Tag: Bank of England (BoE)

Another Turkish Lira flash crash

Another Turkish Lira flash crash  

A busy start to the session dealing with yet another mini TRY flash crash as the bad Lira news continues to compound. Otherwise, global Forex and fixed income markets remain in neutral  overnight and predictably focused on the upcoming FOMC minutes

The Turkish Lira meltdown. As far as I can tell was little more than a liquidity crunch reminding the Efx space again just how weak liquidity is during less than ideal times. As usual, the predictably fall out from the TRYJPY carry trade  has kept my desk hoping this morning

President Trump was keen to remind us overnight that trade war is not about to leave the stage anytime soon declaring he is  “not pleased” with the results of China trade but sees them as “a start.” Which then triggered a subtle risk reversal on US equities leaving investors rudderless and prone  heading into today’s Asia session

Oil Markets 

Oil prices had taken a respite although their far-reaching implications across asset classes most likely contributed to denting equity sentiment when Washington suggested oil prices have gone too far. With US gas prices jumping to 3 dollars per barrel in the states ahead of peak driving season, the political backlash not to mention the likelihood surging oil prices will sap some momentum from the US economy has caught the US administrations attention. Which of course puts more focus on Vienna Group’s decisions on whether and when to increase production in response to the latest supply shocks from Iran and Venezuela

Gold Markets
The US dollar continues to drive the Gold bus as a short covering US dollar rally has tentatively lifted the gold bulls spirits. But the market remains mired in no man’s land as the break fo 1300 did create enough of a fire sale to shock gold market into submission. The markets will not shift to the FOMC minutes for inflation updates as any suggestion that the Feds do see a pick up beyond their 2% target could be interpreted bullishly for Gold which should find support as an inflation hedge

Currencies

EUR: challenging to avoid the excessive noise around the Italian political scene but the focus remains on the FOMC and ECB statement.

JPY: USDJPY is coming off rather aggressively this morning as more disclosures have been noted from PM Abe stemming from the Kake school scandal. Attention remains focused on the Nikkei which is cratering this morning and triggering some interday USDJPY stop losses below 110.75 in this mini-meltdown. Liquidity has been thin post TRYJPY meltdown, so this could be exacerbating moves, but we should expect some ” bargain hunting below 110.50 to keep the movement contained at least for the short term

MYR: Profit taking on the broader USD with US bond yields remain stable has improved local sentiment however the market is in desperate need of fiscal clarity, and this fact alone will hold foreign investors at bay despite some desirable levels on both bond and currency markets. Despite foreign investors shying the local markets, domestic funds have been significant equity buyers which continues to underpin domestic sentiment.

Italian Bond Yields Off Highs after Six Days of Selling

Italian government bond yields came off 14-month highs on Tuesday as the market paused after six days of heavy selling on concerns over the high-spending policies mooted by a potential coalition government in the euro zone’s third-largest economy.

The likelihood of a new Italian government being formed by the 5-Star Movement and the far-right League has pushed Italian 10-year yields up nearly 70 basis points since the start of the month, potentially making the debt attractive again for some.

“We’re in the realms of markets being very technical, and the fact that there’s no real news overnight is an opportunity for some to add a little to their positions,” said Mizuho strategist Peter Chatwell, though he cautioned against reading too much into the moves.

Italy’s 10-year government bond yield fell 2.5 basis points to 2.31 percent, well below the 14-month high of 2.418 percent hit in earlier trade.

The closely watched Italy/Germany 10-year bond yield spread hit 189.6 bps before settling at 182 bps, still wider than any closing price since June 2017.

Spanish and Portuguese yields also came sharply off the multi-month highs touched on Monday, dropping 8-12 basis points.

Yet they provide an alternative for Italian BTPs given the uncertainty around that country’s future, according to Mizuho analysts.

“We expect Spanish bonds to find demand as a BTP substitute, and see best value in the five-year sector on the curve,” they said in a note.

Italy’s M5S and the League have proposed Giuseppe Conte, a little-known law professor, as prime minister to lead the coalition, which many fear will boost spending and raise the country’s debt levels.

“Conte looks rather like a puppet for the 5-star and League leaders to push through their agenda,” said Commerzbank strategist Christoph Rieger.

He added that though the programme put forward by the two parties does not appear as radical as first rumoured, it is clear that Italy is now “clearly abandoning all fiscal restraint”.

