Tag: Bank of Canada (BoC)

Turkish Lira Collapse Continues

Wednesday May 23: Five things the markets are talking about

Geopolitical risks from Turkey to N. Korea, from China to Italy, have pressured global equities in overnight trade. U.S Treasuries, along with the ‘mighty’ dollar have found support, while crude oil prices dropped along with most commodities.

Yesterday, U.S President Donald Trump tempered market optimism over progress made in trade talks between the U.S and China and his historic summit with N. Korea taking place.

Elsewhere, market concerns over Turkey’s financial-market stability has driven the TRY ($4.8792) to successive record lows outright and is weighing on emerging-market (EM) currencies, while safe-haven currencies, like the yen and CHF remain better bid.

Later today, the Federal Open Market Committee (FOMC) will release minutes of its May 1-2 policy meeting (02:00 pm EDT), while the ECB follows suit tomorrow (07:30 am EDT). Also this week, a plethora of U.S debt sales adds to the busy agenda.

1. Global stocks bleed red

In Japan, the Nikkei share average suffered its biggest fall in two months overnight, as Trump comments again ignited worries about trade friction, hurting steelmakers and shippers among others. The Nikkei tumbled -1.2%, while the broader Topix skidded -0.7%.

Note: The Nikkei volatility index jumped to three-week high of 16.41.

Down-under, Aussie stocks fared better than most regional bourses after yesterday’s region-leading declines. Nevertheless, the S&P/ASX 200 recorded its fifth consecutive drop, the first since January. The index fell -0.2% as the energy sector slid -2.3%. In S. Korea, Samsung stock has been a noted laggard this month after its equity split. But they rebounded with authority overnight, making Korea’s Kospi a rare gainer. Following yesterday’s holiday, the index rose +0.3%.

In Hong Kong, stocks posted their biggest intraday fall in two-months overnight, pulled down by energy shares, which slumped after Beijing intervened to cool the red-hot coal market. The Hang Seng index ended down -1.8%, while the China Enterprises Index closed -2.1%.

It was a similar story in China, a slump in coal miners dragged the blue-chip CSI300 index down -1.3%, while the Shanghai Composite Index declined -1.4%.

In Europe, regional bourses have opened lower and have continued that trend over geopolitical concerns and weaker than expected macro data supporting risk-off trading. Lower commodity prices are dragging on material stocks, while energy stocks are underperforming.

Note: This morning’s major Eurozone PMI data is raising market concerns over the extent of the recent slowdown in the recovery – France, Germany and Eurozone readings all missed expectations.

U.S stocks are set to open deep in the ‘red’ (-0.6%).

Indices: Stoxx50 % at 3,538, FTSE -0.6% at 7,826, DAX -1.5% at 12,975, CAC-40 -1.3% at 5,566; IBEX-35 -1.6% at 9,973, FTSE MIB -1.9% at 22,778, SMI -1.1% at 8,842, S&P 500 Futures -0.6%

2. Oil prices slip on potential easing of OPEC supply curbs, gold lower

Oil prices have eased overnight as the possibility of higher OPEC output is weighing on the market, although geopolitical risks are expected to keep prices near multi-year highs.

Brent futures fell -37c, or nearly -0.5%, to +$79.20 a barrel, after climbing +35c yesterday. Last week, the global benchmark hit $80.50 a barrel, the highest print in four years. U.S West Texas Intermediate (WTI) crude have eased -21c, or nearly -0.3% to +$71.99 a barrel.

OPEC may decide to raise oil output as soon as next month due to worries over Iranian and Venezuelan supply and after the U.S raised concerns the oil rally was going too far.

Note: To date, OPEC-led supply curbs have largely cleared an inventory surplus based on the deal’s original goals.

Capping prices to a certain extent is the rising supply in the U.S, where shale production is forecast to hit a record high in June.

Note: API data yesterday showed that U.S crude and distillate stockpiles fell last week, while gasoline inventories increased unexpectedly.

Ahead of the U.S open, gold prices have slipped a tad, pressured by a firm dollar ahead of today’s FOMC minutes for May 1-2 meeting. Spot gold is -0.1% lower at +$1,289.71 per ounce. U.S gold futures for June delivery are down -0.2% at +$1,289.40 per ounce.

3. Sovereign yields fall

Italy continues to take center stage in the sovereign bond market as dealers focus shifts to the implementation of the coalition’s ambitious agenda and its potential ministers. Will the incoming government sully Italy’s relations with E.U?

Note: Italy’s government debt remains heavily dependent on support from the ECB’s bond purchases, and the country’s wider financial system is more closely linked to government debt markets than in much of Europe.

For German Bunds, the safety bid continues to gather pace as the Italian BTP sell-off spills over into the core market. Germany’s 10-year Bund yield has decreased -3 bps to +0.53%. The gap between Italy and Germany’s government bond yields has climbed to +192 bps, the highest in nearly a year – the spread has increased more quickly than at any time in the last five years.

Elsewhere, the yield on 10-year Treasuries has dipped -3 bps to +3.03%, the lowest in more than a week, while in the U.K, the 10-year Gilt yield has declined -5 bps to +1.523%.

4. The collapse in TRY continues

The collapse of the Turkish lira continues, with the currency proving vulnerable again overnight in thin trading. USD/TRY has rallied around +4% to a record high of $4.8522 ahead of the open after rating agencies sounded the alarm over plans by President Erdogan to tighten his grip on monetary policy.
The lira has fallen around -20% outright so far this month.

In the U.K, lower inflation (see below), is causing sterling to fall to a five-month low of £1.3346 against the dollar, although this partly also reflects dollar strength. Also, politics continues to play a role, with recent comments from a government official showing risks of a U.K leadership change have returned. EUR/GBP is up by +0.1% at €0.8778.

Note: With U.K inflation easing again m/m, the chances of a BoE interest rate increase any time soon are diminishing.

