FOMC Minutes

In no uncertain terms, the FOMC minutes deflated the markets Federal Reserve air balloon as the minutes unequivocally temper September. So without the Fed air balloon floating markets today, stocks are temporarily succumbing to forces of gravity.

For all intents and purposes with interest rates likely hugging the LBZ for the next 2-3 years, it is unlikely US stocks will have to deal with a particularly deep or intense air pocket as the wall of money argument seems always to win out. ( see views on the BAML fund manager survey below).

US equities were weakerWednesday, S&P stepping back from its record close on Tuesday, down 0.4%. Stocks had been bubbly and trading stronger for most of the session but turned lower after the Fed minutes tempered expectations for more near-term monetary easing. The July FOMC meeting minutes released overnight revealed a Committee aiming to wrap up the policy review in the "near future." Still, they did not see an urgent need to provide additional accommodation imminently.

And similar to the post-July Fed meeting where it was thought unlikely we would see YCC in the US anytime soon, the minutes took a further step away YCC: Most "members judged (it) would likely provide only modest benefits in the current environment. My view has been pretty consistent since US yields backed up last week, and the financial market barely blinked with the S&P 500 racing to all-time highs, so why would there be a need for central banks to lean against rates via YCC when slightly higher yields pose little threat to market stability. The bond markets are doing the best non intervened job of setting the prices; why fix something that is not broken.

In the FOMC minutes, away from yield curve control, there was talk about the framework review being finalized in the "near future," and talk around all the iterations of forwarding guidance (inflation, unemployment, calendar, or some combination of those). Which should keep the market in " don't fight the fed mode."

BAML fund managers survey

Nothing speaks more ironic than on the day that the latest BAML fund manager survey showed that investors were worried about overvalued markets, the S&P 500 managed to make a new record high. Maybe that proves their point. That does suggest that the pain trade for a lot of investors is a continuation of the equity market rally that a lot have missed out. .Details from the survey support that view and BAML think that positioning is not "dangerously bullish." They pointed to cash balances, which stand at around 4.6%, still above the 4% level considered to signal the emergence of "greed."

Currency Markets

The Euro

Like other cross-assets, currency markets succumbed to the FOMC temper in September as the EURUSD fell over 100 pips post minutes.

However, since we are still within the current well worn EURUSD ranges, market participants will be looking for clues at 1.1825 support level, which was a strong buy point of late, and below there, the critical level is 1.1750 before the 1.1700 pivots.

Despite the FED walking back YCC enthusiasm still we will likely see some form of inflation targeting in September. During these economically trying pandemic conditions ( current and post), the Fed will be more than willing to let the economy overheat for an extended period before tweaking Fed funds higher. Indeed that thought alone should keep the dollar bulls nose ringed to the bullpen into September.

However, given the immense CTA and technical influences in currency markets these days ( because data is so unreliable ), even this fundamental trader is trading on moving averages to replicate what the CTA's are thinking. So I reason that specs will be more patient to trade on levels and momentum than anything else. So far this morning, with the EURUSD hugging 1.1850, the viewfinder is empty.

But on the fundamental side of the equation, nothing has changed in the macro picture, and congress is still dithering. So the longer this impasse continues, the slower the US recovery will take as the EU economy repairs and chugs along quite nicely as the economic surprise index points nearly 2 to 1 in the EU favor.

Gold markets

There is not a great deal to say about the gold slide; the Fed completely underdelivered on gold market expectations while the stronger dollar merely rubbed salt in the wound. But the real sting came after the FOMC minutes were released and showed that meeting participants were somewhat skeptical about yield curve control.

It is going to be another day of picking up the pieces where a lot of new gold entrants face the harsh reality that gold trading isn't a one-way street despite what those who wear the gold shaded tin foil hats will tell you. I'm not too fond of mornings like this as I know lots of newbies own naked gold positions despite the massive tail risk heading into the FOMC.

But it's not as if the golden phoenix can't rise again in the absence of YCC. It just means gold will need some help for higher inflation breakevens or renewed US dollar pressure.

Oil markets

OPEC's Joint Ministerial Monitoring Committee concluded after addressing very familiar themes. And, as widely expected, intend to hold the course on production as coronavirus flareups around the globe and with the northern hemisphere heading into colder winter months, there remains "growing risks" of a prolonged second wave. Indeed there was little incentive to send anything but a strong and unified message. Still, it seems that Nigeria's continued failure to deliver on its quota drew the lions share of the JMMC participant's attention.

Saudi Arabia's King Salman held a call with Nigeria's President to discuss oil markets. So traders are assuming that discussions a this highest level will set the stage for a mea culpa from Nigeria, and perhaps a commitment to over-comply in the coming months. Only time will tell  as there was a similar agreement from Iraq at the last JMMC meeting. According to industry data, they continued to struggle with targets producing around 150,000 b/d above original quotas. So cheating could still be a problem in the future.

Oil started moving higher after the US Energy Information Administration report walked back API's gasoline inventory report build, which had tempered bullish ambitions on Tuesday. The EIA reported more seasonal 3.3 million declines in gasoline inventories that nudged prices higher during the NY session. Indeed, that should alleviate some market concerns around the pace of product demand rise, especially around the critical gasoline metrics where a " surprise draw" is always most welcome.

However, the predominant theme in oil markets is the dramatically falling level of volatility and the very slow grind higher for prices.

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