Trump Almighty or the market is looking for volatility

Fed cuts rate; Brexit is looking for the last chance; Trump has stopped negotiations with China, and oil is changing direction. Market focus is shifting to the UN session. The week promises to be dangerously active.

So …

  • Fed

The rate on federal funds was reduced by 0.25%, the rate on excess reserves − by 0.30%. The market perceived the accompanying statement as too optimistic, although the situation still indicates a slight increase in inflation.

The forecast for US GDP growth for 2019 was increased by 0.1%, the forecast for unemployment − by 0.1%, which confirms the opinion of the majority of the Fed members on the achievement of full employment by the labor market. The Fed still expects inflation to return to asymmetric target of 2.0%, the need to increase the balance will be considered at the next meeting. Conclusion: in the event of a continuous infusion of dollar liquidity, the absence of new risks, de-escalation of trade conflicts and the prevention of a tough Brexit, the markets are ready to forgive the Fed for the lack of new incentives.

Apparently, Trump's failure in the 2020 elections is expected not only in China. For the first time, Powell ventured to respond to criticism after another round of abusive language on monetary policy. According to the head of the Fed, it is the president, with his tariff adventure, that is the main source of all the troubles of the world economy, which, according to the OECD forecast, will slow down to 2.9% this year.

There is no response from Trump yet, but today opens ...

  • The UN General Assembly, 23-27

Business meetings begin today, but the key point will be the performance of trump tomorrow. Trump's meeting with Iranian President Rouhani is not excluded, but tough US rhetoric may lead to escape from the risk. Also trump may announce the increase of duties on EU goods because of the decision of the WTO to subsidize Airbus.

On Wednesday at a meeting with Prime Minister Abe is scheduled to sign a trade agreement with Japan, but it may be overshadowed by the refusal of the US to neutralize duties on Japanese cars and auto parts.

  • Brexit

Some members of the EU has softened the rhetoric in the subject Brexit and the pound took this as a signal that European politicians agree to amend the agreement to exit. But the illegal publication of the document of the European Commission showed that there are no alternative proposals on the Irish border have Johnson there, and the new negotiations – an attempt to postpone the decision to the critical date. The lack of progress after the Congress, conservatives 2 Oct hard will make Brexit almost inevitable. The position of the European leaders clearly shows the rigidity in question «backstop», which is a ghostly idea to keep Britain in the EU. Comments after the meeting, Johnson and Merkel can trigger another panic wave of risk aversion with falling assets, with the participation of GBP and EUR.

  • USA-China

Beijing's hopes for a temporary trade agreement were offset by Trump, who said that he was only interested in a full long-term agreement. Recall that since September 20, the United States has exempted 437 Chinese goods from duties, but so far the period and extent of such benefits have not been announced. Now, representatives of China have left the United States ahead of time, canceling a trip to a farm in Montana, which was originally planned as a public relations event. It is not clear how this fact will affect the date of the main meeting, but the lack of progress in the negotiations on October 10-11 will lead to a new wave of increase in duties, which will surely bring down the stock markets.

Some more news − briefly:

  • NYSE today opens trading in Bakkt's «physical» bitcoin futures: a trader who holds a contract until expiration will be able to rely on the actual receipt of tokens. Bakkt is becoming a direct competitor to the Chicago Mercantile Exchange, which launched trading in settlement futures in December 2017. CME has announced plans to launch options on BTC in early 2020. So far, the main problem of the Bakkt platform is a small number of clearing companies that have agreed to serve the trading of these futures, in particular, Goldman Sachs does not plan to work with such assets.
  • The Arab coalition led by Saudi Arabia launched a military operation in northern Yemen. Trump approved the dispatch of US troops to enhance Saudi air defense, including the presence of a US aircraft carrier in the region for an indefinite period. This decision reduces the risk of an unexpected armed strike but can provoke Tehran’s allies into a wide regional conflict. The United States imposed additional sanctions against the Iranian National Bank, as well as against some Iranian companies that are used to conceal illegal financial flows.
  • The problem of Arab oil supplies is already having a devastating effect on global commodity flows. Saudi Arabia intends to import crude oil (in particular, from Iraq) to support its exports. Aramco is already looking for petroleum products on the market, including diesel, gasoline and fuel oil for domestic use, to preserve its raw materials for export. Also, the Saudis will have to change the quality of supplies in favors of low-grade raw materials, so the UAE and Qatar have already entered the market with additional volumes of premium grades, and the United States is ready to fill the shortage of light grades of oil.

This week we pay attention:

  • in the USA − inflation of consumer spending, PMI of industry and services, US GDP for the 2nd quarter, reports on the real estate sector;
  • Eurozone − PMI of industry and services, German IFO index, French consumer price inflation. Draghi will delight the markets with a discussion with the European Parliament today and a speech in Germany on Thursday. It is unlikely that a working meeting of the ECB will generate a new batch of insiders, as the EuroBank still does not have fresh ideas.

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Author: Lachlan Patel,
ForexChief Currency strategist