The EUR/CHF (€1.1611) cross continues to move away from its key level of €1.2000 (former SNB floor). The cross is again probing the lower end of its €1.16 area after testing the former floor only a few weeks ago.

5. U.K inflation at its slowest in 12-months

Data this morning showed that U.K consumer inflation was at its slowest in more than a year in April.

Consumer price inflation stood at +2.4% in the year to April, easing from +2.5% in March.

Digging deeper, according to ONS (office for National Statistics), falling airfare prices is contributing to cooling inflation. Airfares fell -0.2% on the month vs. a +18.6% rise in the same month last year. Also behind the softening was a slip in house prices in London.

Note: BoE Governor Carney told lawmakers yesterday that the bank might raise rates in “a few months.” Policymakers stood pat at their previous meeting as official data pointed to weak economic growth in Q1, 2018.

Forex heatmap

Canada: Wholesale trade, March 2018

Wholesale sales rose 1.1% to $62.8 billion in March, more than offsetting the decline in February. The motor vehicle and parts subsector contributed the most to the gain. Excluding this subsector, wholesale sales rose 0.2%.

Sales were up in four of seven subsectors in March. In volume terms, wholesale sales rose 0.8%.

In the first quarter of 2018, wholesale sales rose 0.5% in current dollars and 0.4% in constant dollars compared with the fourth quarter of 2017. For both current and constant dollars, this marked the eighth consecutive quarterly increase

Higher sales in four subsectors

The motor vehicle and parts subsector recorded the largest gain in dollar terms, with sales rising 5.0% to $11.8 billion, following three consecutive monthly declines. Lower sales in the other two industries within the subsector were outweighed by gains in the motor vehicle industry (+6.6%), where sales rose following five consecutive monthly declines. This was the highest sales level since the record high in September 2017 for both the subsector and the industry. Imports of passenger cars and light trucks were up in both February and March.

Sales in the building material and supplies subsector increased 3.4% to a record high $9.2 billion. Sales were up in every industry, led by the metal service centres industry (+9.4% to $1.9 billion). Related indicators including imports of metal and non-metallic mineral products and the Industrial Product Price Index for primary ferrous metal products and primary non-ferrous metal products also increased in March.

The personal and household goods subsector rose 0.6% to $8.8 billion. Gains in the pharmaceuticals and pharmacy supplies industry (+3.6%) offset declines in other industries.

Sales in the food, beverage and tobacco subsector declined for the second consecutive month, down 1.4% to $11.9 billion in March. The food products industry (-1.5%) accounted for most of the decline in the subsector.

Sales in the machinery, equipment and supplies subsector fell for the second time in three months, down 0.5% to $12.6 billion in March. The computer and communications equipment and supplies (-3.2%) and the construction, forestry, mining, and industrial machinery, equipment and supplies (-2.5%) industries led the declines.

On a quarterly basis, the food, beverage and tobacco (+2.0%) and the machinery, equipment and supplies (+1.8%) subsectors led the gain in the first quarter of 2018, their second consecutive quarterly gain. The gains in these subsectors were attributable to record high sales in January (food) and February (machinery).

Sales up in two provinces, led by Ontario

Sales were up in two provinces in March, which together accounted for 56% of wholesale sales in Canada. In dollar terms, Ontario contributed the most to the gains.

Sales in Ontario rose 2.5% to $32.8 billion in March, on the strength of higher sales in four of seven subsectors. This was the largest monthly increase for the province since January 2017. The motor vehicle and parts subsector (+7.7%) contributed the most to the gain, following five consecutive monthly declines. The building material and supplies subsector (+8.0%) also contributed to higher sales in Ontario with its second consecutive monthly gain.

In Saskatchewan, sales increased for the first time in five months, up 2.5% to $2.1 billion, on the strength of higher sales in three subsectors. The gain was led by higher sales in the miscellaneous subsector (+11.6%), following a 12.1% decline in February. The agricultural supplies industry contributed the most to the gains in the miscellaneous subsector.

Sales were down in Quebec for the fourth time in five months, declining 0.6% to $11.2 billion. Lower sales in the food, beverage and tobacco (-6.2%) and the building material and supplies (-2.5%) subsectors contributed the most to the decline. The food, beverage and tobacco subsector declined for the first time in 2018, while the building, material and supplies subsector decreased for the second time in three months. Despite the decline in March, sales in Quebec were up 0.1% in the first quarter of 2018, their eighth consecutive quarterly increase.

Following three consecutive gains, sales in Alberta declined 0.7% to $6.7 billion in March, led by the machinery, equipment and supplies subsector (-2.6%). This subsector has declined 4.5% in value over the past two months.

Inventories edge down in March

Wholesale inventories edged down 0.1% in March to $82.6 billion. Decreases in three subsectors, representing 32% of total wholesale inventories, were offset by gains in three other subsectors.

Inventories in the motor vehicle and parts subsector decreased 1.3% in March, accounting for the largest drop in dollar terms. The motor vehicle industry (-3.0%) was the sole contributor to the decline.

The personal and household goods subsector (-0.6%) decreased for the first time in 2018. Lower inventory levels in the personal goods industry (-6.1%) contributed the most to the drop.

Higher inventories in the building material and supplies subsector (+0.8%) were led by higher stock levels in the metal service centres industry (+4.6%).

Inventories in the miscellaneous subsector (+0.5%) rose for the fourth time in five months, led by the recyclable material (+16.0%) and agricultural supplies (+1.0%) industries.

The inventory-to-sales ratio decreased from 1.33 in February to 1.31 in March. This ratio is a measure of the time in months required to exhaust inventories if sales were to remain at their current level.

Stats Canada

Trade Ceasefire Supports Risk Assets

Tuesday May 22: Five things the markets are talking about

Markets traded mixed overnight, with global equities drifting and a number of risk currencies finding support as investors digest easing trade tensions and the latest comments from a plethora of central bank members.

The EUR (€1.1809) has found some traction as Italian bonds recover from a two-session slide as the market focuses on whether Italy’s president will veto the populist coalition’s plans to form a government. The pound (£1.3465) is rallying amid speculation over another U.K election.

