Insights and Analysis for Today's Markets

Market Overview

Major escalations leading to heightened uncertainty for the current world system–led by the Israel-Iran conflict, the Red Sea is now being blocked off actively by the Houthis, firing on over 80 vessels since the start of the conflict in Gaza. 

Just a few hours ago, the Liberian-flagged ship MV Groton was hit for the second time. This cargo ship was targeted by the Houthis, who claimed it had crossed into Pakistan waters near their port illegally.

Additionally, the Houthis have planted explosives on the oil tanker Sounion in the Red Sea, which was carrying about 1 million barrels of oil, risking a major oil spill.

The Houthis have announced that they will target all ships related to Israel, the U.S., and the U.K., including those owned by companies in these countries.

Will the U.S. and its allied forces remain passive and allow this to continue?

The U.S., along with its allies the U.K. and France, has launched Operation Prosperity Guardian to protect shipping lanes in the Red Sea. This operation involves patrolling warships and conducting defensive actions. For instance, U.S. Navy helicopters recently engaged and destroyed Houthi boats after an attack on a cargo ship, demonstrating a commitment to safeguarding international commerce.

The U.S. has stated that while it seeks to de-escalate tensions in the Middle East, it will not hesitate to protect the freedom of trade.

But for what reason?

If the Houthis continue their attacks and maintain their aggression, there will be significant implications for global trade. The impact could be profound on the world’s economy, especially for nations directly tied to the U.S. and its allies.

How so?

We can start with the obvious: there will be a surge in oil prices because the Red Sea, through the Bab el-Mandeb Strait, is a key transit route for oil and liquefied natural gas (LNG) from the Persian Gulf to Europe and North America. The potential blockade of this Strait could force a detour around the southern tip of Africa, the Cape of Good Hope, significantly increasing costs and shipping time.

Two things are significant here: costs and shipping time. This blockade will effectively influence global prices for imported and exported goods, lowering supply while increasing demand. In other words, inflation would be immediate. This is particularly troubling for those of us already exposed to high-inflation economies.

Furthermore, this conflict could prompt a larger response from the West. A response that may further the conflict in West Asia–where the name of the United nations is already tarnished.

A disruption in the global supply chain of this magnitude would undermine trust in the U.S. economy and raise doubts about its ability to maintain order in areas it is supposed to safeguard.

This doubt could then lead to questions that erode credibility and dissuade investors from other countries from trusting the U.S. economy.  The timing couldn't be worse, with U.S. elections already being questioned by its own people. What might other countries say? We’ll have to wait and see.

Certainly, this decline in trust and demand will likely drive up the prices of GOLD, which will quickly be followed by SILVER and the Franc. But will the Franc’s strength last? We’ll address that in the coming analyses.

In addition to that question, we must consider whether the Japanese government made the right move in hiking interest rates during a generation marked by instability, unease, and concerns about inflation.

What about the economies that responded early by cutting rates, like New Zealand and Switzerland? Today, we see heightened growth expectations for their economies in the coming year due to early stimulus. Will this confidence persist despite rapidly escalating tensions and conflict in West Asia?

What we do know right now is that this is not the end. This may very well be a coordinated and planned move. Alongside the rising tensions in West Asia, we are witnessing increased conflict between Ukraine and Russia, with Ukraine giving Russia more reason to retaliate after its successful invasion of Kursk Oblast.

There are also growing tensions between Taiwan and the Philippines against China. North Korea and South Korea a ticking time bomb that everyone is watching, waiting to see what will happen next.

Which begs the next question: What is their next move? Iran, Russia, China—those who seek to diminish Western influence over the world. If you may ask me, what is the next strategic move that they will make to increase their chances?

Well, we will have to examine the 16-month-old civil war in Sudan and South Africa in the next analysis.

MARKET ANALYSIS

GOLD - GOLD has stagnated and fallen as expected before the September meeting. Everyone is betting on the rate cut to happen but is waiting to see whether it will be a 25 bps or 50 bps cut. Many major data releases are set for this week to help determine the coming rate cut.

