The ‘mighty’ dollar has taken it on the chin in the overnight session, weakening for a fifth consecutive day, allowing the EUR to soar to its highest point in six-months on a hearsay report that U.S President Donald Trump revealed classified information to a Russian diplomat last week.
The time and effort that it taking for his administration to put out fires has investors questioning the President’s ability to deliver on his economic agenda.
Elsewhere, the surge in oil prices is boosting commodity currencies (CAD, MXN and NOK) even as concern grows over the strength of the global economy. Stocks are mixed.
In the U.S, today’s industrial production print (08:30 am EST) will provide useful insight into how the factory sector is performing.
1. Global stocks mixed results
Stocks opened the week upbeat on higher commodity and oil prices, with the S&P touching a new all-time high, before closing lower.
However, investors are growing increasingly wary as valuations look stretched and with the latest rally taking place in thinner volumes and led by just a few sectors.
In Japan, the Nikkei share average edged up +0.25%, drawing support from a sagging yen (¥113.61), while the broader Topix rallied +0.3%, paring an earlier gain of +0.7%.
In Hong Kong, China shares retreated -0.3% after surging +1.6% yesterday amid optimism over Beijing’s infrastructure spending program.
In China, the Shanghai Composite Index increased +0.7%, erasing an earlier loss, while the Shenzhen Composite surged +2.1%, the most in nine-months, while India’s Sensex rallied +0.5% to a new record.
In Europe, indices are trading mixed. The DAX hit a record high before pulling back, supported by Telecoms, while healthcare and automakers decline. On the FTSE 100, air transport and commodity prices are providing the early support.
U.S equities are set to open in the red (-0.1%).
Indices: Stoxx50 -0.1% at 3268, FTSE +0.4% at 7486, DAX -0.1% at 12799, CAC-40 -0.4% at 5394, IBEX-35 +0.1% at 10972, FTSE MIB +0.1% at 21714, SMI -0.2% at 9094, S&P 500 Futures -0.1%.
2. Oil rises on expectations output cuts, gold shines
Oil prices have extended yesterday’s gains this morning after top producers – the Saudi’s, Russia and Kuwait – supported prolonging supply cuts until the end of March 2018 in a bid to drain a global glut.
Brent crude oil is up +30c at +$52.12 a barrel, while U.S light crude (WTI) is +25c higher at +$49.10 a barrel.
Note: Both benchmarks have rallied more than +$5 a barrel since hitting five-month lows last week.
Global inventories remain high, and the output from other producers, especially the U.S is rising, which is keeping prices below the psychological +$60 some OPEC members would like to see.
OPEC and non-OPEC countries meet to decide policy on May 25 in Vienna.
Data last Friday showed that U.S energy firms added oil rig’s for a 17th consecutive week, extending a 12-month drilling recovery.
Note: Today, the IEA comes out with estimates of April OPEC production.
Gold prices (+0.4% at +$1,234.81 per ounce) are rallying for a fourth consecutive day as the dollar slides on signs of slower economic activity in the U.S which is denting dealers expectations of an aggressive string of interest rate hikes by Fed.
The Fed remains on track to hike rates next month; however, the odds have fallen to +70% from +83% on waning U.S inflation outlook.
3. Yields on the move, but beware
If and how the Trump administration delivers on its promise to boost the country’s growth rate may influence the pace by which the Fed drains easy money from the financial system.
If growth advances due to productivity gains, policy makers could keep interest rates “lower for longer,” but, if growth rises because it boosts demand without ‘higher employment or higher productivity,’ U.S policy makers could feel pressure to raise interest rates to prevent stronger inflation.
Nevertheless, last Friday’s disappointing U.S data (Retail Sales and CPI) has fixed income dealers trimming the odds for a Fed hike next month. Fed fund futures currently see a +70% chance of a hike, down from +83% pre data release.
The yield on 10-year Treasury notes have backed +1 bps to +2.34%, after dropping -6 bps Friday when the weaker-than-expected CPI report buoyed bond prices.
Elsewhere, yields on Aussie 10’s lost -5 bps to +2.59%. Benchmark yields in France and Germany rose +1 bps.
4. ‘Big’ Dollar sees red
The mighty greenback is under pressure from a number of sources – geo-political, economic and rate differential odds.
Ahead of the U.S open, Europe’s single unit hit a fresh seven-month high (€1.1050) on continued optimism following the election of new French President Macron.
Germany’s Chancellor Merkel is open to changing the E.U’s treaties to strengthen the region, voicing a desire to “develop and renew” their bilateral relationship. The EUR continues to face strong resistance around the €1.1060-70 area, however, through here the techies sees it open to €1.1125-50 area.
The pound was firmer, trading atop of £1.2932, as U.K inflation (see below) data topped estimates and remained above the BoE’s target for the third straight month.
But, unable to find the momentum to tackle the psychological £1.30 handle, has since reversed to test back below the £1.29 level. Fixed income dealers are pricing in a BoE unlikely to raise interest rates in 2017 or 2018. With the Fed on track to hike rates next month and the worries of tough Brexit negotiations with the E.U, sterling bears have their sights on a sub £1.28 in the short-term.
5. U.K Inflation, Euro GDP and trade data
In the U.K, April data this morning indicates that consumer prices rose at the fastest pace in over three-years (y/y +2.7% vs. March +2.3%).
This may suggest that the U.K is facing a living-standards squeeze as the country heads into a general election (June 8) and begins its exit from the EU.
Compared with March, prices rose +0.5%, slightly above market expectations.
In the eurozone, exporters enjoyed a record March, with sales of goods to buyers outside the currency area at an 18-year high. Despite imports also up on the year, the trade surplus widened to €30.9B.
Other data also showed that preliminary Eurozone GDP rose by +0.5% q/q, and +1.7% y/y for Q1.
