Tag: Reserve Bank of New Zealand (RBNZ)

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.

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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.

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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

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.

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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.

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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.

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U.S Dollars Plight shaped by Trade Talks and Geopolitics

Monday May 14: Five things the markets are talking about

Last week was a light week on the economic data front as the market focused again on the continued outpouring of earnings reports and geopolitical news from Asia and the Middle East.

This week there are no central bank meeting scheduled, however, there are a number of moving parts that are expected to keep capital markets on their toes.

U.S and Chinese officials will meet in Washington for a second round of trade talks mid-week, after apparently making little progress in discussions in Beijing earlier this month. Also stateside, both Canada and Mexico are ‘not’ doing a convincing job in trying to downplay the urgency to reach a Nafta deal/outline this week.

Elsewhere, flash Q1 GDP data will be released for the Eurozone, Germany and Japan (May 15). In the U.K, it releases its April labour market report (May 15), while down-under we get Aussie employment data (May 16).

Stateside, U.S retail sales (May 15) and industrial production are due while we close out the week with Canadian CPI and core-retail sales (May 18).

In the Middle East, investors can expect this powder keg to remain a key focus with displays of aggression between Israel and Iran on the rise.

1. Stocks in the ‘black’

Global equities head higher on hopes of thawing trade tensions.

In Japan, the Nikkei share average rose to a four-month high overnight following sharp gains in cosmetics after better-than-expected earnings offset weak tech shares. The Nikkei ended +0.5% while the broader Topix rallied +0.6%.

Down-under, Aussie shares rose on Monday, carried higher by BHP hitting its highest in four-years. The S&P/ASX 200 index rose +0.3%. In S. Korea, the Kospi ended the session flat.

In Hong Kong, stocks rose for a six consecutive session and hit a more than seven-week high overnight, as Sino-U.S trade tensions eased. The Hang Seng index rose +1.4%, while the China Enterprises Index gained +1.6%.

In China, it was a similar story, easing trade tensions between Beijing and Washington gave investors the green light. The blue-chip CSI300 index rose +0.9%, while the Shanghai Composite Index rose +0.3%.

In Europe, regional indices trade mostly lower in a subdued session, however, there is one exception, the Swiss SMI trades slightly higher.

U.S stocks are expected to open a tad higher (+0.2%).

Indices: Stoxx600 -0.2 at 391.8, FTSE -0.1% at 7717.4, DAX -0.2% at 12972, CAC-40 -0.2% at 5532.3, IBEX-35 -0.2% at 10254, FTSE MIB -0.1% at 24127, SMI +0.2% at 9010, S&P 500 Futures +0.2%

2. Oil slips from multi-year highs as U.S rig count rises, gold higher

Oil prices eased from just shy of their four-year highs overnight as resistance emerged in Europe and Asia to U.S sanctions against major crude exporter Iran, while rising U.S drilling pointed to higher N. American production.

Benchmark Brent is down -40c at $76.72 a barrel, while U.S light crude oil is down -35c at +$70.35.

Note: Both oil futures contracts hit their highest levels in nearly four-years last week at +$78 and +$71.89 a barrel respectively, as markets anticipated a sharp fall in Iranian crude supply once U.S sanctions bite later this year.

U.S Iran sanctions is supporting China’s newly established crude oil futures, and may spur efforts to start trading oil in yuan rather than dollars. Since launching in March, Shanghai crude oil futures have seen a steady pick-up in daily trading, with daily volumes hitting a record +250k lots last week.

Note: According to Baker Hughes data on Friday, capping crude prices is U.S drillers adding 10 oil rigs in the week to May 11, bringing the total to 844, the highest level since March 2015.

Ahead of the U.S open, gold prices are a tad better bid on the back of a subdued dollar as the market considers the prospects of fewer interest rate hikes in the U.S this year. Spot gold is up +0.2% at +$1,320.80 per ounce, while U.S gold futures for June delivery is little changed at +$1,320.80 per ounce.

3. German Bund yields rally to a two-week high

The benchmark German 10-year bund yield has pushed back to a two-week high ahead of the U.S open and is set for the biggest daily rise in three-weeks, after the ECB’s Francois Villeroy de Galhau said the central bank could give fresh guidance on the timing of its first rate hike as the end of its bond stimulus approaches.

His comments have certainly caught the fixed income market flat footed in a relatively thin market and in a week where European corporate bond supply is expected to dominate sentiment.