On the geopolitical front, U.S President Trump meets S. Korea President Moon Jae-in in Washington to coordinate their approach to N. Korea, while Brexit negotiations are ongoing.

The Federal Reserve releases minutes of the central banks May 1-2 meeting tomorrow and a slew of U.S debt sales this week is expected to dominate proceedings.

1. Stocks mixed results

In Japan, stocks edged lower overnight, backing away from their four-year high print yesterday, with financial shares leading declines as investors booked profits on signs of an apparent peak in U.S bond yields. Both the Nikkei and broader Topix ended -0.2% lower, weighed down by financial shares.

Down-under, Aussie shares tumbled to a three-week low on Tuesday, led by banks following admissions of misconduct. The S&P/ASX 200 index fell -0.7%.

Note: S. Korea and Hong Kong exchanges were closed for holidays.

In China, Shanghai stocks erased early losses to end flat overnight, amid signs of easing trade tensions, after the U.S and China are said to be nearing a deal to settle ZTE controversy. The blue-chip CSI300 index fell -0.4%, while the Shanghai Composite Index ended flat.

In Europe, markets opened higher and have remained positive. Equities are catching up after the extended weekend. Higher oil prices is supporting the energy sector, while automakers are supported as China is said to cut import duty for cars.

U.S stocks are set to open in the ‘black’ (+0.2%).

Indices: Stoxx50 +0.2% at 3,580, FTSE +0.2% at 7,875, DAX +0.2% at 13,094, CAC-40 flat at 5,636; IBEX-35 +0.5% at 10,119, FTSE MIB +0.6% at 23,229, SMI +0.1% at 8,951, S&P 500 Futures +0.2%

2. Oil prices firm on supply worries, gold lower

Oil prices have rallied overnight on concerns that Venezuela’s crude output could drop further following a disputed presidential election and potential U.S sanctions on the OPEC-member.

Brent crude futures are at +$79.37 per barrel, up +15c, or +0.2%, from their last close.

Note: Brent broke through $80 for the first time since November 2014 last week.

U.S West Texas Intermediate (WTI) crude futures are at +$72.45 a barrel, up +21c, or nearly +0.3%.

The U.S has also toughened its stance on Iran, which could further curb the country’s crude oil exports and boost oil prices. They have demanded Iran make sweeping changes – from dropping its nuclear program to pulling out of the Syrian civil war – or face severe economic sanctions.

Note: Growing production of U.S shale oil could curb oil prices eventually and widen the price spread between WTI and Brent crude oil.

Ahead of the U.S open, gold prices have dipped slightly, hovering atop of this year’s low print in yesterday’s session as a firm U.S dollar nears its five-month highs and optimism in global markets curbed appetite for the precious metal. Spot gold is down -0.2% at +$1,290 per ounce. On Monday, it slid to +$1,281.76, its lowest since December, 2017. U.S gold futures, for June delivery slipped -0.1% to +$1289.8 per ounce.

3. Italian bond yields off highs after heavy selling

Italian government bond yields (BTP’s) have backed off from their 14-month highs as the market takes a breather after six days of heavy selling on concerns over the high-spending policies proposed by the 5-Star/League coalition in the eurozone’s third-largest economy.

Note: The likelihood of a coalition has pushed Italian 10-year yields up nearly +70 bps in May.

Ahead of the U.S open, Italy’s 10-year government bond yield has eased -2.5 bps to +2.31%, well below the 14-month high of +2.418% hit in earlier trade.

Note: The Italy/Germany 10-year bond yield spread hit +189.6 bps before settling at 182 bps.

Elsewhere, the yield on 10-year Treasuries increased +1 bps to +3.07%. In Germany, the 10-year Bund yield advanced +4 bps to +0.56%, the largest rise in more than a week, while in the U.K, the 10-year yield advanced +4 bps to +1.517%.

4. EUR may reverse losses if BTP-Bund spread narrows

The USD is consolidating just above its five-month highs, stalling as a higher U.S yield trend comes under pressure.

The dollar is reversing early gains versus the EUR and now trades lower, with EUR/USD up +0.3% at €1.1827. However, the market remains cautious on the Italian political situation. Italian President seems to be hesitant in confirming the proposed PM due to his lack of political experience.

USD/JPY is still flat at ¥111.02. Commodity currencies are also up against the dollar, with USD/CAD down -0.3% at C$1.2754 and AUD/USD up +0.3% at A$0.7604.

GBP/USD (£1.3473) has bounced back to approach the £1.35 handle. Hawkish rate outlook by BoE’s Vlieghe at his reappointment hearing is helping the pound recover. Vlieghe stated that he saw one to two rate hikes of +25 bps per year during the three-year policy horizon.

5. U.K’s CBI – Manufacturing pauses for breath in May

According to the Confederation of British Industry’s latest monthly industrial trends survey, U.K Manufacturing output was broadly unchanged in the three months to May and firms reported a further softening in order books (-3 vs. 2).

Digging deeper, the survey found that the volume of total order books fell to the lowest since November 2016, though orders remained above their long-run average.

Export order books held up better, having been broadly unchanged in recent months at a level that is also well above the historical average. Output was broadly unchanged in the quarter to May, the weakest performance since April 2016, but is expected to rebound over the next three months.

Note: Output grew in only 8 of the 17 sub-sectors, with the heaviest drag coming from the chemicals, and food, drink and tobacco, sectors.

Forex heatmap

Dollar Consolidates ahead of Today’s Event Risk

Thursday May 17: Five things the markets are talking about

Italian political uncertainty continues to dominate European domestic asset prices.

Since yesterday, Italian bond yields have ballooned on reports of a draft government program, penned by the proposed populist coalition, the introduction of procedures within the eurozone to allow countries to quit the euro. The draft copy indicated that Italy would ask the ECB to write off €250B of government debt.

