Tag: Federal Open Market Committee (FOMC)

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

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.

Fed Minutes to Drive Market as Trade Concerns Recede

The US dollar is mixed ahead of the release of the minutes from May’s Federal Open Market Committee (FOMC) meeting. The central bank held rates unchanged but there is almost 100 probability of a 25 basis points rate hike at end of the June 13 meeting. Commodity currencies were higher at the beginning the North American trade session only to fall as commodity prices gave way. Safe haven currencies rose after US President Trump said the June 12 Peace summit between North and South Korea could be delayed.

  • US Crude oil inventories expected to drop by 2.5 million barrels
  • UK inflation to remain steady at 2.5 percent
  • US 10 year bond yields were flat ahead of FOMC minutes

EUR Still on Backfoot due to Italian Politics

The EUR/USD lost 0.07 percent on Tuesday. The single currency is trading at 1.1783 ahead of the release of the notes from the Fed’s monetary policy meeting. The EUR is still struggling with the fallout of the Italian coalition. The latest from the union between the 5 Star Movement and the League is the nomination of Giuseppe Conte as prime minister. The lack of experience from the lawyer and academic did not inspire much confidence with the markets.



With rise of euro scepticism in the area the last thing needed was criticism from German economists who do not agree that the deeper integration proposed by French President Emmanuel Macron. 154 German economists criticized the call to protect the currency union and instead bring back the argument that economic reform is needed with member states who are struggling. Also opening the door to creating an orderly process for nations to exit the Union.

The economic calendar this week will not any major releases with mostly lagging indicators in the agenda. European producer managers index (PMIs) and the minutes fro the European Central Bank (ECB) meeting could offer some insight but investors are looking forward to more guidance from the central bank which so far has remained very quiet on what are its plans after the massive quantitive easing program runs its course in September.

Loonie Gets Commodities and Trade Boost

The USD/CAD appreciated 0.26 percent in the last 24 hours. The currency pair is trading at 1.2819 as the loonie bounced back during the Asian trading session from disappointing retail sales data on Friday and a long weekend after the Victoria Day holiday. Commodity prices rose as the USD rally ended after trade tensions eased with China. Strong commodities in particular oil prices boosted the CAD as well a strong signal the US is more open to trade negotiations as the fate of NAFTA remains to be decided. Energy prices could not maintain the upward momentum and West Texas Intermediate fell below $72 but geopolitics is keeping energy prices at 3 year highs.


usdcad Canadian dollar graph, May 22, 2018

The economic calendar this week will be dominated by the release of the Fed minutes. The market is pricing in a June rate hike and investors will scan the notes from the Federal Open Market Committee (FOMC) looking for further clues on the path of monetary policy. Fed members have supported two or more rate hikes this year. The Bank of Canada (BoC) is expected to hold its rate untouched in May at 1.25 percent after a string of soft data is not putting as much pressure as earlier in the year.

Core retail sales dropped by 0.2 percent instead of the 0.5 percent expected growth. Tuesday’s release of wholesales sales beat the forecast with a 1.1 percent gain and an upward revision to the previous 0.8 percent loss that now stands at –0.4 percent.

Oil Reaches 3 Year High on Supply Concerns

West Texas Intermediate is trading at $71.98 and trading near 3 year highs due to geopolitical events. The fundamentals of the energy markets call for a lower valuation as demand has not grown to levels that justify current prices. The Organization of the Petroleum Exporting Countries (OPEC) agreement with other major producers, most notably Russia, accomplish the goal of stability but it is now the uncertainty in the Middle East that drives price action.


West Texas Intermediate graph

Investors are aware of a risk that a rapid decline could come, but it could be achieved only if there is political stability in the region, a long shot at this point. Or if there are significant changes in how big oil producers not part of the deal react to higher prices. The US has slowly ramped up their production but with fundamentals only in the periphery at this time it could be some time before the market prices in higher oil production.

The situation in Venezuela and Iran could end up keeping prices at 3 year highs as supply disruptions have been the most effective factor dictating crude prices. Timing wise the start of the driving season in North America will be supportive as season demand rises.
Market events to watch this week:

Wednesday, May 23
4:00am AUD RBA Gov Lowe Speaks
4:30am GBP CPI y/y
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Meeting Minutes
Thursday, May 24
4:30am GBP Retail Sales m/m
7:30am EUR ECB Monetary Policy Meeting Accounts
Friday, May 25
4:30am GBP Second Estimate GDP q/q
8:30am USD Core Durable Goods Orders m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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

China to cut Tariffs on some Auto Parts and Vehicles

China’s Finance Ministry said that it will cut import tariffs on some vehicles to 15 percent, down from as much as 25 percent.

The announcement Tuesday also said that tariffs on some automotive parts would fall to 6 percent. The cuts will be effective from July 1.

The move signifies an attempt to open up the world’s largest auto market to international players. Discussion of a potential automotive sector tariff cut surfaced in April, and was mentioned in a speech by Chinese President Xi Jinping that month. It was also revealed that China would permit full foreign ownership of car makers in five years.

According to the Finance Ministry on Tuesday, the average tax on qualifying vehicles will now be 13.8 percent. Car parts to have import duties lowered include bumpers, doors and seat belts.

The European automotive sector was trading up just over 0.7 percent Tuesday morning, with German parts maker Schaeffler leading the way. Higher-end car makers could stand to benefit from the decision, given that less production for these models has shifted to China. Toyota’s Lexus could do well, given it currently does not make its cars in China and has not announced any plans to move manufacturing into the country.

BMW could also gain from the tariff cut. Previous analysis had suggested that the German auto maker would be hit by China’s implementation of import tariffs against the U.S. last month given that it builds a significant amount of its cars in the U.S. and then ships them to China.

The levy reduction sends “a strong signal that China will continue to open up,” a spokesperson for BMW said in a statement. “This will certainly benefit the customer and boost the market to an even more dynamic level,” it added. BMW also said that it would review its pricing in response to the news.

Meanwhile, a spokesperson for U.S. carmaker Ford said that the firm welcomed China’s announcement.

Chinese car imports rose 16.8 percent year-on-year in 2017, according to state-run news agency Xinhua in February, citing the China Automobile Dealers Association. Around 1.21 million vehicles were brought into the country.

A trade rapprochement?

Tension over a potential trade war between China and the United States has eased in recent days following talks between top officials.

Over the weekend Vice Premier Liu He met with Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross among others in Washington, discussing how China could buy more agricultural and energy products from the U.S. to ease the trade deficit.

President Donald Trump tweeted that China had “agreed” to buy “massive amounts” of additional agricultural commodities, calling the news “one of the best things to happen to our farmers in many years.”

The meeting also yielded wins for China, with news that previously planned U.S. duties on Chinese imports, which threatened $50 billion-worth of trade, had been suspended. It has also been reported that the two countries are close to securing a deal on Chinese software firm ZTE, which had been banned from selling in the U.S. due to its violation of American sanctions on Iran and North Korea.

In an interview with CNBC Monday, Mnuchin said that “meaningful progress” had been made with China. “This has been a trade dispute all along, it never was a trade war,” he added.

CNBC

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

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