The German 10-year bund yield has backed up to +0.60%, its highest level since April and up +4 bps on the day.

Elsewhere, the yield on two-year Treasuries has dipped less than -1 bps to +2.53%, the first retreat in more than a week, while the yield on 10-year Treasuries climbed less than +1 bps to +2.97%. In the U.K, the 10-year Gilt yield has advanced +2 bps to +1.467%.

4. Dollar under pressure

The EUR (€1.1978) is better bid heading into the U.S session, mainly due to dollar weakness, but also because Italy’s 5-Star Movement and far-right League have agreed to form a government.

Although there may be concerns about a government made up of anti-establishment parties, but should reduce for the time being any enduring risks of another Italian election and ongoing political impasse. However, follow-through price support for the single unit is expected to be somewhat minimal as the market awaits details on policy proposals and the name of Italy’s next Prime Minister.

GBP/USD (£1.3580) is edging aging towards the pivotal £1.3600 resistance. The market is looking to Tuesday’s U.K jobs data for guidance. A sustainable move above the psychological £1.3630 area could flush out weak shorts in the short-term.

Note: U.K average earnings for Q1 are expected to have risen +2.9% compared with a +2.8% rise in Q4, 2017.

Elsewhere, Bitcoin (BTC) continues to fall, down -4% to $8,357 in the euro session. Last week it lost -13% mainly due to criticizing comments from Warren Buffet and Bill Gates, and the fact that S. Korean’s biggest cryptocurrency exchange was raided by the regulators.

5. Banque De France – French growth to slow

Banque De France (BoF) expects the French economy to continue growing in Q2, albeit at the slower pace it set at the start of the year.

Q2 GDP will rise +0.3% on quarter, according to the central bank’s monthly survey of business activity that was conducted in April. At +0.3%, growth marks a slowdown from 2017 when the French economy accelerated sharply. In Q4 2017, GDP expanded at +0.6% on quarter.

Digging deeper, sentiment indicators for April inched down in manufacturing and services, with both falling to 102 from 103. In construction, the sentiment indicator declined slightly to 104 from 105. The long-term average for the sentiment indicators is 100.

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Loonie Looking For Further Gains

Friday May 11: Five things the markets are talking about

Yesterday’s U.S inflation data, which came in lower than expected at +0.2% vs. +0.3% m/m, has possibly removed some pressure from the Fed to step up the pace of monetary tightening. In the overnight session, the ‘mighty’ dollar has steadied after dropping the most since March on Thursday.

Global stocks have taken comfort in the fact that G7 central banks may not hike as fast as previously feared. Overnight in Europe, equities have erased some of their earlier advance, although regional bourses are heading for they seventh consecutive week of increases.

Elsewhere, U.S 10-year Treasury yields are holding below the psychological + 3% as U.S President Trump’s plan to meet North Korea’s Kim Jong Un has aided sentiment somewhat.

In commodities, crude oil prices are steady, heading for a second-week of gains after the U.S pulled out of the Iran nuclear deal earlier this week.

On Tap: Canadian employment numbers are due at 08:30 am EDT. Market is anticipating +18k new hire and an unemployment rate to stay steady at +5.8%.

1. Stocks mixed results

In Japan, the Nikkei share average rose to a three-month high overnight, supported by tepid U.S inflation data and easing concerns over the pace of Fed hikes. The Nikkei closed the day up +1.16% and has gained +1.3% this week, while the broader Topix rallied +0.98%.

Down-under, Aussie stocks eased overnight and joined China as the only Asia-Pacific markets that were lower. At -0.04% the S&P/ASX 200 still racked up a sixth-straight weekly gain, the strongest run in two-years at +0.9%. In S. Korea, the Kospi gained +0.55%.

In Hong Kong, stocks rallied overnight after data showed China’s industrial demand remains resilient even as trade tensions ratchet up with the U.S. The Hang Seng index rose +0.9%, while the China Enterprises Index gained +0.4%.

In China, stocks fell on Friday, but posted their best weekly performance in almost three-months, as interest towards Chinese blue chips continues to build. The CSI300 index fell -0.5%, while the Shanghai Composite Index lost -0.4%.

In Europe, regional bourses have opened mixed after several were closed for Ascension Day yesterday. Weaker commodity prices are keeping material stocks under pressure, while the healthcare sector is outperforming.

