Capital markets are in a ‘wait and see mode’ now that the Fed (June 13-14) and the ECB (June 8) are all in a quiet period ahead of their key policy decisions.
The EUR, for now, remains contained on the assumption that the ECB may take a less ‘dovish’ tone – will the ‘single unit’ take flight if Draghi and company discuss dropping some of their pledges to ramp up stimulus?
Aside from central banks, most of investors’ attention this week has shifted to the U.K’s snap election and testimony from former FBI head James Comey on ‘Super’ Thursday.
Currently, U.K polls are suggesting that PM Theresa May might not be able to bolster her majority, while Comey’s testimony may offer clues to how the probe into the Trump campaign’s contact with Russian officials will impact the administration’s ability to push through its policy agenda.
The ‘mighty’ dollar trades atop of its eight-month lows with safe-haven assets in vogue, mostly supported by new geopolitical Middle-East concerns – gold and yen remain better bid while U.S yields trade near the lowest levels since November.
U.S data of late has done little to dissuade the market that domestic growth remains intact. Fixed income dealers are forecasting a more than +90% chance of a Fed interest-rate hike next-week.
1. Global equities under risk aversion pressure
The aforementioned geopolitical worries have taken its toll on global equities in the overnight session, a follow on from Monday’s modest losses on Wall Street.
In Japan, the Nikkei plummeted -1% pressured mostly by a strong yen (¥ 109.62) sapping sentiment. The broader Topix index fell -0.8% for the biggest decline since May 18.
Down-under, Australia’s S&P/ASX 200 Index tumbled -1.5%, the most in more than two-months and this despite the RBA standing pat on interest rates as expected (see below).
In Hong Kong, the Hang Seng Index rallied +0.3% while the Shanghai Composite Index slipped -0.1%.
In Doha, Qatari stocks plunged the most since 2009 yesterday after four U.S Arab allies isolated Qatar over its ties to Iran.
In Europe, indices trade slightly lower across the board, led by the Swiss SMI leading the decliners with notable weakness in the chemical sector. The Airlines are again the focus in the FTSE 100.
U.S equities are set to open in the red (-0.1%).
Indices: Stoxx50 -0.3% at 3570, FTSE -0.3% at 7506, DAX -0.4% at 12774, CAC-40 -0.3% at 5293, IBEX-35 -0.2% at 10867, FTSE MIB +0.1% at 20749, SMI -0.8% at 8976, S&P 500 Futures -0.1%.
2. Oil slides on Middle-East worries, gold shines
Concerns over the rift between Saudi Arabia and allies with Qatar continue to weigh on oil prices and undermine efforts by OPEC to tighten the market.
Saudi Arabia, the United Arab Emirates, Egypt and Bahrain closed all transport links with top ‘liquefied natural gas and condensate shipper’ Qatar, accusing it of ‘supporting extremism and undermining regional stability.’
Benchmark Brent crude is -15c a barrel lower at +$49.32, down around -8% from the open of futures trading on May 25, when an OPEC-led policy to cut oil output was extended into Q1 of 2018. U.S light crude (WTI) is down -15c at +$47.25.
Note: With oil production of about +620k bpd, Qatar is one of the smallest crude producers in OPEC, but some investors fear tension within OPEC could weaken its agreement to hold back production in order to prop up prices.
Some crude ‘bulls’ believe that inventories in the U.S may provide some near-term relief as we head in to the summer driving season, but the ‘bears’ counter this argument with continued growth in U.S production to weigh on the inventory discussion.
Ahead of the U.S open, gold is holding steady (+0.7% to +$1,289.19), hovering close to its six-week high print in Monday’s session, on weaker global stocks and amid dwindling expectations for aggressive U.S rate hikes this year.
3. Yields curves flatten on fear
The yield on the benchmark U.S 10-year is little changed in the overnight session; at +2.16% it’s trading atop its lowest level in more than five-months.
The subdued move in the bond market reflects investors’ hesitance to place large bets before Thursday’s ECB meet, U.K snap election and former FBI Director Comey’s testimony.
Many believe that Thursday’s geopolitical outcome is unlikely to stop the Fed from raising short-term interest rates next week, but it raises some question whether U.S policy makers may stand pat during the balance of this year after a June hike.
Note: Expectations of a slow-moving Fed have reduced anxiety over a swift rise in Treasury bond yields, contributing to the slides of bond yields since the Fed’s policy meeting in March. The 10-year Treasury yield traded above +2.60% in March.
Fading hopes for greater fiscal stimulus has pushed down the USD and the yield on 10-year Treasury note back to levels seen before Trump’s election.
Elsewhere, the yield on Aussie 10-year government bonds have lost -2 bps to +2.37%. In the U.K, 10-year Gilt yields fell -2 bps to +1.04%, in Germany, Bunds lost -2 bps to +0.27%.
4. Dollar trades at eight-month lows
EUR is expected to trade in a contained range between €1.12-€1.13 ahead of the ECB meeting on Thursday. Given some of the expected tapering of QE is already priced in, and given that ECB’s Draghi will likely avoid hints at imminent QE tapering even as the ECB is expected to make some ‘subtle’ changes to its communication, any EUR gains are expected to be somewhat limited.
With the USD trend remaining weak, any downside implications for the EUR are expected to be limited, especially given a low probability the Fed will embark on an ‘aggressive tightening cycle.’
In the U.K, a Survation Poll on the Parliamentary elections shows support for Conservatives Party at +41.5% vs. +40.4% for Labour. Despite the disappointing reading for PM May, sterling (£1.2919) remains above the psychological £1.2900 handle.
Note: The Survation poll in particular assumes that a higher young voter turnout would occur; historically this tends not to happen.
The yen has found support from risk averse investors, trading atop of its seven highs at ¥109.64.
Down-under, the AUD (A$0.7482) ended higher overnight after the RBA (see below) left interest rates on hold and downplayed concerns about a slowdown in the economy over recent months.
5. RBA monetary policy decision – Euro retail sales
The RBA left their benchmark overnight rates on hold at a record low +1.5% as Aussie policy makers juggles fears around rising house prices and record household debt, with signs of weakness in the job market and a slowdown in consumer spending.
Governor Philip Lowe in his statement said ‘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.’
The market has perceived the RBA to be more ‘neutral’ than expected. Up to this point, policy makers have said little about signs of a slowdown in the economy in Q1; tomorrow’s GDP growth data is expected to show the economy barely moved in the first three-month.
Instead, the RBA seems to be is intent on focusing on the expectation that domestic growth will pick up to above +3%, and the transition occurring in the economy away from mining investment as being ‘almost complete.’ They also added that business conditions have improved and that capacity utilization has increased.