For Euro supporters, the 5-Star Movement and League have said that their most recent discussions did not put Italy’s membership in the common currency into question.

Elsewhere, the U.S 10-year note yields have extended their advances, rallying through the key resistance at +3.1% as investors continue to adjust to an upbeat outlook for the world’s largest economy.

That aside, most of the markets efforts is now focused on trying to second-guess issues stretching from peace on the Korean peninsula to Italian populists forming a government and Sino-U.S trade talks in Washington today.

On tap: U.S jobless claims are due at 08:30 am EDT, while Chinese Vice-Premier Liu is expected in Washington for more trade talks.

1. Stocks gain some traction

In Japan, the Nikkei share average advanced overnight, following Wall Street, with financial stocks rallying on an increase in sovereign bond yields while tech shares attracted buyers after the yen (¥110.66) weakened. The Nikkei ended +0.5% higher, while the broader Topix gained +0.4%.

Down-under, Australian shares ended lower on Thursday as the country’s second largest bank went ex-dividend, though gains in materials and energy sectors helped limit the overall losses. The S&P/ASX 200 index closed -0.2% lower, the weakest level in over a week. In S. Korea, doubts on a N. Korea/U.S summit occurring have pressured stocks. The Kospi closed down -0.5%.

In Hong Kong, the benchmark stock index fell overnight as investors turned cautious as the U.S/China are set to resume trade talks today. The Hang Seng index fell -0.5%, while the China Enterprises Index lost -1.3%.

In China, stocks also fall on caution as Sino-U.S trade talks resume. The blue-chip CSI300 index fell -0.7% while the Shanghai Composite Index lost -0.5%.

In Europe, regional bourses trade mostly higher with a rebound in Italian stocks as well as talk the U.K plans to stay in the customs union after Brexit is helping to provide positive momentum.

U.S stocks are set to open in the ‘red’ (-0.2%).

Indices: Stoxx600 +0.1% at 393.4, FTSE flat at 7732.4, DAX +0.1% at 13004, CAC-40 +0.3% at 5583, IBEX-35 +0.4% at 10152, FTSE MIB +0.5% at 23851, SMI -0.3% at 8948, S&P 500 Futures -0.2%

2. Oil nears $80, gold prices lower

Oil prices have hit their highest level in four-years in the Euro session, with Brent crude creeping closer to +$80 per barrel as supplies tighten and tensions with Iran simmer.

Brent crude futures have rallied +32c to $+79.60 per barrel, while U.S West Texas Intermediate (WTI) crude futures are up +29c at +$71.78 a barrel.

The prospects of a sharp drop in Iranian oil exports in the coming months due to renewed U.S sanction continues to support oil prices on any pullbacks.

Global inventories of crude oil and refined products have dropped sharply in recent months due to robust demand and production cuts by OPEC. This scenario is expected to only get worse as U.S peak summer driving season nears – it should offset increases in U.S shale output.

Ahead of the U.S open, gold prices have erased their early gains overnight and are edging closer to its five-month low, hit in the previous session, as the dollar pared losses against G10 currency pairs and traded within sight of its 2018 peak. Spot gold has fallen -0.1% to +$1,288.65 per ounce, while U.S gold futures for June delivery are nearly -0.3% lower at +$1,288 per ounce.

3. Italy 10-year bond yield at two-month high

Future price action in Italian government bonds (BTP’s) will depend on the details of the program to be published by the League and the Five Star Movement and party rhetoric.

The 10-year Italian BTP yield has backed an aggressive +15 bps since yesterday and the spread over equivalent German Bunds has surged on a leaked draft agreement of the two parties in which they advocated for the write-off of +€250B in Italian debt and for the creation of a procedure to allow a country to exit the Euro. Ahead of the U.S open, the 10-year BTP yield is down -1.5 bps at +2.096%,

Elsewhere, the yield on 10-year Treasuries has increased +2 bps to +3.11%, reaching the highest yield in about seven-years on its fifth straight advance. In Germany, the 10-year Bund yield has rallied +3 bps to +0.64%. In the U.K, the 10-year Gilt yield has climbed +4 bps to +1.503%, the highest in more than three-months.

4. Dollar consolidates ahead of event risk

The USD is experiencing some mild consolidation of this week’s gains, but the ongoing marginal steepening of the U.S yield curve is working in favour of a stronger dollar.

EUR/USD (€1.1804) continues to hover atop of some key support levels as investors focus on Italy and on the formation of the next Italian government.

The GBP (£1.3492) rallied during the Asian session after reports circulated that U.K was planning to tell E.U leaders that it was prepared to stay in a customs union beyond 2021 – akin to a ‘soft’ Brexit. However, the report has since been refuted by a government spokesperson in the Euro session.

USD/JPY (¥110.66) has hit its highest level since late January aided by the rising of U.S bond yields.

Elsewhere, most EM currencies are little changed or only slightly lower against the dollar as U.S 10-year Treasury yields continue to rally. The exception is TRY, which is getting battered again. USD/TRY is last up +0.7% at $4.4448, although it has eased from yesterday’s high of $4.50. The consensus believes that without emergency interest rate increases USD/TRY is likely to move above the $4.50 level persistently.

5. Aussie employment on target

Data overnight showed that Australia’s jobless rate rose to a nine-month peak of +5.6% last month as more people entered the labor market, however, the number employed beat expectations with more full-time jobs added.

Overall, +22.6K net new jobs were added in April, topping forecasts of +20K. Digging deeper, full-time jobs jumped +32.7K.

While job growth topped expectations, the uptick in Australia’s unemployment to 5.6% in April is expected to worry the RBA as they continue to fret about low wage growth.

Forex heatmap

The trend is your friend.

The trend is your friend.

Currency Markets

There was an intense focus on Italy Wednesday thanks to speculation that its new coalition government would request that the ECB write-off the bank’s QE-acquired debt of EUR250bn. Panic ensued with the EURUSD plunging to 1.1760 before recovering after the report was denied.