The cost of insuring against Italian government debt souring was at its highest in 7 months with Italy’s 5-year credit default swaps (CDS) rising to 142 bps, according to IHS Markit.

Elsewhere, higher-grade euro zone government bond yields moved 1-4 bps higher as sentiment improved across markets, and European stocks rallied as well.

The yield on Germany’s 10-year government bond, the benchmark for the region, was 4 bps higher at 0.56 percent.

Reuters

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

Commodity currencies are beaming

 

Currency Markets 
The US dollar has given up some of its gains overnight as investors keenness for Greenbacks has temporarily abated. The shifting dynamics around trade and tariffs does give pause for thought as US dollar bulls are consolidating gains at a very tricky and treacherous junction for both the USD and US bond yields. After making some significant advances last week, USD profit taking was the name of the game in Monday NY session.

Commodity currencies are beaming on the back of surging Commodity Indexes as oil prices broke through last week high water mark. The de-escalation in the US -Sino tariff and trade has put to rest, temporarily albeit, some of the market biggest fears around a Global growth slowdown and commodity markets and prices are returning in vogue.

Also,  there’s the usual air of uncertainty with both May FOMC minutes and  April ECB minutes due this week. Trader’s will be more inclined not to get ahead of the curve before these releases.

EM currencies performed better overnight as stretched positions unwound and the bounce in oil prices provided some idiosyncratic benefits to petrol related currencies. However,  the common denominator in the EM space remains the stronger USD which could continue to run amok after the overnight profit taking inspired u-turn.

So far, the beginning of the week is  shaping up to be all about consolidating and gingerly contesting last week’s significant breakouts

Oil Markets

The markets positive take on “no trade war “and Venezuela political woes are driving Oil prices higher. The global condemnation surrounding the election of incumbent Venezuelan president Nicolas Maduro has as expected trigged the Trump administration to levee new sanctions on the debt-ridden country. Tightening the economic screws will severely cripple  Petróleos de Venezuela ability to export while making it virtually impossible for the country to acquire dollars.

Also, US secretary of state Mike Pompeo raised the Iran sanctions bar by promising to impose the “strongest sanctions in history” on Iran to bring it to the bargaining table for a new nuclear deal.

The effect of OPEC -Non-OPEC supply compliance and the US abandonment of the JCPOA has created ultra-tight supply conditions to the point where any hint of supply disruption will send oil prices soaring. Supply-side dynamics are apparently in the driver’s seat suggesting prices should push higher near term.

Equity Markets

Equity investors revelled as trade war fears have temporarily abated suggesting the parties are heading on a far more appealing approach than feared. But hope springs eternal that both superpowers can iron out a market-friendly bilateral trade agreement and at the minimum maintain, stay at the negotiation table until the more contentious trade issues can be ironed out. The fear is that the “no trade war “announcement is little more than kicking the can down the road., but only time will tell.

Gold Markets
Gold price movements continue to be as much as anything a USD trade. Gold prices moved off overnight lows on the back of USD profit taking. But from both a fundamental and technical picture the Gold bears continue to have the upper hand as bullish signals are non-existent. Given the resurgent dollar, a reprieve on the trade war front, equity markets stabilising and evaporated geopolitical risk premiums, the balance of risks suggests gold prices move lower over the near term.

Currencies

EUR: A bit of a mixed bag overnight with ECB’s Nowotny erring dovish but Italian Political risk premiums eased after Conte is said to be the next Prime Minister. However, given the Italian affair has little chance of a spill over into other peripheral debt and with the ECB already leaning very dovish with the first hike not priced until September 2019, the Italian risk should be of little influence on ECB policy.

JPY: After falling to move above 111.40 overnight, the dollar bulls turned more conservative without the support from higher US yields as 10 Year UST’s were little changed from last weeks levels

AUD: Strong Beta currencies are benefiting from the conciliatory actions on the US-China trade front as global equity markets soared and Wall Street has followed suit starting the week on a robust note. But the bullish case for commodities on the back of surging oil prices is building which is underpinning AUD sentiment.