Our bias remains positive for GOLD, and we see this market as bullish.

SILVER - SILVER has fallen below 29.018, following the SHS formation visible on the H1 chart. This market may continue its bearish move as September approaches. We suggest taking advantage of this short-term opportunity, but with the appropriate system to ensure security between trades. Overall, we still view SILVER as bullish due to several fundamentals coming into play. However, until a major escalation happens, expect the markets to downplay SILVER’s worth, allowing for purchases at a lower price.

DXY - The dollar has recovered in anticipation of the rate cut. Traders are booking profits to allow entry at a better price. With that in mind, we are closely watching how the upcoming data releases this week will affect prices. If they show dovish results, we may see a sudden drop in prices or a significant lack of trading volume, as traders prepare for the expected drop at the September meeting. However, if a 25 bps cut occurs, it may support USD strength by bolstering economic expectations for further growth. In other words, the double bottom pattern we are currently seeing may represent the bottom for this quarter, leading into the final quarter of the year. What could change these strengthened expectations for the dollar? Several factors, including geopolitical tensions and election outcomes.

GBPUSD - The pound has completed the SHS pattern, with prices dropping and potentially heading towards 1.29966. However, we continue to expect rate cuts from the BOE. In the meantime, the spotlight remains on the upcoming weakness of the USD. Although we anticipate a possible spike in this trade before a continued decline in the pound’s strength, there is also the risk of Houthi attacks in the Red Sea, given the proximity to Israel. Conflicts and escalations in that region will require a response from the U.K. Additionally, the rising conflict between Ukraine and Russia adds to the uncertainty.

AUDUSD - The RBA is pricing in further weakness for the Aussie as the September rate cuts near for the FED.

The Commonwealth Bank of Australia predicts the Aussie could fall towards 67 cents if markets price in a 25 bp cut by the Fed in September. The National Australia Bank’s model estimate places the local currency near the top of its fair value.

“AUD/USD will be volatile this week in response to the release of key U.S. labor data... Overall, we expect the U.S. labor data to show resilience and encourage the market to price in a 25 bp cut, supporting the USD,” said Joseph Capurso, head of international economics at the CBA.

NZDUSD - The Kiwi remains steady even after the USD’s rebound. The growth of the Kiwi is notable, with prices holding above 0.62086. We anticipate further growth in this market but also see the possibility of a price drop following the expected FED rate cuts. There may be a single spike candle before a continued decline, but this will also depend on the overall outlook for the Kiwi.

EURUSD - The Euro is falling toward 1.10361 as France assesses its stance between Ukraine and Russia. Not much news is coming from this country, but we remain objective in our readings and expectations. We await further price action. However, we currently see increased bearish momentum, with prices completing an M formation. How long will this drop last? We’ll have to wait and see, but it could extend until the end of the final quarter of 2024.

USDJPY - There is a possibility that the Yen has found its bottom after completing a W formation. Prices are currently at 146.512, and the potential for further bullish momentum exists. With that said, we will wait to see how the next few candles play out, and depending on market expectations, we may anticipate further weakness for the Yen.

USDCHF - The Franc continues to show bearish momentum, with the current rise being called a technical correction. There is a W formation, but we question whether it will last in the coming days. However, the possibility that the bottom has been reached still exists, especially given the potential for rising tensions in West Asia, which could drive market expectations for a rise in the Franc.

USDCAD - The CAD remains stagnant at 1.34803, with markets pricing in increased demand for oil. However, current oil prices do not yet reflect this, as both Light and Brent Crude Oil futures remain low. Although we expect this to change soon, we view the current return as a correction.

COT REPORT ANALYSIS

CAD - STRONG (1/5)

CHF - WEAK (3/5)

GBP - STRONG (5/5)

JPY - STRONG (3/5)

EUR - STRONG (5/5)

AUD - STRONG (2/5)

NZD - STRONG (2/5)

USD - STRONG (5/5)

SILVER - STRONG (5/5)

GOLD - STRONG (3/5)

UST 10Y - STRONG (1/5)