But the Italian political noise proved to be little more than a distraction from the markets complete focus on US 10-year yields as investors continue to challenge their conviction on both the USD and the trajectory of US bond yields. But, what’s new with this picture as the market has been second-guessing the emerging bullish dollar narrative since Mid-April and missing out on 550 pips EURUSD  downside move

If the market continues to trade off US yields and diverging economic data between the US and EU, it’s hard to argue against the current direction in yields or the dollar. Forget the VIX the DXY is the new fear index if we consider the number of market cracks the dollar has exposed on its recent move.

On the US economic data front, the consumer remains the economy’s backbone, and if this robust trend in the retail space continues to build, factor in a bit of wage growth pressure and the US dollar will continue to move higher on the back of higher yields.

However, the Pound has firmed considerably on Brexit news breaking news from The Telegraph explains. “Britain will tell Brussels it is prepared to stay in the customs union beyond 2021 as ministers remain deadlocked over a future deal with the EU, the Telegraph has learned.” which has towed the EURUSD gingerly higher in early APAC trade

EUR:  With the EURUSD back above 1.1800, we’re at a make or break point for judging near term trader sentiment. Over the next 48 hours will be telling, as the bulls and bears jostled for position but provided the EURUSD can finish the week below 1.1850, that would suggest the bullish USD story remains intact. But a close below 1.1775 would be even more convincing

JPY: Similarly, a weekly market close above 110 indicates the near term USD rally continues. The correlation between rates feels right, and the USDJPY could be the best bet to express the USD dollar bullish bias near-term

AUD: It remains to confuse by not trading in line with US fixed income. And even more frustrating for the Aussie bears is the copper continues to sell poorly. After yesterday miss on the wage price index, a lot of buying emerged. Far much more than usual, suggesting some real cash interest on the dip possible from resting orders. ( Exporters??)
Oil Markets
Oil prices resumed their climb Wednesday after shrugging off Tuesday’s API data as investors turned focuses on the key Energy Information Administration report which highlighted an unexpected draw of 1.4 million barrels for the week to May 11. Of course, more attention will fall on EIA given that the API is a voluntary metric and, at times entirely off the wall, whereas EIA reporting is a mandatory industry regulation and the preferred metric for short-term investors. None the less, divergence in the reports will leave some investors scratching their heads as this week’s API data provided traders with more questions than answers.

With the dual supply shortcomings from Iran and Venezuela providing substantial support and given we’re not even in peak July driving season, at least for the short term, it’s hard to imagine Oil prices giving up too much ground especially on bearish inference from one of highly unpredictable US Oil inventory reports. Dips continue to look attractive in this environment.

Gold Markets
Gold remains under pressure from the US dollar and utterly vulnerable to higher US bond yields which are showing signs of a significant topside breakout after the 10-year Treasury note yield hit 3.1 % overnight. The inflationary overtones from oil prices coupled with a substantial US retail sales print have increased Fed rate hike expectations. As the trickle-down effects from US fiscal stimulus continue to show in the data, bond yields will move higher, but ultimately the positive data prints will leave a larger than life footprint on Fed members interest rate views and challenge the current dot plot scenario.
Malaysia Markets

Not unexpected the political noise, stronger USD and higher US Treasury yields continue to dent sentiment in local markets.  But given the higher US Bond Yields, I expect the USDMYR to grind higher over the short term in line with the broader USDASia basket.

 

Stephen Innes OANDA Head of Trading APAC

Canada: Monthly Survey of Manufacturing, March 2018

Manufacturing sales rose 1.4% to $57.1 billion in March. Higher sales at primary metal; aerospace product and parts; fabricated metal product; and the other transportation equipment industries were mostly responsible for the increase.

Overall, sales were up in 13 of 21 industries, representing 72% of the Canadian manufacturing sector.

The primary metal and aerospace product and parts industries post the largest gains

Primary metal sales rose 4.2% to $4.4 billion in March following a 4.4% increase in February. While the growth in sales in dollar terms was widespread, the iron and steel mills and ferro-alloy as well as the alumina and aluminum production and processing industries posted the largest sales gain in March.

In the aerospace industry, production rose 10.6% in March following a 4.0% gain in February. The depreciation of the Canadian dollar contributed to a rise in the value of sales and inventories. Most sales and inventories held in the industry are priced in US dollars, and both are key components in the calculation of aerospace production.

Sales were also up in the fabricated metal product (+4.6%), other transportation equipment (+37.4%) and wood product (+3.7%) industries.

These increases were partially offset by declines in the motor vehicle (-2.0%), machinery (-1.7%) and computer and electronic product (-3.4%) industries.

Sales up in seven provinces

Sales were up in seven provinces in March, with Quebec and British Columbia responsible for most of the total national gain.

In Quebec, sales rose 2.9% to $13.8 billion in March, mainly due to a 21.3% increase in the aerospace product and parts industry. Sales also rose in the primary metal; machinery; and fabricated metal product industries.

Sales in British Columbia increased 4.0% to $4.6 billion in March, following four consecutive monthly declines. The increase was largely attributable to higher sales in the wood product industry.

In Saskatchewan, sales rose 5.6% to $1.5 billion. Higher sales in the food industry (+27.7%) were responsible for the gain. Greater availability of rail cars in March allowed more food products to be processed and shipped, leading to higher sales compared with February. Excluding the food industry, sales in the province declined 1.4%.

Sales were down in Manitoba, Nova Scotia and Prince Edward Island due to lower sales of durable goods.

Inventory levels rise

Inventory levels increased 0.7% to $79.3 billion in March. This was the sixth consecutive increase in inventories, with 6 of 21 industries posting higher levels. The gains were attributable to the transportation equipment (+3.5%), chemical (+5.9%) and plastic and rubber products (+5.3%) industries.

The inventory-to-sales ratio declined from 1.40 in February to 1.39 in March. The inventory-to-sales ratio measures the time, in months, that would be required to exhaust inventories if sales were to continue at their current pace.

