US stocks remain near record highs; Oil hits 6-week high

Summary:

• S&P500 remains above 3000

• US core CPI Y/Y rises to 2.1%

• Oil hits 6-week high as Gulf tensions rise

• Branson warns GBP/USD could hit parity

The S&P500 remains near record highs this afternoon with the futures market currently trading above the 3000 handle after earlier coming within a whisker of its all-time high at 3007. Wednesday’s session was defined by the Fed, with both Powell’s speech and the FOMC minutes offering very little reason for investors to believe that he won’t deliver a rate cut this month. The Fed chair is set to testify again this afternoon at 3PM and even though there’s a good chance that the main market moving remarks have already been delivered there could be something new for traders to react to.    

One of the biggest economic releases of the week has seen a slight pick-up in US price pressures and this could present something of a headache for the Fed. The CPI Y/Y came in as expected at 1.6%, down from 1.8% previously but the core reading edged unexpectedly higher to 2.1% from 2.0% versus and expected 2.0%. While it isn’t a big increase it is an increase nonetheless and the data could be a concern for the Fed given that they are almost unanimously expected to cuts rates at their next meeting. 

There’s been further gains seen in the price of crude oil with international benchmark Brent hitting its highest level since the end of May, above $67, a barrel as tensions in the Gulf are escalating once more. Reports that Iranian boats attempted to impede a British oil tanker before being driven off by a Royal Navy ship has once more raised the spectre of a major disruption in what is a key choke point for waterborne crude.

 Roughly 20% of global oil flows through the Strait of Hormuz and any disruption around this key bottleneck could cause a rapid supply shock and send oil prices spiking back near the year-to-date high in the mid $70 region. The oil markets were already enjoying a solid week of gains, with Wednesday’s session posting an increase of more than 4%, supported by another large decline in US inventories and a softening US dollar. There seems to be a confluence of factors combining to provide a pretty potent cocktail for Oil at present and it would not come at all as a surprise if further gains lie ahead.

There’s been a bit of a bounce seen in the pound in the past 24 hours, thanks in part to a drop in the US dollar after the Fed reaffirmed their dovish stance yesterday. The GBP/USD rate has moved back above the $1.25 handle and while there is still plenty of pessimism around there is also a feeling that with a lot of bad news already baked in there could be a further recovery ahead. Leading the pessimistic voices today is Sir Richard Branson with the boss of Virgin warning that the GBP/USD would fall to parity if there is a hard Brexit. 

Unsurprisingly, there have been many calls for further declines in the event of a no deal Brexit, but a drop of 20% is needed for the pair to reach $1/£1 and this does seem a pretty extreme forecast. Despite his promises to deliver Brexit by 31st October there still seems to be significant hurdles for the likely next PM Boris Johnson to deliver on this, and as such these doomsday scenarios for the pound are still unlikely to manifest.