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

Indices: Stoxx50 -0.3% at 3,557, FTSE flat at 7,700, DAX -0.3% at 12,977, CAC-40 -0.4% at 5,524; IBEX-35 +0.1% at 10,258, FTSE MIB -0.1% at 24,015, SMI -0.2% at 8,970, S&P 500 Futures +0.1%

2. Oil atop multi-year highs as Iran sanctions tighten supply outlook

Oil prices are trading within striking distance of their four-year highs on Friday as the prospect of new U.S sanctions on Iran tightened the outlook for Middle East supply.

Benchmark Brent crude oil is unchanged at +$77.47 a barrel. Yesterday, Brent hit +$78, its highest since November 2014. U.S light crude is up +10c at +$71.46, having touched a 3-1/2 year high of $71.89 this week.

Currently, the global oil market is considered finely balanced, with top exporter Saudi Arabia and No.1 producer Russia having led efforts to curb oil supply to support global prices.

However, the U.S plans to reintroduce sanctions against Iran, which pumps about +4% of the world’s oil, after abandoning a deal reached in late 2015 that limited Tehran’s nuclear ambitions.

The market is anticipating that Iranian crude oil exports to start falling in the next few months and is expecting that Brent crude prices to trade atop of the +$80 handle.

Ahead of the U.S open, gold prices have eased a tad in range-bound trading as the dollar firmed slightly, with the market mostly brushing off a potential broadening of conflict in the Middle East. Spot gold is down -0.1% at +$1,319.61 per ounce. The precious metal is still on track to register a first weekly rise in a month. U.S gold futures, for June delivery, are -0.2% lower at +$1,320.20 per ounce.

3. Global sovereign yields slip

Investors are buying Euro bonds ahead of the U.S open, taking advantage of a rise in yields on the back of Italian political concerns, though Italian 10-year yields are still set for their biggest weekly rise in four-months.

Note: Increasingly likely that Northern League and Five Star will form an anti-euro, anti-austerity full on populist coalition in Italy. The League is reported as saying that leaving the E.U/EUR was not one of the priorities and this is giving the market some confidence to buy the dip.

Elsewhere this week, central bankers north and south appear to have become even more cautious as concerns over inflation and international trade cloud the global economic picture. The Bank of England (BoE) yesterday held rates against recent expectations and New Zealand’s Reserve Bank of New Zealand (RBNZ) said the official cash rate would remain at +1.75% for the foreseeable future.

The yield on U.S 10-year notes has declined -1 bps to +2.95%, the lowest in more than a week. In Germany, the 10-year Bund yield fell -1 bps to +0.54%, while in the U.K the 10-year Gilt yield fell less than -1 bps to +1.43%.

4. Loonie Looking For Further Gains

It was a quiet FX market overnight, with the U.S dollar consolidating its recent gains just shy of their multi-year highs after yesterday’s softer than expected inflation data.

USD/CAD is trading at its Euro session low at C$1.2746 ahead of this morning’s Canadian jobs report (+18k expected and an unemployment rate of +5.8%). This morning’s data is likely to shed light on whether the Bank of Canada (BoC) will raise interest rates on May 30 or at its subsequent meeting on July 11.

Note: Since the beginning of the year, the loonie has lost -1.5% against the U.S dollar and retreated the least against the ‘mighty’ buck since mid-April, when the dollar started to rise.

Despite trading briefly atop of its yearly lows this week (C$1.2997), many considered the CAD to still be undervalued compared with the U.S dollar. With oil prices unlikely to retreat rapidly due to tensions heating up in the Middle East and expectations remain that an agreement on a Nafta deal will ultimately be reached is certainly strong support for the CAD in the medium term.

EUR/USD is steady atop of €1.1920, despite the Italian political scene to likely see the Northern League and Five Star party form an anti-euro, anti-austerity coalition in Italy. Will the new Italian government makes good on their populists promises or will the realities of power water them down?

5. Aussie housing-investor credit slumped in March

Data down-under overnight showed that Aussie housing-finance approvals fell -2.2% in March from February, with the value of lending to housing investors down -9%.

Other housing data earlier this month already showed that Australia’s housing market is soft with sales at auction falling sharply and prices in retreat in places like Sydney.

Tighter credit standards, and some negative press for banks and their practices are being blamed for the shutting off of the credit taps.

Forex heatmap

U.S Dollar Rises on Higher Yields, EM pairs suffer

Wednesday May 9: Five things the markets are talking about

The threat of an increase in geopolitical tension in the Middle East is weighing on global sentiment just as concern spread over the implications of higher U.S Treasury yields and a stronger dollar.

