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Video / 06 September 2017 at 8:10 GMT

From the Floor: After Harvey, beware of Irma — #SaxoStrats

  • • US equities fell by roughly 1% on Tuesday
  • • Hurricane Irma off the coast of Florida has driven up cotton and orange juice prices
  • • Gold resumes rally with support from numerous sources of worry
  • • Dovish Fed speakers kept USD soft, rates pressured
  • • Bank of Canada meets with market participants split on what to expect
  • • Bull run in Treasures, Bunds continues, but EM bonds also up
Saxo Strats banner
 By John Acher

US stocks fell about 1% on Tuesday, led by cyclicals, while gold and other commodities were supported by the threat of another powerful hurricane, this time dubbed Irma, off the coast of Florida.

"After Harvey and the impact on energy last week, we now have Irma approaching Florida,” says Saxo Bank's commodities strategy chief Ole Hansen.

Those worries drove cotton and orange juice futures higher because the storm has the potential to damage those crops, he says, adding, however, that it looks like energy assets will be spared this time.

"It looks like south Florida and Miami could avoid a worst-case scenario, but it is way too early to say," Hansen says. "It has been named the most powerful hurricane ever in the Atlantic, so one to keep an eye on."

Irma: Potentially Atlantic’s most powerful hurricane ever
Hurricane Irma

Source: National Hurricane Center, National Oceanic and Atmospheric Administration

Meanwhile, gold resumed its rally after closing the gap on Tuesday.

Hansen says numerous factors are now supporting gold: dovish comments from Fed officials, which sent yields lower, North Korea tensions, a stronger Japanese yen, weaker stocks, an isolated US president, Hurricane Irma, and "the list keeps getting longer."

"There is no short-selling appetite out there with all these drivers taking it higher," he says.

Fed officials Neel Kashkari and Lael Brainard issued dovish sounds on Tuesday, with Kashkari saying the past 18 months of rate hikes may likely have harmed the US economy in terms of wage growth, jobs and the inflation outlook.

With such dovishness in the air, the markets are not pricing in more than 50% chance of another Fed rate hike until September 2018 , says Saxo Bank's equities strategy chief Peter Garnry.

The Fed speakers' dovish remarks kept the dollar soft, but also kept the long end of the US yield curve going down towards the low of the cycle, says Saxo Bank's head of FX strategy John J Hardy. (Read also Hardy's latest FX Update here on TradingFloor.)

The Bank of Canada's policymakers meet on Wednesday, with the market near evenly split on what to expect, says Hardy. "It’s not just about a hike or no hike today, it is also about the guidance, [...] A slight majority is leaning towards a hike."

Weaker equities

The Dow ended down 1.1% on Tuesday, the Nasdaq lost 0.9%, and the S&P500 fell 0.8%.

The decline in US equities was led by technology, industrials and financials -- "so just what you would expect,” says Garnry. "When you have weakness in markets, it’s led by cyclicals."

In the current market environment, investors should be tilting their portfolios towards a more defensive stance, Garnry says.

One way to do that is by buying puts to limit the downside risk to a long equity portfolio from, for instance, further escalation of the North Korean crisis, as Garnry outlined in a bearish risk reversal strategy on Tuesday.

Yields down

The widespread uncertainty in the markets helped drive bonds higher and yields lower, with a bull run extending in US Treasuries and German bunds, but also with emerging-market bonds gaining.

"In fixed-income markets, we still see strong sentiment, especially in emerging markets,” says Saxo's fixed-income strategy chief Simon Fasdal.

"So definitely low yields for longer, and the market doesn’t see any threats from the ECB tomorrow," he says, referring to Thursday's meeting of the European Central Bank's governing council.

Hardy will hold an FX Update webinar today at 1330 CET (1130 GMT), and Saxo Bank's Georgio Stoev will hold an OptionsLab webinar on trading spreads with VIX options at 1600 CET (1400 GMT). Click here to join the webinars.

Florida orange grove
"A day without orange juice is like a day without sunshine," as the Florida 
Citrus Commission said. Photo: Shutterstock 

John Acher is a consulting editor at TradingFloor


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