Unfilled orders increase

Unfilled orders rose 1.5% in March to $88.6 billion, a second consecutive monthly increase. The advance reflected a gain in the aerospace product and parts industry, up 2.4% to $47.1 billion, representing more than half of total unfilled orders.

New orders fell 0.7% to $58.5 billion, following a 7.4% increase in February. The decline in March was mainly the result of lower new orders in the aerospace product and parts; machinery; and the motor vehicle industries.

StatsCanada

Italian Politics Pounds Euro

Wednesday May 16: Five things the markets are talking about

Investors continue to grapple with worries around global trade, growth and geopolitics.

Overnight in Asia, equities dipped after N. Korea’s Pyongyang abruptly called off talks with Seoul, throwing a U.S/N. Korean summit into doubt, while surging bond yields stateside has re-energized market worries about faster Fed interest rate hikes that could curtail global demand.

Note: A cancellation of the June 12 summit in Singapore could see tensions on the Korean peninsula flare again. If talks do break down, President Trump may no longer feel that he needs to keep China content, which could escalate global trade tensions again.

In Europe, unlike its southern counterparts, stocks have opened a tad higher despite yesterday’s spike in yields, while the ‘big’ dollar is trading flat. Crude oil prices have eased a tad ahead of today’s EIA inventory reports (10:30 am EDT).

Also in Europe, the focus is on Italian politics as the two populist parties – Five-Star and league – negotiate a coalition. Leaked draft documents have pushed the EUR (€1.1796) to test new yearly lows.

On tap: China’s Vice Premier, Liu He, is expected in Washington this week for more trade talks.

1. Stocks mixed results

Asian markets produced some mixed results, carrying forth Wall Streets knocked sentiment from a spike in Treasury yields.

In Japan, stocks fell after Pyongyang called off talks with Seoul, throwing Trump’s U.S/N. Korean summit into question. Not helping equities was Japanese data indicating that their domestic economy contracted more than expected in Q1 (-0.6%). The Nikkei ended -0.4% lower while the broader Topix fell -0.3%.

Down-under, Aussie stocks bucked the trend with the S&P/ASX 200 advancing +0.3%, while in S. Korea, the Kospi struggled for traction, rallying +0.05%.

In Hong Kong, stocks barely changed on trade worries. Investors are waiting for news on a second round of U.S/China trade talks in Washington this week. The Hang Seng index ended -0.1% down, while the China Enterprises Index was unchanged.

In China, it was a similar story. The market waits for some positive news from the Sino/U.S. trade talks where both sides are believed to be still far apart. The blue-chip CSI300 index fell -0.8%, while the Shanghai Composite Index lost -0.7%.

In Europe, regional bourses trade mixed Indices trade mixed following the recent run up, as U.S futures rebound following weakness in yesterday’s session.

U.S stocks are set to open in the ‘black’ (+0.1%).

Indices: Stoxx600 flat at 392.3, FTSE +0.1% at 7735.4, DAX flat at 12973, CAC-40 flat at 5551, IBEX-35 -0.7% at 10132, FTSE MIB -1.2% at 23994, SMI -0.2% at 8975, S&P 500 Futures +0.1%

2. Oil dips despite OPEC cuts and Iran sanctions, gold higher

Oil prices fell overnight, weighed down by sufficient supplies despite ongoing output cuts by OPEC and looming U.S sanctions against Iran.

Brent crude futures are at +$78.22 per barrel, down -21c or -0.3% from the close. U.S West Texas Intermediate (WTI) crude futures are at +$71.03 a barrel, down -28c, or -0.4%.

Despite the dips, both benchmarks remain close to their four-year highs.

Expect investors to take their cues from today’s U.S inventory reports. Official U.S government fuel storage data is due for release by the EIA this morning (10:30 am EDT). The market is expecting the report to display ‘bearish’ results amidst higher rig counts and production levels in the U.S.

Ahead of the U.S open, gold prices have recovered some lost ground on short-covering after prices fell to the lowest level this year in yesterday’s session on surging bond yields and a stronger dollar.

Spot gold has rallied +0.3% to +$1,294.30 per ounce, after shedding -1.7% and marking the lowest price this year at +$1,288.31 on Tuesday. U.S gold futures for June delivery are up +0.2% at +$1,293.60 per ounce.

3. Italy 10-year bond yield at two-month high

Italian bonds have slumped as populists struggle to reach an agreement to govern, but core European notes remain stable.

The 10-year Italian government bond yield has backed up +7 bps to a two-month high of +2.027%. The draft program of the League and of the Five Star Movement – the two populist parties in negotiations to form Italy’s next government, has triggered the move.

A leaked draft version of the agreement shows the parties sought the creation of a mechanism to exit the E.U. They have called for the ECB to forgive billions of EUR’s in Italian debt.

Stateside, strong U.S retail sales and factory data yesterday has pushed the U.S 10-year yield through a key level to hit +3.095%, its highest yield in seven-years.

Elsewhere, Germany’s 10-year Bund yield has declined -2 bps to +0.63%, the biggest decrease in almost two-weeks, while in the U.K the 10-year Gilt yield has dipped -1 bps to +1.508%.

4. Dollar flat after sharp rise, EM currencies fall

Ahead of the U.S session, the ‘big’ dollar continues to hover atop of its five-month highs against G10 currency pairs, supported by yesterday’s surge in the benchmark 10-year Treasury yield above +3.05%.

EUR/USD (€1.1796 -0.31%) continues to trade within striking distance of some key support levels atop of the psychological €1.1800 handle. USD/JPY (¥110.14 -0.12%) is above ¥110 with the yen largely shrugging off data that showed Japan’s economy shrank more than expected in Q1, while the pound (£1.3472 -0.22%) has finally penetrated the £1.3500 handle.

Emerging market currencies are nearly all falling against the dollar, with the TRY and IDR rupiah taking the biggest hit. USD/TRY is up +0.5% at $4.4708 and USD/IDR up +0.5% at $14,103.