Overnight, the ‘big’ dollar has rallied for a fourth consecutive session, pressurizing emerging-markets pairs and mudding the picture for commodities as investors digest President Trump’s announcement yesterday to walk away from the Iran nuclear deal.

Elsewhere, U.S bond yields again have penetrated the psychological +3% handle as the market prepares to take down another +$73B of new U.S debt product this week.

Global equities have produced mixed results, while most metals are trading under pressure.

1. Stocks ‘mixed bag’

In Japan, stocks fell overnight as global tensions flared after President Trump pulled the U.S out of the nuclear deal with Iran. The Nikkei ended down -0.4%, while the broader Topix was down -0.3%.

Down-under, Aussie shares ended slightly higher on Wednesday, as gains across a number of sectors following an optimistic budget were offset by financials. The S&P/ASX 200 index rose +0.26%. In S. Korea, the Kospi fell -0.24%.

In Hong Kong, stocks rallied, led by the energy sector after Trump pulled out of the Iran nuclear deal, sparking fears about global oil supplies. The Hang Seng index rose +0.4%, while the China Enterprises Index gained +0.3%.

In China, equities ended a tad lower overnight as losses in the financial and property shares outweighed gains in energy stocks. The blue-chip CSI300 index fell -0.2%, while the Shanghai Composite Index dipped -0.1%.

In Europe, regional indices trade higher across the board, trending upwards on the back of rising U.S futures following earnings and geopolitical events.

U.S stocks are set to open in the ‘black’ (+0.5%).

Indices: Stoxx600 +0.3% at 391.2, FTSE +0.6% at 7608, DAX +0.3% at 12953, CAC-40 flat at 5522, IBEX-35 flat at 10167, FTSE MIB +0.8% at 24328, SMI +0.1% at 8949, S&P 500 Futures -+0.5%

2. Oil jumps to highest since 2014 after U.S. quits Iran deal, gold lower

Oil prices have rallied more than +3% overnight, hitting a four-year high, after the U.S walked away from the Iran nuclear deal and announced the “highest level” of sanctions against the OPEC member.

Brent crude oil is trading at its highest in three-years at +$77.20 a barrel. The benchmark contract was up +$2.15 a barrel, or more than +2.8%. U.S light crude is up +$1.90 a barrel, or almost +2.9%.

Note: In China, the biggest single buyer of Iranian oil, Shanghai crude futures hit their strongest since they were launched in late March.

Iran is the third-biggest exporter of crude within OPEC, behind Saudi Arabia and Iraq. Walking away from the nuclear deal means that the U.S will re-impose sanctions against Iran after 180 days.

The oil supply/demand is somewhat currently ‘balanced’ and it could turn to a complete supply shortage. Nevertheless, Saudi Arabia this morning said it would work with other producers to lessen the impact of any shortage in crude supplies.

Note: Saudi Arabia has been leading efforts since last year to withhold production to prop up prices.

Ahead of the U.S open, gold prices are trading under pressure, atop of their weekly lows, as the ‘big’ dollar strengthened after U.S’s decision out of the Iran nuclear deal boosted energy prices and pushed Treasury yields higher. Trump said he would reimpose U.S economic sanctions on Iran that had been lifted under the 2015 agreement.

Spot gold has fallen -0.65% to +$1,305.16 an ounce, its lowest since May 3, while U.S gold futures for June delivery are down -0.6% at +$1,305.70 per ounce.

3. U.S yields back up to old territory

Stateside, today brings with it a +$25B auction of 10-year U.S notes and the market is waiting to see if the new bonds will carry a +3 % coupon for the first time in nearly seven-years.

Currently, the yield on U.S 10-year Treasuries has climbed +3 bps to +3.00% in the overnight session, the highest in two-weeks on the biggest increase in almost three weeks.

Elsewhere, in Germany, the 10-year Bund yield has climbed +1 bps to +0.58%, the highest in a week, while in the U.K, the 10-year Gilt yield has increased +2 bps to +1.444%, the highest in almost two-weeks.

In Sweden, Norway and Hungry, CPI data this morning came roughly in-line with expectations and any concerns of “prolong low inflation” seem to be abating.

4. Turkey’s CBRT makes its move

TRY ($4.2858) has reversed its earlier losses outright after their central bank (CBRT) this morning took additional liquidity measures in a move to prop up the currency. The CBRT has increased the daily amount of currency swap auctions from +$1.25B to +$1.5B. The sale position of forward foreign exchange auctions may increase from $5.3 billion to $7.1 billion by the end of June, the central bank said. President Erdogan would hold a meeting on exchange rates.

