Oil tumbles; market boosts bets of RBA cut; all eyes on Fed

Markets settled ahead of the Fed tonight

It was a settled night in global markets, overnight. There’s plenty happening in the undercurrents, but on the surface of things, trading was relatively subdued. It’d be a slight stretch to suggest it, however there’d be an element of truth to it: this is the calm before the storm as the market prepares for tomorrow’s US Federal Reserve interest rate announcement. Oil markets and geopolitics are still capturing attention, and nervousness remains about the chances of war in the Middle East. All-in-all, that hasn’t stopped a notionally positive day for financial markets. Stocks are generally higher, though bond yields have dipped once more, and currency markets are mixed.

Oil prices plunge on easing production concerns

The pockets of volatility, at least as it pertains to the big-traded markets, were mostly to be found in oil markets. The chances of a war in the Middle East is still growing, and investors are still trying to price in, roughly enough, the risk of that occurring. But the story overnight moving prices was the announcement from Saudi Aramco it sees production returning to 70% of full capacity by the end of the month. That quelled some concerns that the market could be in for a prolonged period of undersupply, and sparked a 5% sell-off in oil prices during Wall Street trade.

RBA Minutes captured local interest

As for the local news-flow in the past 24-hours, the RBA’s Meeting minutes took the limelight. The document more-or-less confirmed the central bank’s wait-and-see approach to rates, right now. Still, the tone of the minutes was largely judged to be more dovish than expected. The RBA emphasized it’s conviction that growth within the economy would likely see slightly softer labour market conditions. “Spare capacity” and subsequent sluggishness in wage growth and inflation would likely persist. Interest rates are likely to remain low “for an extended period” and would be cut again “if needed” – especially if softer global economic conditions keeps washing-up on our shores.

Traders see higher chance of RBA cut this year

Market participants saw the RBA’s commentary as a cue to boost-bets of another rate cut before year end. A cut was already, practically priced into interest rate futures markets – yesterday’s RBA minutes just solidified that idea. 25 basis points of cuts are baked-into market pricing by December. A better than fifty-fifty chance of a cut in November is presently priced-in to the market. That move gave the Australian Dollar a little kick-in-the-guts during Asian trade, which was already suffering at the hands of a slightly stronger USD, pulling-away from challenging the 69-cent level, to trade deep into the 68 cent handle this morning.

Australian stocks benefit from lower AUD and yields

The ASX 200 benefited from the drop in the Australian Dollar and Australian Government Bond yields following the RBA Minutes. The 10 Year Australian Government Bond yield fell by 5 basis points yesterday. The drop-in yields saw money track back into yield-sensitive sectors of the market in particular. Utilities and Real Estate sector stocks rallied over 1 per cent. The health care sector also did some heavy lifting, courtesy of a big rally in CSL. On the other side of the equation, the miners were the big laggards in the market yesterday, as commodity prices dropped on heightened fears of an economically disruptive war in the Middle East.

US Fed expected to cut rates – will it flag more to come?

Casting eyes ahead to the next 24-hours, and attention becomes firmly fixed on the US Federal Reserve. It’s currently meeting, and will announce it’s interest rate decision early tomorrow morning, our time. Interest rate markets are betting that it’s an effective certainty that the Fed will cut rates for the second-meeting in a row. As a result, market interest is going to be directed towards the Fed’s famous “dot-plots”, for some pretty explicit guidance about where rates ought to go in the year ahead. Traders are betting rates will be cut roughly 4 times in the year ahead. Markets are hoping the Fed’s guidance backs up this notion.

Fed likely to battle against high expectations

Arguably, that’s a pretty high bar for the Fed to meet. This is especially so, given that the Fed has form in trying to “keep its powder dry” when it comes flagging a full-blown monetary policy easing cycle. A bit like the ECB last week, markets could be in for a touch of disappointment, once again. Should it be so if the Fed is more “hawkish” than expected, markets could be in for a small-bout of volatility. The USD would likely spike. Bond yields would lift, and that would likely weigh on Wall Street equities. Of course, if somehow the Fed comes-out more “dovish”, the opposite would likely prove true.