Action Insight

Sterling ended last week as the weakest major currency. The Conservatives' losing of majority in the parliament created much uncertainty on politics, economic policies and Brexit negotiation. While the selloff in the Pound was steep, it's so far holding on to key support level against Dollar, Euro and Swiss Franc. And it seems like traders are still holding some of their bets to watch the developments in near term. Euro ended as the second weakest major currency for the week as traders were not satisfied with the tiny hawkish move in ECB's language. And the general weakness in European majors also dragged the Swiss Franc.

China's headline CPI inflation accelerated to +1.5% y/y in May, from +1.2% a month ago. for the first 5 months of the year, CPI has stayed at average of +1.4%, amongst the lowest levels in history. Core inflation steadied at +2.1% in May. Non-food CPI moderated to +2.3% from 2.4% in April. Food inflation remained in contraction but the decline narrowed to -1.6% y/y in May from -3.5% in the prior month. We believe it was the low base that had helped improve the reading. PPI inflation continued to slow, falling to +5.5% y/y in May from +6.4% in April. Weakness in commodity prices is expected to weigh on PPI, sending it lower to around +5% in coming months.

Sterling stabilized a bit after the post UK election sharp fall. After suffering the election backslash and losing majority in the parliament, Prime Minister Theresa May visited the Queen at Buckingham Palace to get permission to form a new government. May emphasized that "what the country needs more than ever is certainty" and "now, let's get to work". The Conservatives is now expected to form coalition with Northern Ireland's Democratic Unionist Party. And both parties reached consensus to keep May in the position for now. But overall, May's political survival remains in question. And, there are five candidates identified who could fill the role of Prime Minister, including Boris Johnson, Philip Hammond and David Davis.

With 98% of the vote declared, PM Theresa May's Conservative Party would remain the biggest party with over 300 seats in the Parliament. However, Tories would highly likely fall short of majority. The disastrous scenario in our previous report materializes: A hung parliament is now inevitable. Yet, unlike the situation in 2010, Tories would find it very challenging to form a coalition government with other parties. The snap election not only has resulted a reduction in number of seats for Tories, but also has scrapped their majority status in the Parliament. This would only make the Brexit negotiation with the EU more difficult, even if Tories managed to form a coalition government.

Sterling tumbles sharply and broadly as the UK election is now very likely proved to be a serious blow to Prime Minister Theresa May and the Conservatives. While the Tories would still get the most seats, exit polls showed that it's going to lose majority and get only 318 seats, down -13 from prior parliament. On the other hand, Labour would probably set 267 seats, up 35. That means UK is now heading to a hung parliament and that is seen by many market participants as the worst case scenario. Much uncertainty would be injected into UK politics, economic policies and most importantly, the Brexit negotiation with EU. And it clearly showed that May's bold decision for a snap election has backfired and it's now even uncertain how long May will stay as Prime Minister.

ECB President Mario Draghi poured cold water onto hawks who had anticipated a more upbeat policy statement following recent improvement in macroeconomic data. However, the central bank downgraded the inflation forecasts for three years despite upward revision on GDP growth. The forward guidance was slightly less dovish with the reference "or lower" removed. Honestly, all of us understand that, at the currently exceptionally low (some are negative) interest rates, further rate cuts would offer little help to the economy. Notwithstanding expectations that the ECB would begin preparing the market over QE tapering, the central bank maintained the easing bias, reiterating the commitment to accelerate its monthly asset purchases if necessary. The single currency remains under pressure after dropping to a one-week low against the US dollar.

Euro dips mildly after ECB left monetary policies unchanged as widely expected. The central bank moved a tiny step by closing the door for further rate cut. But it leaves the door open for extending the asset purchases. Meanwhile, inflation forecasts were revised down as media reported earlier in the week. But that was offset by the upward revision in growth forecasts. Markets will now look into former FBI Director James Comey's hearing in Senate Intelligence Committee. At the same time, voters in UK are going to vote for their government. Exit polls are expected to be published at around 2200 GMT. By that time, hopefully, we will have a clearer picture on the results of the election, a landslide Conservative victory, a hung parliament, or a surprised Labour win.

