6 Month in, what’s still to come?

Market realities that limit horizons and stories that are still to mature. Setting the score for H2.

Central Banks (CB) of the world react to curb intense inflation and keep growth intact. Currently, the main driver of inflation is Oil. Find out where oil is headed and the path of inflation will get dragged along leaving the CBs exposed. 

The only CB currently raising interest rates is the FED. This in turn means instant growth stagnation will hamper The US, should inflation not pick up. That is exactly what the Bond market is telling us. They are calling the FED out on what is set to be a major miscalculation to prematurely tighten the recent easing policies. 

Oil supply glut is looming:

-Market getting swamped ignoring supply cut agreements

-U.S is moderately pacing oil drill reactivation, while other minor players pushing production to win market share

-U.S pulling out of Paris accord and with it, unrestraint fossil fuel production can emerge

-Trump planning to sell strategic oil reserves

Mid term outlook for oil is $44-40.  While oil prices are pointing lower and wage growth is sluggish, how is inflation going to find traction?  Probably not at all for the time being, leaving ECBs forward guidance loose until March 2018 and beyond. If it has any sanity left, the FED will backtrack and wait for confirming data too.

Euro downside limited:

-Enjoying inflows from the Trump trade unwind

-Hedge funds are increasing their stakes in EZ shares and are not hedging their USD exchanges into Euros. This means they are betting on better EZ market and higher Euro

Long term we can expect the trend to hold. Euro should find a new range soon stretching the field from 1.1200-1.1600.

Pound has made startling advance so far this year:

-Bidding time before the election is over to scale further

-Better data and greater competitiveness from a lower currency is driving exports and drawing in foreign investors

Medium term GBP has got great potential to claim 1.34+ area once again.

Gold is one of the big winners so far this year:

-North Korea threat

-Multi probes twirling from campaign staff all the way to the commander in chief of the U.S

-Global trade war

With enough political risks in the backdrop, further gains are just a matter of time. It’s been declining since April but none of the risks that have driven it this high so far have diminished, just muted for now. Target for the year is upside $1300.

Miad Kasravi

 

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