The inmates are running the asylum as policy makers are busy putting out old prairie fires. The European Central Bank’s move on Thursday was a final curtain call for President Draghi as he sought to cement his legacy as the man that would do whatever it takes to “preserve the Euro” and would have no taboos in his efforts. But it seems like the opposition to both the rate cut and new QE was far greater than the magician of Frankfurt let on at his final obfuscation. It is amazing how the dissidents find their voice the day after. Oh well, so it goes in the world of consensus-driven outcomes.
Following the ECB meeting, the bottom line is that fiscal stimulus will now become the prevailing policy action as pressure mounts on those with the ability to spend should do so. (Germans, the world is looking at you.) Even Draghi was able to muster the courage to actually call out the Germans.
On Friday, the markets reacted to the idea of fiscal stimulus supplanting monetary policy as INTEREST RATES continued to rise as traders unwound LONG POSITIONS unwound. The COPPER struggled to rally on Thursday but as of the close of Friday the metal with sustained its strong rally while the precious metals were crushed by the rise in yields. The DOLLAR had a down week as the EURO gained on all the crosses, especially the greenback, as investors sensed that a fiscal stimulus program might well provide investment opportunities in a regime dominated by negative interest rates.
Europe has not been a desired destination for global investors because of the lack of any type of cohesive and coherent investment policy beyond negative interest rates. Draghi’s program of lower for longer has not benefited any firms beyond those in need of low rates to remain solvent.
Mind you, everything I just wrote was correct until the GEOPOLITICAL events of this weekend as missiles destroyed 50% of the oil capacity of Saudi Arabia. EVERYTHING WE THOUGHT WE KNEW IS NO MORE. The calls are now for OIL to open 10-15% higher as fears about a global shortage send consumers of OIL scurrying to ensure supplies. (NOTE: As markets opened in Asia, crude oil futures jumped as much as $11.73 a barrel to $71.95. According to Bloomberg, it’s the biggest advance in dollar-terms in futures started trading in 1988.)
The OIL market closed down on the week so there has to be an assumption that SHORT POSITIONS exist as the removal of John Bolton empowered the Iran doves to believe that there was movement to begin some type of discussions with the Iranians. What will the actual fallout be from this massive disruption to supplies? I DON’T KNOW but be sure that the airwaves will be filled with the sound of experts all pretending to be certain of whatever market actions.
Beyond OIL, pay attention to the global BOND MARKETS. Last week’s selloff created a great deal of shorts in the Treasury market. Will the rise in OIL cause concerns about inflation or will the drop in equity prices and increased energy prices lead to FEARS OF A GLOBAL SLOWDOWN and send bond prices higher as investors fear a PANIC BY CENTRAL BANKS.
However, central banks have no room to maneuver as they have wasted potential ammunition. It will be critical to watch how GOLD acts tonight. Readers of NOTES FROM UNDERGROUND know that I always say buying GOLD in reaction to geopolitical events is a fool’s errand that can be a PROFITABLE SHORT-TERM TRADE but don’t get married to the idea as a long-term investment.
AT THIS TIME PAY ATTENTION because the world’s central banks are already at ZERO there is LITTLE ROOM FOR CUTS. So how will central banks react? This is what makes the GOLD an important indicator tonight. WATCH TO SEE IF RESISTANCE LEVELS CAN BE VIOLATED AND PRICES SUSTAINED. The precious metals did close on the weak side so there will some SHORT COVERING to boost prices but be alert to the be different this time due to the current state of global monetary policy.
There is much to analyze in regards to the significance of the Saudi news. Many variables are in play from EQUITIES, precious metals and of course commodity prices. Oh, and there is an FOMC meeting this week. If turmoil reigns, then the FED will have cover to CUT AGGRESSIVELY in response to heightened RISKS and UNCERTAINTIES to the already tepid global growth outlook. It was David Rosenberg who enumerated the FED‘s use of UNCERTAINTY and RISK 48 times in the last FED minutes. Let UNCERTAINTY and RISK be our watchwords, and keep focused on GOLD. The King of Hearts searches for the key to insanity. Who really runs the asylum?
Tags: central banks, copper, crude oil, ECB, Fed, fiscal stimulus, Gold, Mario Draghi, precious metals, Saudi Arabia
September 15, 2019 at 5:53 pm |
Thanks again Yra, fascinating time. With the acknowledgment from ECB, that fiscal is critical next step, and support form price action, Bunds etc, two questions, Other than the bund trade, do you think long eurostoxx short Growth, Nasdaq, make sense? And are you expecting anything from the SNB this week?
September 16, 2019 at 10:58 am |
Ah– i think SNB sits tight but as Whitewave has been pointing out for the last week the Swiss ten year bond has been in steep correction mode—-the eur/chf cross is higher on the month so there is nothing to generate any angst from Thomas Jordan,especially as the Eur/chf cross bounced after the ECB decision—-thinking about the long europe/short u.s. but have nothing yet as dependent on a big fiscal stimulus program
September 15, 2019 at 6:55 pm |
The timing of John Bolton leaving and this happening makes one wonder.
September 16, 2019 at 10:54 am |
Pierre—very good point.Much to ponder here and it will take a while to unfold but if you are not prepared for battle I would suggest keeping one’s mouth shut
September 15, 2019 at 9:57 pm |
/GC As mentioned prior, Buyers need to regain bid above 1538.50 or anticipate lower with 1482 being the lower bound.