Note: The record high USD/TRY print was a tad above $4.37.

In Sweden, the krona (+0.80% to $8.7528) has rallied after April inflation data came in line with market expectations, up +0.4% m/m, and higher than last month’s +0.3% rise. EUR/SEK has fallen to a two-week low of €10.4102 from around €10.4635 beforehand.

Note: The krona lost ground between late January and early May after the Riksbank twice postponed a first rate increase in years due to the fact that the underlying inflation trend had turned lower.

Elsewhere, the Bank of England (BoE) could help boost the pound (£1.3531) if it raises interest rates tomorrow. However, the central bank has communicated before that a rate rise is not a given, which has led the fixed income market to price out a May rate increase. The consensus is for the BoE to stand pat, but most believe that a summer hike is in the works.

Similar to the Argentinian peso, Indonesia’s rupiah has fallen to a fresh 29-month low on worries about capital outflows from emerging markets.

Note: Argentina’s reliance on U.S dollar funding, coupled with the depreciation of its own currency is sending the country in to the all-too-familiar direction: financial turmoil.

5. French Industrial Production fell unexpectedly

Data this morning from France’s official statistics agency INSEE showed that French industrial production fell unexpectedly in March, reflecting a sharp manufacturing drop in the mining, energy and utilities industries.

INSEE said industrial production fell by -0.4% in March m/m, after rising +1.1% in February. The figure for the previous month had been revised down from a preliminary reading of +1.2%.

Note: Market consensus was expecting a +0.4% rise, with estimates rising from -1.0% to +1.5%.

Forex heatmap

Italian Politics Weighs on the Euro

Tuesday May 8: Five things the markets are talking about

Capital markets are back to full capacity after yesterday’s May Day celebrations in parts of Europe.

Euro stocks are drifting lower despite the broad advances in Asia overnight, while crude prices come under some pressure ahead of President Trump’s decision on the Iran nuclear deal at 02:00 pm EDT.

The ‘mighty’ dollar again has found some traction as Treasury prices steadied despite the amount of U.S debt supply hitting capital markets this week (approx. +$73B, 3-, 10- and 30- year bonds).

Expect oil trading to dominate proceedings today amid speculation the U.S. may pull out of a nuclear accord with Iran, escalating tensions in the Middle East and potentially disrupting supplies from OPEC’s third-largest producer.

On Tap this week: Nafta talks resumed yesterday – it remains a critical period for the tri-nations, and its no surprise that the U.S is still pushing a hardline. On Thursday, the BoE takes center stage with its rate announcement, while U.S inflation data for April is due the same day.

1. Stocks mixed results

In Japan, the Nikkei share average rallied on Tuesday as banking stocks found support while Takeda Pharmaceutical climbed ahead of news the drug maker had agreed to buy London-listed Shire. The Nikkei ended +0.2%higher, while the broader Topix gained +0.4%.

Down-under, Aussie shares ended mostly flat overnight, coming off a three-month high as investors attempted to reduce their exposure before today’s federal budget. The S&P/ASX 200 index rose +0.12%. In S. Korea, tech shares also lifted the Kospi index, which rose +0.4%.

In Hong Kong, stocks end higher as Sino-U.S trade war fears ease. The Hang Seng index ended +1.4% higher, while the China Enterprises Index closed up +1.5%.

In China, stocks posted robust gains overnight, amid hopes that resumption of Sino-U.S talks next week in Washington could help avert a trade war. The blue-chip CSI300 index rose +1.2%, while the Shanghai Composite Index gained +0.8%.

In Europe, the Stoxx Europe 600 Index declined after two days of gains, dragged lower by oil and gas companies and miners. In Italy, stocks have been the worst performers in the region as the country-looks set for new elections, while in the U.K; the FTSE 100 index has found some support as it reopened following a long weekend.

Indices: Stoxx600 -0.4% at 388.5, FTSE +0.1% at 7577, DAX -0.7% at 12864, CAC-40 -0.5% at 5506, IBEX-35 -0.2% at 10124, FTSE MIB -2.1% at 24027, SMI -0.4% at 8944, S&P 500 Futures -0.3%

2. Oil prices fall as market awaits Trump decision on Iran, gold lower

Oil prices have retreated from their four-year highs overnight as the market waits on an announcement by President Trump on whether the U.S will reimpose sanctions on Iran.

