks to come. We could see a floor building near $60 in WTI crude and near $65 in Brent. Meanwhile, the expectation that the trade talks between the US and China could lead to a temporary agreement should give an additional boost to energy prices.

The FTSE 100 closed 0.63% lower on Monday, despite the 2.71% rally in energy stocks. FTSE futures (-0.30%) hint at a soft start on Tuesday, on the back of a limited risk appetite, or the lack thereof.

The pound gave back gains as discussions between Boris Johnson and the outgoing EU President Juncker were little constructive. Although the leaders decided to intensify talks, the UK will likely remain in no man’s land with the absence of ‘legally operational solutions’ to reach a comprehensive Brexit deal in the foreseeable future. Meanwhile, the UK’s Supreme Court will discuss the case against Johnson’s most controversial suspension of parliament. If the MPs are allowed to return, expect a decent rally in the pound.

Otherwise, the pound’s recovery should remain topped near the 1.25 mark against the US dollar. The downside correction could stretch to 1.2390, the minor 23.6% Fibonacci retracement on September rebound. But Cable will remain in the bullish consolidation zone above the 1.23 mark, which stands for the major 38.2% retracement.

The EURUSD fluctuates near the 1.10 mark, awaiting the ZEW survey results for September in Germany and the Eurozone. A soft read in German expectations could further weigh on the single currency and justify a renewed attempt below the 1.10 mark against the greenback. But the 1.0930 support should remain intact ahead of the Federal Reserve’s (Fed) policy decision.

The DAX is expected to open 15 points higher at 12395.


FOMC meets as markets and Trump push for lower rates

The FOMC starts its two-day policy meeting today. The FOMC is under a decent political pressure as President Donald Trump explicitly and relentlessly pushes for significantly lower, and ideally negative interest rates. Hence, the Fed is sandwiched between a deteriorating economy due to Trump administration’s aggressive foreign policy, dovish market expectations and a demanding president. Therefore, the Fed is broadly expected, and somewhat forced to lower its interest rates by 25 basis points for the second straight meeting to meet all expectations.

But this month’s accompanying statement could be less dovish to prevent the market from taking the lead and pricing in another rate cut immediately after the meeting, again.

On the other hand, despite a fairly dovish stance, it seems that the Fed struggles controlling the short-term interest rates, as the overnight repo jumped to 4.75% according to ICAP and settled more than 20 basis points higher within the session. Hence, the Fed may want to come up with new and creative policy tools, similar to a reverse operation twist considered by Bank of Japan (BoJ), to control the short end of the interest rate curve, to support the longer-term rates and to relieve the pressure on institutional returns.

In Japan, the BoJ may hold fire at this week’s monetary policy meeting, relying on the recent yen depreciation past the 108.00 mark against the US dollar.