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By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Trade was again cautious on Thursday as a more risk-averse tone took hold, with participants continuing to closely monitor geopolitical news flow, and as the February US jobs report comes into focus today.
WHERE WE STAND – It’s been a long old week, so I’ll try to keep things short this morning.
Yesterday was a pretty risk-off day, with stocks surrendering most of the gains seen a day prior, and crude benchmarks rallying to fresh cycle highs, as participants continued to closely monitor geopolitical news flow.
I do worry, here, that I might be getting a little caught up in the very noisy intraday price action, which it must be said continues to provide little by way of concrete signal, either in terms of how participants are viewing the present situation, or how consensus expects things to evolve from here on in.
That said, what we see is still broadly in line with the second scenario I outlined yesterday, whereby markets consolidate for a time, chopping around current levels, as a ‘wait and see’ approach takes precedent for the time being. I would flag, though, the potential for some degree of de-risking and position squaring through today’s session, given how participants remain highly cognizant of the potential for weekend gapping risk.
There’s really not much else to add to that, in all honesty, not least considering that every asset seems to be taking its lead from energy prices right now, though that’s clearly not going to be a long-run driver of proceedings. On that note, though, I would flag how plenty of participants seem to be assuming that a more prolonged Middle East conflict will automatically led to higher crude prices. That’s not necessarily the case, especially considering that there is a world in which, regrettably, conflict continues, but the US provide insurance guarantees and/or navy escorts to ensure flows resume through the Strait of Hormuz. In fact, I’d wager there’s a decent chance that that’s where we end up, at least in the short-term.
Even if it might not seem obvious right now, there is probably a ‘Trump Put’ in here somewhere, especially considering that higher gas prices would be the worst possible political nightmare ahead of the midterms, where ‘affordability’ is already set to be a key campaign issue.
Setting that aside, I remain of the view that, as has often been the case in the past, this latest bout of geopolitical turmoil will be little more than a short-run impediment to risk taking, and shan’t mark a longer-term turning point.
As such, I still see equity dips as buying opportunities, while I’d also be a dip buyer in the precious metals complex, in addition to betting on further upside for the greenback. Not only should the buck attract haven demand in the present environment, but it should also find inflows if geopolitical noise were to fade, given how growth stateside should notably outperform that of peers through the year ahead. As much as these things ever can be, that feels like a ‘win-win’ view.
LOOK AHEAD – Thank goodness it’s finally Friday!!
While geopolitical headlines will likely again dominate the day, we do still have the small matter of the latest US labour market report to digest.
Headline payrolls are set to have risen by +55k last month, just under half the pace seen in January, while unemployment should hold steady at 4.3%, and average hourly earnings are likely to have risen 0.3% MoM/3.7% YoY, keeping in check any concerns over the risk of inflation proving persistent. That said, it seems difficult to envisage the jobs report materially moving the needle from a policy perspective, with the FOMC firmly in ‘wait and see’ mode for now, as well as from a market perspective, given that participants’ attention is very much elsewhere for now.
On that note, and as flagged above, I’d not be at all surprised to see positions squared up, and risk exposures trimmed, as we move into the weekend. That, in turn, is likely to take precedence not only over the jobs report, but also the January US retail sales figures, and a whole host of Fedspeak that we get before the pre-meeting ‘blackout’ period starts at close of play.
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