Sterling is steadily in range as the latest poll on the eve of today's election showed that the Conservative could get an increased majority. According to ICM, Conservatives got a 12 point lead over Labour, 46 to 34. ComRes suggested a 10 point lead with Conservatives at 44, Labour at 34. YouGov said Conservatives got 42 and Labour got 35, 7 point lead. Meanwhile, Survation results showed Conservative at 41.3, Labour at 40.4, a mere 0.9 point lead. YouGov Director Anthony Wells said that "the seven-point Conservative lead is the same as at the previous election, but we think it is likely they will nevertheless be returned with an increased majority." But there is one key factor that analysts pointed out. The turnout of young voters is uncertain and they typically support Labour.

Euro dips broadly today as it's reported that ECB would downgrade inflation forecast in the staff economic projections to be published tomorrow. Bloomberg quoted unnamed source noting that ECB staff forecasts inflation to be at 1.5% in 2017, 2018 and 2019. That's quite notable downward revision from prior forecasts of 1.7%, 1.6% and 1.7% respectively. Weakness in energy price is seen as a major factor for the change. This will add to the case for policymakers to be have more patience regarding any stimulus exit. However, GDP forecast will be another thing that's closely watched for any upward revision. Based on March staff projections, Eurozone economy will grow 1.8% in 2017, 1.7% in 2018 and 1.6% in 2019.

Australian dollar surges broadly today as GDP grew 0.3% qoq in Q1, meeting market expectations, even though it's sharply slower than prior quarter's 1.1% qoq. But after all, it's the 103rd successive quarter, or 26 years, without recession. And it's now a new world record of a country without a recession. Treasurer Scott Morrison said that "the results demonstrate the continued resilience of the Australian economy:" Some analysts noted that the slowdown in Q1 showed that the economy is "tired". But Morrison blamed the weather for the slowdown in Q1 and argued that improvements would be seen ahead. He noted that RBA Governor Philip Lowe reiterated yesterday that he expects the economy to grow above 3% in the next couple of years.

Yen jumps sharply this week and is extending it's broad based rally today. There are a couple reasons noted in the markets for the move. The sudden escalation in tension in Middle East, between Qatar and other nations, is seen a a factor. The uncertainties over election in UK is another one. However, we'd believe Yen's strength is more concerned with the outcome of former FBI director James Comey and the impact on US President Donald Trump. And investors are getting increasingly impatient on the lack of progress in Trump's tax reform and economic policies. This is clearly seen in the sharp fall in US bond yields and persistent weakness in Dollar.

Geopolitical uncertainty in the Middle East lifted Australian dollar. A boycott over Qatar is expected to disrupt the country's exports, benefitting its rival, Australia, over LNG exports. Aussie, however, retreated on 'Tuesday, using RBA announcement as an excuse. The central bank reiterated that the global economy continued the "broad-based pick-up", suggested that the domestic economic transition from mining investment has "almost complete" and maintained a neutral tone on the monetary policy. Yet, it remained concerned that low household income growth would constrain consumption. We are skeptical over RBA's forecast that Australia's economy growth would reach+3% p.a. and cast doubt over how long it can refrain from cutting the policy rate further so as to prevent the property bubble.

Aussie stays in tight range today after RBA left cash rate unchanged at 1.50% as widely expected. The central bank also maintained a neutral stance and noted that "the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time." Regarding the economy, the statement pointed out that "year-ended GDP growth is expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the growth figures." But Governor Philip Lowe is optimistic that "economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent."