/ES With 2991.50 being broken on the gap open this eve, anticipate any bounce that Sellers hold below 3010, to bring mkt lower. A bid above 3010 wld be Bullish.
My .02
September 16, 2019 at 3:39 am |
The Saudis were attacked by a drone. We are slowly leading up to the final denouement in the Middle East. A drone is a male bee that services the queen bee. In this case the Queen is Iran. As reluctant as Trump is to get into any combat situation, Iran will force his hand. The sanctions are threatening the regime’s ability to keep control. Look for further instability in that part of the world, and the ghost of John Bolton will rise.
September 16, 2019 at 5:51 am |
Yra
Markets are reacting far too complacently to this Saudi development.
This was a sophisticated and well-planned attack, likely the work of a state actor and not some rebel Houthi soldiers.
The odds that Trump will act in a thoughtful, judicious and strategic manner are nil…..And, actions will occur that neither he nor his generals are prepared to counter as US force strength in the region is not nearly as large as they once were.
MbS is boxed in….A desperate despot who is capable of doing almost anything in reaction to this likely Iranian provocation.
Does he do nothing and risk internal opposition that he is not a worthy leader? Or, does he impetuously blunder into a larger actual
declared war against Iran?
What about Israel? Does she get dragged into the affair as Bibi lobbies Trump to cut off the “head of the snake” in Tehran?
What are the odds of a possible second Yom Kippur War just to keep things spicy in the region with an attack by Hezbollah to sow even more chaos.
While all this happens, what does Erdogan or Assad decide to do while attention is focused somewhere else?
Does Xi use this “distraction” to hammer the HK protesters, betting that Trump is too distracted/bogged down in a Middle Eastern “shooting” war?
The mind fairly boggles at all that can possibly go wrong now that a Black Swan has entered the room
Am I predicting a market crash? No. On the other hand, I think stock markets are far too complacent about the risks that are now nigh. Do you think the buzz inside the WH situation room or the Pentagon’s war room is, perhaps, reaching DEFCON 1 levels?
I certainly do, as that is what the soldiers and generals are paid to do when such events take place.
Personally, I think the stock market complacency is ALL WRONG and that a decent opportunity has arisen to go “short” stocks as this could all go sideways very very quickly.
As for gold/silver, seems a tad too tricky right now. Longer term, I think they have a tremendously bright future.
Short term, the technical damage from the manic peaks of two weeks ago looks daunting, at least in the short run. Yet, they have and can spike further on an overall “risk off” move.
But, as I said, US stock futures and global stocks seem to suggest that this is just a mere kerfuffle—for now.
My best bet…..I think stocks are in for a rude surprise as these developments play out.
Longer term (as in early next year), I think stocks have a HUGE problem if and when Warren takes the post position among the Dems and markets are forced to realize that we could have an “Argentina” moment in which a Peronista might just have a decent chance of being elected. Markets will absolutely plotz when they
begin to discount that the potential for a President Eliz Warren is genuinely real and possible, and that she has her guns trained on Wall Street and Big Business.
No amount of Fed cutting will save stocks from that reality.
September 16, 2019 at 10:52 am |
Mike–wonderful post providing thoughtful areas to chew on—I agree that the sophistication of the saudi attack is worth pondering and those who have a tendency to talk too much ought to shut up–as the wisdom goes–those who know don’t say and those who say don’t know.But the complacency of the equity markets is either to be applauded for maturity of behavior or to be abhorred as being in denial about the condition my condition is in—as I have opined on for several years–there is enough tinder for multi prairie fires as Mao may have suggested and don’t think that the forces of disruption are not cognizant of the fragility of the system—oh but the power of negative interest rates to blind us to the discomfort of the heat from the uncertainty–torn between two lovers feeling like a fool
September 17, 2019 at 3:28 am |
We’ve been writing about the absence of free markets, especially in the precious metals for some time going back to the 1970s and Henry Kissinger.Many continue to believe in the integrity of the markets and that manipulation is virtually non-existent.
See the link below and JPM.
https://www.zerohedge.com/markets/three-jpmorgan-traders-charged-massive-gold-market-manipulation-fraud
September 17, 2019 at 6:32 am |
Asherz–thanks for the reminder.Being an active trader I am wondering whether I am ever going to compensated or whether it just goes into the coffers.Interesting how JP blames Bear Sterans for the culture—let’s see who else gets named
September 17, 2019 at 3:54 pm |
Interesting, but one only need to refer back to the Goldman code theft case, circa 2009. In open court, GS admitted that the stolen code had the potential to manipulate markets. Funny, no one bothered to ask, “What are you using the code for?” So let the axiom, Don’t bring a knife to a gunfight, be our guide. 😕
September 17, 2019 at 6:32 am |
Asherz–thanks for the reminder.Being an active trader I am wondering whether I am ever going to compensated or whether it just goes into the coffers.Interesting how JP blames Bear Sterans for the culture—let’s see who else gets named
September 17, 2019 at 4:35 pm |
Yra, I am interested in your thoughts on the continued record inversion, certainly back to 1995 of the Canadian Yield curve, why and any implications/trades?
thanks