MYR: We would typically expect USAsia to trade lower as the US dollar has taken a bit of a detour overnight. However, the Riggit remains vulnerable to the lack of insight into fiscal planning.  But markets levels look attractive from both a Bond yield and currency perspective not to mention surging oil prices, so we are left to surmise that once fiscal clarity is offered, we could finally see the Ringgit sentiment improve. I the meantime   EM Asia FX will remain susceptible to the stronger USD

A test of the breakouts

A test of the breakouts 

This week should be all about contesting and consolidating last week’s significant breakouts in 10 year UST, EURUSD, USDJPY and Oil Prices. And despite weekend inspired short-covering in US fixed income, we’ve seen a weekly close in US 10y above 3.05 %. And with the Baker Hughes rig count holding steady, the tumultuous trifecta of USYields, US Dollar and OIl prices, should get set to resume their upward trajectory.

While significant economic data fixtures will be far and few this week, markets will be inundated with central bank speakers, including four central bank governors (Fed Chair Powell, RBA Governor Lowe, Riksbank Governor Ingves, and BoE Governor Carney). Also, traders will navigate the May FOMC minutes, April ECB minutes and Riksbank Financial Stability Report.

The May FOMC minutes will be of particular interest after the markets shaded the May 2 FOMC meeting dovish. But with the market now slightly leaning to the four rate hike camp this year, any hawkish glean would raise that conviction and should propel the dollar to new yearly highs.

The latest statement on the China-US trade suggests both parties are happy to avoid the dreaded tit for tat escalation while working towards a more market-friendly bilateral trade agreement. But the intentional vagueness delivered by both parties statements suggests a great divide, but there’s a hint of a consensus, none the less, to bridge that gap. So given the possible worst-case scenario was avoided the market should view the latest trade discussions as a favourable and equity market should be in that happy place, at least for today

Oil prices

The US and China agreeing to no trade war will be positive for Oil prices given that the possibility of a full-out trade war would have dealt a significant blow to global growth.

The well documented dual supply disruptions from Iran and Venezuela continue to drive current sentiment. But with the pipeline constraints in the Permian Basin in focus and continuing to factor, the supply side dynamics suggest prices will remain firm through 2018. And throw in a positive demand fillip from a de-escalation of trade wars and prices could run higher for longer.

No change in US oil rig counts this week holding steady at 844 and about half of the heyday numbers of the Oct 2014 high, when oil was at $80. Suggesting no Monday morning downside test is in the offing

Gold Prices

Gold prices rebounded off weakly lows as the US dollar eased on the back of profit-taking ahead of the weekend. With geopolitical premiums getting exhausted, gold bulls are in search of the next significant catalyst. But, gold remains under pressure from the US dollar and utterly vulnerable to higher US bond yields which are showing signs of a strong topside breakout after the 10-year Treasury note yield hit 3.1 % overnight. The inflationary overtones from oil prices coupled with a strong US retail sales print have increased Fed rate hike expectations. This week FOMC minutes could be a key driver for near-term USD sentiment so we should expect Gold and the USD to remain relatively rangy head of the release

Currencies
The depth of USD appreciation in recent weeks has exceeded virtually everyone expectations. What started as a purge of long EURUSD positioning has manifest into a full USD bull. I think G-10 dealer will go AUD and JPY route to express stronger US dollar bias from a catch-up perspective. EURO could start to take cues from the USDJPY which could assert itself as the dominant driver near-term

JPY: With equities stabilised and 10y yields in the US breaking out of 3.05, USDJPY has arguably underperformed so we could see USDJPY lead the USD bulls to charge over the near term. Correlation with fixed income remains robust and UsdJpy touching 111.00 as US 10 year yields reached 3.125

MYR: Oil prices remain high but so too does political risk, particularly the discussion around GST and SST and how the Credit agencies will view the drop in budget finances
Also, the USD continues to firm against all Asian currencies, and this may be caused by US and China trade negations that will carry on tomorrow.

Outside of oil positivity, the negatives are building as   the USD could continue to grind higher near-term

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

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

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

Yields in focus , again

Equity Markets

Equity markets clung on, at least for today, to the easing of trade tensions on the back of President Trumps ZTE reprieve from potentially crushing sanctions. But with US yields again moving higher and the key 10 Year UST nudging above 3 %, it indeed took the wind out of equity investor sails. None the less, the major US indices managed to eke out a positive close despite giving up earlier gains.

