Maximus Pressure or Circus Maximus
Both the S & P and Nasdaq fell overnight snapping the 5-day winning streak as the tech sector sags. But entering weeks end investors are taking another peek at the calendar and thinking that perhaps booking some profit is prudent in case politics gets messy over the next week or so.
There’s a high level of circumspection associated with this weekend’s G7 meeting as President Trump prepares to enter the G-7 lion’s den. Usually, a non-event for markets but with all the focus on escalating trade tensions amongst long-standing G-7 allies, there’s a good reason for investors to be chary as this meeting is unlikely to follow an orderly arrangement of discussion. Even more so as Canada and Mexico have retaliated against a range of U.S. exports and the EU has promised to do so as well.
Ultimatums and revelation around the upcoming Trump-Kim summit are spooking investors. The President reinforced his denuclearisation ultimatum to North Korea and is prepared to walk if 100 % compliance with his rigid demands is not agreed. My quants are busy entering the phrase ” maximum pressure” into the news reader algorithm as Trump promises to use these words if the meeting goes bad. Maximus Pressure or Circus Maximus, strap up as this could get bumpy.
Then there’s that small matter of the European Central Bank and Federal Reserve Board meeting’s which could be very crucial for the markets next tack.
The Fed is widely expected to announce an interest rate hike on Wednesday, but investors will be keying on forward guidance for clues if the U.S. central bank could raise rates a fourth time this year.
While Draghi’s lieutenants rolled out a well-orchestrated PR campaign leaving the market convinced the ECB would discuss the removal of QE at next week’s meeting. This news is hardly a watershed moment, but being so deprived of any hawkish ECB inference the markets will run take off running at any hawkish glean.
Oil Market
From a supply and demand perspective, oil markets are so finely tuned that any perceived supply disruption will send Oil prices surging higher.
Oil prices surged as concerns over declining Venezuelan production and exports escalated after a report was released that shipments were running a month behind. Also, suspicions regarding the disposition of OPEC-led producers to ease production limits at their upcoming June 22 summit also supported the rally. Iraq’s oil minister Jabbar al-Luaibi told Reuters that an output increase isn’t on the table at June’s gathering in Vienna
Oil traders realise that price at the time of the Vienna meeting will have as much to do with OPEC supply rebalancing act as global supplies themselves. So, oil traders continue to respect this $ 64-65 per barrel support level.
While oil prices may have seen their near-term peaks, it’s highly unlikely prices will collapse but rather OPEC, through gradual supply increases, will guide prices low enough so US consumers will not feel the pinch, yet remain high enough to benefit the industry going forward.
Gold Market
Gold prices have been very steady despite the lack of safe-haven demand. But the market is struggling to find a direction amidst a plethora of conflicting signals. While haven flows are tepid around 1,300 gold continues to remain bid on the dip as traders know we are little more than a spark away from igniting another risk aversion free for all. Also, the USD remains persona non- gratis as in the absence of the US tier one economic data, the USD is struggling to find a grip.
However, there are some significant events on the horizon none more so than the Trump-Kim summit which suggests trader’s angst will be running high as we approach June 12 and should attract some attention from gold hedgers.
But in general, as with most cross-asset classes, we remain in a wait and see mode ahead of the US Federal Reserve Board(Fed) and European Central Bank policy announcements next week. But since no one is expecting a hawkish shift from the Fed, this too could prove to be a blessing for Gold bulls.
Currency Market
EUR: The markets have shifted ECB expectations and have pared back of EUR shorts, almost as if Italy never happened. But be cautious of Draghi’s propensity to downplay QE reduction at the follow-up presser, which could prove to be a bitter pill to swallow going all in on the EUR at this stage of the game.
JPY: A bit of risk aversion playing into the equation as US 10-year yields collapsed to 2.88 % as some sizable bock order trades went through. The pair should continue to watch Bond yields and will likely be quite sensitive to next week’s FOMC and ECB outcomes.
AUD: Jittery risk assets are leading to some underperformance on FX high beta like the Aussie dollar. But continue to like the Aud higher via the NZD near-term.
Asia Market
With so much focus on Brazil overnight, it’s hard to know what to expect for EM Asia.
But Asia FX should be relatively isolated from these events
However, there’s a ton market chatter this morning around @TheTerminal headlines suggesting that China Trade surplus my narrow about 10% in 2018 and the PBOC may respond by cutting the RRR despite expected Fed hikes
Malaysia
There are a lot of competing narratives, and we saw the Asian currencies trade with a weaker bias despite the higher EUR (weaker USD). That tells me that local currencies including the MYR are debating how more hawkish ECB comments could feed through to Asia FX. But the stronger EUR will not hurt sentiment in the same fashion as a stronger USD. But this hawkish shift from the ECB was a sudden shift, so you see EUR MYR risk adjustment and hedging vs the likely change in ECB policy
MYR: The problem for the Ringgit, despite the obvious fiscal uncertainties, continues to be the lack of action on the bond markets.