Sterling recovers mildly today as last Guardian/ICM poll showed that the Conservative is still having 11 pt lead over Labor ahead of Thursday's election. The poll showed that 45% of respondent would vote for Conservatives, unchanged from last week. Meanwhile, 34% would vote for Labour, up 1% from last week. FTSE continues it's negative correlation with Pound and trades mildly lower today, down -0.3% at the time of writing. Technically, 1.2925 minor resistance in GBP/USD and 0.8654 minor support in EUR/GBP will be watched for indication of strength in the Pound.

The forex markets are generally quite quiet today with many European countries on holiday. Nonetheless, Aussie is trading broadly higher as boosted by Chinese services data. Canadian Dollar also strengthens as oil price is lifted mildly by geopolitical news in Middle East. The greenback tried to recovery against Europeans and Yen but lost momentum in early European session. Meanwhile, Sterling showed little reaction to the terrorist attack in London as markets are holding their breath ahead of UK election. Services data are the main focus for today but markets will look through them to key events on Thursday.

Risk appetite in the global financial markets was pretty strong last week. DOW, S&P 500 and NASDAQ shrugged off the much weaker than expected non-farm payroll report from US and all closed at record highs. Strength was also seen in other markets with FTSE 100 in UK and DAX in Germany hitting records too. In Japan, Nikkei also closed above 20000 handle for the first time since 2015. The sharp fall in US yields following NFP argues that markets could be starting to bet on a relatively slower tightening path by Fed and that could be a reason for the strength in US stocks. Eurozone sentiments, on the other hand, was lifted by optimism on easing political risks and improving economic outlook. Meanwhile, UK stocks are riding on the weakening Pound, in particular against Euro.

Dollar dives sharply in early US session after disappointment from employment data. Non-farm payroll report showed only 138k growth in May, well below expectation of 185k. Prior month's figure was revised down from 211k to 174k. Unemployment rate, though, dropped to 4.3%, lowest since 2001. Average hourly earnings grew 0.2% mom, meeting expectation. But prior month's figure was also revised down from 0.3% mom to 0.2% mom. Also released, US trade deficit widened to USD -47.6b in April. Canada trade deficit narrowed to CAD -0.9b in April. Canada labor productivity rose 1.4% qoq in Q1.

Major US indices surged to new record high overnight as boosted by solid ADP job data. Positive sentiments also carry on in Asian session. DOW gained 135.53 pts, or 0.65% to close at 2114.18, a record close even if it's slightly short of record intraday high at 21169.11. S&P 500 rose 18.26 pts, or 0.76% to close at 2430.06. NASDAQ rose 48.31 pts or 0.78% to close at 6264.83. Both were also record close. Nikkei follows in Asia and is trading up 1.4% at the time of writing, at 20140. That's also the first time Nikkei tops 20000 handle since December 2015. Elsewhere, 10 year yield closed up 0.021 at 2.217 but was way off session high at 2.239. Gold struggled to find follow through buying above 1270 again and is back at 1262. WTI crude oil stays soft at around 48.

Dollar strengthens mildly in early US session as lifted by solid job data. The ADP report showed impressive growth of 253k in private sector jobs in May, much higher than expectation of 181k. Mark Zandi, chief economist at Moody's Analytics Inc. described the job growth as "rip roaring". And he noted "the current pace of job growth is nearly three times the rate necessary to absorb growth in the labor force. Increasingly, businesses' number one challenge will be a shortage of labor." Moody's helps ADP produce the report.

British pound volatility has recently increased, not only because the general election is approaching, but also because some opinion polls suggest a hung parliament. The latest YouGov/ Time voting intention survey shows that support for the Conservatives declined markedly to 42% while the Labours gained +3 points to 39%. The 3-point lead by the Conservatives is the narrowest since PM Theresa May has called for the snap election in April. The Liberal Democrats hovered around single-digit, the UKIP remained on 4% and votes for other parties are at 8% (from 7%). Converting percentages to numbers, PM May's Conservative Party, while remaining the biggest party, might lose as much as 20 seats, down from 330 to 310, in the upcoming general election. If the election outcome results in a hung parliament, it would be the second time since 1974, and the seventh time since the beginning of the 20th century.