If Trump pulls the U.S out of the multi-nation agreement, Iranian crude exports will be hit, adding to tightness in the oil market.

Brent crude futures are down -67c, or -0.9%, at +$75.50, having jumped +1.7% to settle at +$76.17 in yesterday’s session. U.S West Texas Intermediate (WTI) crude futures have dropped -78c, or -1.1%, to +$69.95 a barrel. They settled above +$70 for the first time since November 2014 on Monday.

Investors will take their cues from today’s announcement at 02:00 pm EDT – dealers believe that if President Trump goes back to the 2012 sanctions, the estimated loss of -0.4m barrels a day of Iranian supply based would be ‘bullish’ for the commodity market.

Ahead of the U.S open, gold prices remain subdued as the ‘big’ dollar hovers around its four-month peak. Spot gold is down about -0.1% at +$1,313.20 per ounce, after closing marginally lower in the previous session. U.S gold futures for June delivery are unchanged at +$1,314.10 per ounce.

3. Chances of BoE rate hike this week fade sharply

A lack of a Bank of England (BoE) interest-rate rise on Thursday – previously widely expected – the resumption of Brexit negotiations, and a slowing U.K economy is expected again to put the pound (£1.3510) under renewed pressure. Many do not foresee a rate rise this year, while the last phase of Brexit negotiations are likely to raise new concerns.

Even PM Theresa May’s government has been able to cast some doubt over the timing, as too have U.K rate ‘hawks,’ who suggest that the recent set of soft U.K data also appears to speak against a rate raise anytime soon.

The yield on U.S 10-year Treasuries has decreased less than -1 bps to +2.95%. In Germany, the 10-year Bund yield advanced less than +1 bps +0.53%, while in the U.K, the 10-year Gilt yield has dipped -1 bps to +1.391%.

Also of note, it’s a busy week with U.S supply. There is a combined +$73B of 3-, 10-, and 30-year securities to be taken down by Friday.

4. Dollar trades atop of its four-year highs

The DXY dollar index is expected to trade between 92 and 93 for the time being, while USD/JPY (¥108.94) is expected to come under some renewed pressure ahead of today’s Iranian nuclear deal announcement. If President Trump does happen to pull the U.S out of the pact or say he wants a renegotiation, there will be a flight to quality by some investors.

The pound (£1.3510) is under renewed pressure ahead of the U.S open after U.K Secretary of State for Foreign Affairs Boris Johnson criticized a proposal for a post-Brexit customs arrangement, favoured by PM Theresa May. GBP/USD is last down -0.4% at £1.3502, partly also due to broad-based dollar strength.

Note: Techies believe that a drop below £1.3487 would mark its lowest since Jan.

EUR/USD (€1.1889) has not been able to sustain initial gains above the psychological €1.19 handle despite Germany having presented some decent economic data. Italian political concerns seemed to be weighing on market sentiment. President Mattarella has called for a neutral government to be in place until the year-end to put together a 2019 budget plan before any new election.

The loonie (C$1.2975) is under pressure outright, as investors remain unsure that higher oil prices will lead to additional investment in infrastructure in energy production. Higher crude oil prices have yet to convince investors that demand for crude will persist at levels that will make additional spending on more production economically sensible.

In emerging markets (EM), the Turkish lira ($4.2939) has slumped to a fresh record low outright. Yesterday’s tweak of the reserve option mechanism (ROM) by the central bank (CBRT), lowering the upper limit for the forex maintenance facility to +45% from +55%, in a bid to tighten lira liquidity, has done little to help the currency.

5. Australian retail sales stall in March

Data overnight from Australia showed that the retail sales report for March came in below expectations.

According to the Australian Bureau of Statistics (ABS), sales were flat in seasonally adjusted terms, coming in below the +0.2% gain forecasted by the street. February’s increase was left unchanged at +0.6%.

Despite the soft March report, annual growth in sales actually accelerated, lifting to +3.2% from +3% m/m, the fastest increase since July last year.

Digging deeper, cafes, restaurants and takeaways, at +0.8%, led the falls, but other retailing (+0.6%), household goods retailing (+0.3%), department stores (+0.5%) and clothing, footwear and personal accessory retailing (+0.2%) also fell.

Note: The result was almost the opposite to that seen one month earlier, hinting that record Chinese tourist arrivals in February may have helped to temporarily boost spending levels during that period.

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