5. Euro area annual inflation falls

Data this morning from Eurostat showed that the Euro area annual inflation rate was +1.2% in April, down from +1.3% in March. A year earlier, the rate was +1.9%.

The European Union (EU) annual inflation was +1.4% in April, down from +1.5% in March. A year earlier, the rate was +2.0%.

Digging deeper, the lowest annual rates were registered in Cyprus (-0.3%), Ireland (-0.1%) and Portugal (+0.3%), while the highest annual rates were recorded in Romania (+4.3%), Slovakia (+3.0%) and Estonia (+2.9%).

Compared with March 2018, annual inflation fell in twelve Member States, remained stable in one and rose in fourteen. In April, the highest contribution to the annual euro area inflation rate came from food, alcohol & tobacco, followed by services, energy and non-energy industrial goods.

Forex heatmap

I’m a believer

I’m a believer

The promising US Retail sales data left a resound footprint on global markets as US consumers are loosening their purse strings, but perhaps more important from an investor perspective, the data speaks directly and plainly while providing a linear gauge of the trickle-down effects from fiscal stimulus. Indeed, green shoots start to emerge.

The UST 10Y closed above the critical and pivotal 3.05 % area which encouraged the dollar Bulls to hammer the EURUSD down to critical structural support levels. While the clearest dollar bull signal is from US 10y yields, but with trader humming the iconically cool ” I’m a Believer” this morning, there’s permanence building as waves of fresh dollar longs hit the books.

Oil Markets
Despite OPEC oil demand forecasts amidst China’s unquenching thirst for crude oil rising, bullish Asia sentiment seems to have gone off the boil after China reported weaker-than-expected investment and retail sales in April, muddying its economic outlook suggesting the domestic surge in refinery runs could be short-lived.

The stronger dollar typically causes a bit of indecision as investors usually back off from commodity risk when the US dollar strengthens.

The API reported a surprise inventory build for the week ending May 11 which caused some intraday long positions to cut risk.

But at the end of the day, Oil markets remain supported by the usual suspects, Iran and Venezuela and OPEC compliance suggesting Oil remains a buy on the dip.

Gold Markets

Gold finally succumbed to the $1300 level as the stronger USD dollar ran roughshod through COMEX gold overnight. But with Gold positioning on CFTC significantly reduced against much of the year, mirroring the money flows into the USD over the past month, there wasn’t a lot of market stress on the move from a flow perspective.

Shifting interest rate dynamics on the back of oil-driven inflation expectations with the stronger USD in tow suggests we could see an extension lower. But ultimately the longer term inflationary pressures, especially with real interest rates expected to stay historically low, gold should continue to find support. However.,logic suggests letting et the dust settle, as bullish signals have remained far and few between of late.
G-10 Currencies

EUR: The US retail sales number triggered a massive currency reaction on the back of UST 10 Y yields rocketing higher. While the market is tentatively finding support at the critical 1.1820-25 level, it’s hard to argue the current direction given the surging US yields which suggest we could print in the 1.17 handle sooner than later.

JPY: USDJPY soared as the US Treasury yield rally spotlight on the interest rate policy divergence between the Bank of Japan and the Fed. USDJPY rose from 109.91 at the NY open to 110.44. However, Yonhap reported North Korea is cancelling its meeting with South Korea for Wednesday and threatening to withdraw from its summit with Trump – all because of US-South Korea drills. Which has seemingly capped, at least for the time being, USDJPY upward momentum

Malaysia

The local markets are going through a period of inflexion. After navigating a potentially high-risk election, as investors are taking a well-deserved breather after coming out relatively unscathed.

But with the US dollar trading stronger across the EM Asia Basket and in G-10 space the Ringgit will struggle to make any inroads today Especially with the US 10 years UST surging to 3.08 overnight.

Investors are unlikely to flock back into the Ringgit end masse over the next week especially with the USD surging and US yields punching higher and oil prices off their latest high-water mark.

We should expect a bit of a bumpy ride over the next few weeks as soon as the government lays all their policy cards on the table. Yesterday Malaysia’s new Council of Eminent Persons briefed the public on its activities, but the main take away is that fiscal reforms will shade more towards cost cuts to offset GST removal at this stage and should be good enough to keep the prey Credit agencies eyes at bay for the time being.

Stephen Innes OANDA Head of Trading AOAC

Rate Differentials and Trade Fears Handcuff Capital Markets

Tuesday May 15: Five things the markets are talking about

Risk-off trading action and higher sovereign yields dominated capital markets overnight session.

Euro stocks continue to struggle for traction following Australasia mixed equity session as investors grappled with worries around global trade, growth and geopolitics.

This week’s U.S Treasury bond sell-off continues to deepen and is allowing the dollar to find support against G10 currency pairs on rate differentials. Crude oil prices are on the precipice of exploding higher.

In the U.K, data this morning showed that employment jumped, but strong wage growth remains elusive. While in Germany their economy cools a tad.

On tap: China’s Vice Premier, Liu He, is expected in Washington for more trade talks today. U.S retails sales are due at 08:30 am EDT.

1. Equities see ‘red’

In Japan, stocks pulled back from atop of their four-year highs overnight, hit by profit taking, although financials staged a rally on hopes of strong earnings for the sector. The Nikkei share average ended -0.2% lower, while the broader Topix was unchanged.

Down-under, Aussie stocks slide deeper into the close and ended more than a week of broad gains. The S&P/ASX 200 fell -0.6% to register only its fifth decline in 22-sessions. The index was driven down mostly by the resource sector. In S. Korea, more selling in Samsung helped the Kospi fall -0.7% – the electronics giant dropped -1.4% to a one-month closing low.

In Hong Kong, stocks snapped a six-day winning streak to end lower overnight, amid renewed fears of a Sino-U.S trade war and worries about China’s economy. The Hang Seng index ended -1.2% down, while the China Enterprises Index closed -0.8% lower.

