This week’s US earning inspired equity markets rebound is but a fleeting memory and has given way to the lurking reality of bubbling trade-tension, geopolitical unrest, Italy risk and a hawkish fed narrative. While the US markets have been somewhat insulated from China equity market meltdowns this year, that strong historical correlation that “when China sneezes the rest of the world catches the flu” is starting to take hold. But things could get worse as the Yuan depreciation train could be arriving at the station anytime soon. EIA Weekly Petroleum Status Report was a complete shocker sending Oil markets spiralling lower amidst some concerning development for Oil bulls.
With risk sentiment going into the tank and investors rehearsing worst-case scenarios around the asynchronous global growth sinkhole. Compounded by China contagion fears, there was hardly a bid to be found in New York markets. This significant price action and discovery suggests traders are no longer concerned about how high price will go but rather how quickly they will fall, as for today at least the bid on dip mentality has run for cover. Gold prices are for the time being are held back by the stronger USD. But the enormity of the significant tail risks around the US midterm elections, and escalating pockets of geopolitical angst still make gold appeal a favourable tail hedge against these escalations. Despite the FOMC minutes cementing the Feds rate hike view, the US midterm elections to pose a significant headwind for both the USD and US equity markets as such Gold should remain a favourable hedge over the short term.