With the lack of fundamentals on offer this week and central banks confiding FX moves to technical range trading, investors continue to feed off scraps looking for price vindication.
Global stocks remain on the back foot, pressured mostly by crude oil tumbling into a ‘bear’ market on concern a global supply glut will persist.
The yen has strengthened on haven demand while the pound weakens for a third day, trading atop of its April lows outright when PM Theresa May called a snap election.
The weakness in crude and other commodities is denting the Fed’s argument that weak inflation rates will be transitory, despite the domestic economy showing any signs of distress. Fixed income dealers are facing a ‘bull’ flattening treasury yield curve.
Note: Still to come on the Fed speaker list this week – Eric Rosengren, Robert Kaplan, Jerome Powell, James Bullard and Loretta Mester.
1. Stocks under pressure from commodities
A break lower in oil prices yesterday continues to weigh on global equity sentiment. Both Brent and WTI prices are testing 2016 September lows as technical pressure and continued skepticism regarding oil producers’ collective efforts to buoy the market.
In Japan, the Nikkei share average fell -0.5% overnight as a stronger yen (¥111.20) sapped risk appetite, while mining stocks underperformed as oil prices tumbled. The broader Topix fell -0.4% after climbing for three days to the highest level since August 2015.
In China, Shanghai equities advanced after MSCI Inc. added China’s domestic stocks to its emerging-markets index – the Shanghai Composite rose +0.5%.
In Hong Kong, the Hang Seng and the Hang Seng China Enterprises Index each fell about -0.6% on fears that MSCI’s decision to include more mainland China stocks to its EM index will threaten the financial centre’s role as a key global investor gateway to China.
Down-under, Australia’s S&P/ASX 200 Index slumped -1.6% to the lowest in four months, with resource names sliding at least -3%.
In Europe, regional indices trade lower across the board following on from weakness in the U.S yesterday, with falling oil prices said to attribute to the negative sentiment.
U.S stocks are set to open in the ‘red’ (-0.4%).
Indices: Stoxx 600 -0.6% at 379, FTSE -0.2% at 7459, DAX -0.6% at 12738, CAC-40 -1.0% at 5243, IBEX-35 -0.8% at 10666, FTSE MIB -0.3% at 20745, SMI -0.8% at 8956, S&P 500 Futures -0.4%.
2. Oil falls as bulls discount OPEC cuts, gold shines
Oil prices have entered bear market territory, pressured mostly by a market concern that nonstop production from U.S shale fields is overwhelming OPEC’s efforts to ease a global supply glut.
Libya, exempt from the OPEC-led output cuts, is pumping the most in four-years while oil stored on tankers has reached a 2017 high this month.
August Brent crude futures are down -12c at +$45.85 a barrel – yesterday it fell nearly -2% yesterday to their lowest settlement since November. U.S crude futures (WTI) for August are down -7c at -$43.44, having hit its lowest price since September on Tuesday.
Note: So far this year, oil has lost -20% in value, its worst performance for the first six-months of the year in 20-years.
API data (American Petroleum Institute) yesterday showed U.S crude stockpiles last week had dropped more than forecast. Gasoline and distillate inventories rose.
The market will take its cue from today’s U.S government report (EIA) on inventories at 10:30 a.m. EDT.
Note: OPEC and non-OPEC oil producers’ compliance with the output deal reached 106 percent in May. However, a number of producers – notably Iraq, Saudi Arabia and Russia – aggressively ramped up output in the run-up to the deal.
Ahead of the U.S open, gold prices (+0.2% at +$1,245.82 per ounce) remain better bid after hitting its lowest price in five-weeks yesterday, buoyed as global equities fall and the ‘mighty’ dollar eases from its one-month highs following crudes tumble. However, the possibility of another interest rate hike by the Fed this year is underpinning the ‘bearish’ outlook for the yellow metal.
3. Energy slide supporting bull flatteners
Lower oil prices have sent market-based inflation expectation readings to the lowest in eight-months. The 10-year breakeven rate – the yield premium to hold US 10-year product relative to the 10-year TIPS (Treasury Inflation-Protected Securities) – is at +165.6 bps, down -2 bps this week.
Note: The breakeven rate rose above +200 bps in January, but now it is drifting below the Fed’s +2% target.
According to the latest JPMorgan weekly client survey last week, investors are the most bullish on Treasury prices in more than two-months. The share of investors expecting ‘lower’ yields, or longs, has risen to +18% for the week that ended this Monday – that doubles the share a week earlier.
The share of those expecting ‘higher’ yields, or shorts, falls to +25% from +27% and those that are neutral holds a +57% share vs. +64% a week earlier.
Treasuries are generally in favor as the stock markets sells off. The U.S 10-year yield has shed -3 bps overnight to reach +2.155% – the curve continues to flatten, as the 10/30-year spread falls further to below +58 bps.
4. Pound remains under pressure
The flight from oil and into long-dated government bonds is benefitting the safe-have yen (¥111.20), while the USD is holding its own elsewhere, despite lower yields.
The EUR stands at €1.1147 after hitting a three-week low, while sterling remains in the firing line sliding back under £1.2600. It took a spill after BoE Governor Carney hosed down speculation yesterday that he might soon back higher interest rates, saying he first wanted to see how the economy coped with Brexit talks.
Note: The last time the pound visited these levels was back on April 18, the day when PM Theresa May called a snap election.
Elsewhere, commodity currencies are feeling the pressure from lower oil price – CAD (C$1.3287), NOK ($8.5505) and MXN ($18.2582).
5. Bank of Japan (BoJ) monetary policy minutes
Bank of Japan (BoJ) Apr 27 Policy Meeting Minutes noted that most members saw momentum towards price goal was not firm enough. Policymakers agreed that the amount of government debt purchases will fluctuate under its QE program, but don’t expect such changes to pose problems for its guidance on market operations. They expressed more optimism about exports and industrial production, but remained cautious on inflation expectations.
In his press conference, BoJ Governor Kuroda reiterated that the BoJ still had long way to go before achieving the +2% price target; price momentum warranted close attention.
He also reiterated the view that it was appropriate to continue with strong easing. The JGB’s yield curve has been moving in line with BoJ’s market operation.