In China, stocks ended higher on Tuesday, supported by optimism towards MSCI inclusion of 234 Chinese large caps – this has helped some investors to overcome worries about China’s economy and Sino-U.S trade war. The blue-chip CSI300 index ended +0.4% higher, while the Shanghai Composite Index closed up +0.6%.

In Europe, regional bourses trade little changed, following a plethora of earnings this morning and weaker U.S futures.

U.S stocks are set to open in the ‘red’ (-0.3%).

Indices: Stoxx600 flat at 392.3, FTSE +0.2% at 7725.4, DAX -0.2% at 12955, CAC-40 +0.1% at 5545, IBEX-35 -0.3% at 10229, FTSE MIB +0.3% at 24305, SMI flat at 8999, S&P 500 Futures -0.3%

2. Iran sanctions, tight supply send oil to new multi-year high, gold unchanged

Oil prices trade atop of their four year high this morning, supported by tight supply and planned U.S sanctions against Iran that are likely to restrict crude oil exports from one of the biggest producers in the Middle East.

Benchmark Brent crude oil reached +$78.60 a barrel, up +37c and its highest since November 2014. U.S light crude (WTI) is +5c higher at +$71.01 a barrel.

U.S crude continues to trade at a hefty “discount” to Brent due to the sharp rises in domestic production to +10.7m bpd, which has left the U.S market well supplied.

Note: World oil prices have surged by +70% over the last year as demand has risen sharply and OPEC has restricted production.

Data yesterday from OPEC showed that oil inventories in OECD industrialized nations in March fell to +9m barrels above the five-year average, down from +340m barrels above the average in January 2017.

Ahead of the U.S open, gold has been trading little changed overnight, buoyed by Middle East safe-haven demand with the upside potential restricted by a stronger U.S dollar and outlook for higher interest rates stateside. Spot gold is unchanged at +$1,311.51 per ounce. U.S gold futures for June delivery are down -0.5% at +$1,311.30 per ounce.

3. Sovereign yields back up

Behind the divergence of E.U/U.S interest rates has been the divergence of inflation. Last year, U.S inflation was +30 bps on top of the E.U in April, and 12-months on, the spread has widened even further to +120 bps.

Hawkish comments yesterday from some FOMC members have again helped to back up U.S 10-year yields above their psychological +3% handle.

Note: Fed fund odds indicate that U.S policy makers will raise rates three more times this year – they have rallied to +50%, up from +39% a month ago.

Other G7 sovereign yields have also being getting a helping hand from the Banque De France (BoF), whose governor, François Villeroy de Galhau, hinted that the ECB might raise rates next year.

Overnight down-under, the Reserve Bank of Australia (RBA) released their monetary minutes. Members agreed that it was more likely that the next move in the cash rate would be up, rather than down. However, RBA Deputy Governor Debelle sees “no pressure to raise rates” as the Aussie economy is on a slowly improving trajectory, but that doesn’t make a case for raising interest rates in the near term.

The yield on U.S 10’s has gained +1 bps to +3.02%, the highest in almost three-weeks. In Germany, the 10-year Bund yield climbed +1 bps to +0.62%, also the highest in almost three-weeks. In the U.K, the 10-year Gilt yield increased +1 bps to +1.482%.

4. Sterling pares losses despite wage growth miss

The ‘mighty’ USD is steady as market participants continue to focus on yields. The U.S 10-year yield has moved back above the +3% territory, again steepening the U.S curve, which is giving the greenback some support.

The EUR/USD (€1.1929) hovers near its four-month low as various European Q1 GDP data (see below) confirmed the anticipated deceleration in growth.

The pound (£1.3557) has pared most of its losses ahead of the U.S open after data this morning showed that U.K wage growth picked up further in March, though the currency’s gains are limited as the figures were in line with expectations (see below). EUR/GBP is at €0.8796, down from €0.8813 beforehand.

EUR/TRY (€5.2420) hit a new high after Turkish President Erdogan said he intends to tighten his grip on the economy and take more responsibility for monetary policy if he wins an election next month.

5. U.K wage growth disappoints, while German economy cools

Data this morning showed that U.K employers hired many more workers than expected at the start of 2018, but wage growth has yet to accelerate sharply – today’s releases will probably do little to alter the outlook for Bank of England (BoE) interest rates.

Employment in Britain rose by +197k during Q1. It’s the biggest jump in three years and far exceeding the +130k consensus. U.K average earnings growth ex-bonuses in Q1 was +2.9%, comfortably above the inflation rate of +2.5%. Unemployment also remained low at +4.2%.

Elsewhere, Europe’s largest economy cooled sharply in Q1 due to high levels of illness and labor disputes. Germany’s annualized growth rate slowed to +1.2% from +2.5% in Q4, 2017.

Note: Market expectations were looking for E.U Q1 GDP growth to decelerate, but, is the effect temporary?

Digging deeper, the “Beats” – Norway, Hungary and Poland and the “Misses” – Germany, Netherlands, Portugal Romania, Czech Republic and “in-line” was the Euro Zone.

Forex heatmap

China Data Flash

10:00*(CN) CHINA APR INDUSTRIAL PRODUCTION Y/Y: 7.0% V 6.4%E; YTD Y/Y: % V 6.7%E– Source TradeTheNews.com

10:00(CN) China Apr Fixed Assets Urban YTD y/y: 7.0% v 7.4%e– Source TradeTheNews.com

10:00*(CN) CHINA APR RETAIL SALES Y/Y: 9.4% V 10.0%E; YTD Y/Y: % V 9.9%E– Source TradeTheNews.com

A bit of a saw off on the critical CNY data dump with both Retail Sales and Fixed Asset spending missing the mark but Industrial Production surprising to the upside. Since Chin’s new wealth consumer will continue to spend, the IP increase suggests the economy remains steady. But the market was looking for more convincing data; and we’re seeing a bit of wobble on WTI/BCO and commodity markets in general.But given the Lunar New Year holiday effect, we shouldn’t get too much of a negative reaction