Look no further than then the far-reaching inflationary implication of higher oil prices underpinning US yields. Higher oil prices will continue to create the bumpy ride on equity markets, And while supportive of the enormous Oil conglomerate constituents, the cause and effect of higher US interest will most certainly weigh on valuations over a broader market.

While comments from US ambassador to China are on various newswires and he says, “ The United States and China are still “very far apart” on resolving trade frictions. He adds,”China agreed to do a lot of opening up when they joined the WTO, but a lot of the promises were not fulfilled. We want a timetable. We want to see these things happen sooner or later,” he said. Suggeting the divide remains wide

Currency Markets

US fixed income continues to trade offered. German Bunds had bettered those moves after the tepid CPI print which held the dollar bulls back from re-boarding the USD bandwagon. Last week’s weaker US inflation print caused investors to increase their curve flattening positions, where they favour longer-dated Treasuries over shorter-dated issues But with US 10y revisiting the 3 % level, the USD dollar is opening the Asia session with a bounce in its step. But, Traders are decidedly mixed in G-10 flipping positions on a dime as the market continues to trade hypersensitive to US yields. And of course, since no one seems to have a reasonable handle on the trajectory of US interest rates, therefore currency markets remain muddled.
Oil Markets
Oil markets turned bid again on geopolitics. Yemen’s backed Houthis launched missiles at a Saudi Aramco facility, but perhaps the most significant flashpoint is violence that broke out on the Gaza Strip in response to the US’s inauguration of its Jerusalem embassy.

Which has triggered much discussion about the WTI-Brent spread (CLCO1 Index), which has plumbed into deeper negative territory

The gain for U.S. benchmark oil prices wasn’t quite as impressive with traders wary of OPEC’s ability to offset crude supply declines and growing U.S. production. However, the wideners could be part and parcel with Oil traders going through the ritualistic Monday tendency of testing the markets downside resolve by overplaying the jump in Friday rig counts.

But adding the overall bullish narrative are signs that global oil market continues to tighten as the monthly OPEC report suggests a very balanced supply and demand dynamic with stockpiles running a small 9 million barrels above the five-year average.

But in general, the market is wholly focused on the hornet’s nest in the Middle that is an accident waiting to happen.

Gold Prices

Gold prices remain tethered to the hip of the USD which continues to be the most dominating factor driving sentiment. Also, investors are erring on the cautious side ahead of tomorrow Retail Sales, as history has a way of reminding us never to understatement the purchasing power of the US consumer. A better than expected print would give the Federal Reserve more cause to raise interest rates would naturally push the dollar higher. But with US yields testing the 3 % level in 10 Yeas UST, rates are also weighing on Gold sentiment, this despite slightly wobbly equity markets and the abundance of geopolitical headline risk.

Malaysia

The political risk premium has tentatively evaporated after the markets opened and traded reasonably well yesterday on affirmative council appointments made at the weekend, the central bank backstop after BNM reaffirmed it would continue to ensure clean conditions prevail in onshore financial markets, and of course the tight MYR-BCO (WTI) correlation.

But investors are indeed not crashing the gates to increase economic MYR risk; instead, it was the placid open which caused bearish MYR bets along with pre-election hedges to unwind. But the positive Ringgit sentiment came on the back of the local supply where Malaysian dealers were comfortable selling dollars using the BNM as a stop-loss order. Even more telling were the local Pension funds which were on the bid (bond and equity markets) all day providing strong support levels.

At 3.95 the market continues to bake in ~.05 political premium on the back of the GST uncertainty and how the debt agencies perceived scrapping the unpopular tax. But in addition to the to the political risk, ultimately what does matter is the future direction of both the USD and US bond yields. Given the anticipated bumpy ride over the next few weeks, for some, there was not enough of a fire sale to comfortably re-engage the Ringgit, and it remains highly unlikely investors will chase the MYR higher until the all the government’s cards are on the table. Expect some consolidation today.

Currencies Views

EUR: The long and short of it. Interest rate differential continues to drive the bus. While the lower EUR does suggest the ECB would be more willing to raise interest rates sooner than later, members are very guarded with their language not wanting to ignite an EUR rally and traders starts tripping over themselves to get EURUSD topside exposure on a definitive policy shift.

JPY: Providing JPY colour for the past few weeks has been a copy and paste, so why change today. “While US fixed income remains, the primary driver suggesting USDJPY moves to 110 but without a spark on the US inflation front Please make me a believer!!