Oil
The Saudi regime has swiftly announced that the supplies
have been restored; the attack would not impact the production for September as
a whole. This swift action was perhaps to help Aramco valuations whose IPO has
been a source of anxiety within Saudi Arabia. The energy minister was changed a
fortnight back perhaps to expedite this IPO. At the same time Saudi Arabia did
not lose the opportunity to squarely blame Iran for the attacks. So we can say
for now that the oil supply shock fear is behind us as Brent trades at 64.50
levels. But will the Geo political tension between US and Iran increase; fanned
by Saudi Arabia (Iran’s arch enemy) and it’s motive to raise international oil
prices before it dilutes its stake in Aramco. On the other hand Trump seems to
have recently realized that international tensions are not helping his approval
rating and fired his hawkish security advisor; it is unlikely that Trump will
do a U turn on Iran within a week. With these factors in the backdrop geo
political uncertainties remain.
US-China trade war
Trump said yesterday that US-China trade deal could come one
day before the November 2020 elections. The President also stated that if the
trade deal comes in his second term it will be much worse for China. These
comments indicate that China is playing hard to get realizing Trump’s eagerness
to get a deal before next year elections. Next info on this story is due after
the first week of October when trade talks are likely to resume.
FOMC
Disruption does not seem to be FED’s motive so a rate cut
today is a foregone conclusion. What remains to be seen is where an incremental
rate cut chances for November which hovers at 67% currently moves to post
the FOMC. The FED is unlikely to be overtly dovish given that US data is still
relatively better (current quarter GDP tracking at 1.8%). The fact that
dovishness would indicate a lack of confidence and a self fulfilling prophecy
the FED would not want the near term rates to move lower which should underpin
the dollar.
US overnight rate spike
US overnight Repo rate traded at 10% yesterday on the back
of dollar shortage in the system. The trigger for this was the debt ceiling
respite that the US government secured on 1st August 2019. This
enables the US government to borrow more and shore up its cash balances with
the FED thereby sucking out liquidity from the system. This balance has
increased by almost $180 billion in the last 45 days. Historically these
balances can be expected to move towards $400 bn (Currently at $300bn) thereby
sucking out another $100 bn from the markets. But the FED can address this by
arranging for overnight Repos among other tools; it need not go for a QE to
address such liquidity concerns. Therefore at present the chances of this
overnight rate spike to spill over to the rest of yield curve looks limited.
USDINR
CNH and other EM currencies continue to trade weak which
should underpin USDINR. FII outflows continue at a steady pace. Geo political
uncertainties in the middle east is likely to keep markets tentative if not on
the edge. China and US are done wooing each other and it’s unlikely that there
will be another round of concession or appreciation bout in CNH before October
(if at all). USDINR should stay supported at 71.35 with 71.85 as an immediate
possibility. CMP 71.46, Range 71.35-71.65 for the day.
Regards
Saket Agarwalla
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