A move to own haven assets has lost some of its momentum overnight as investors take a time out ahead of an onslaught of key events tomorrow that include a snap election in the U.K, an ECB policy meeting, and testimony by James Comey, the former FBI chief fired by President Trump.
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 dollar remains adrift atop of its eight-month low while gold edges lower after touching its highest level since November. U.S Treasuries remain flat after climbing yesterday on news that China is prepared to buy more of the debt. Global equities are mixed.
Speculation about a shift in the ECB’s policy stance tomorrow is gaining traction. Increasing signs of a strengthening eurozone and more upbeat official comments has raised some investor expectations that a ‘no change’ could be seen as a small disappointment.
Nonetheless, with last month’s regional inflation reports surprisingly soft, any move by ECB policy makers is likely to be only ‘subtle’ and possibly limited to just a modification of the forward guidance (FG).
The market majority expects ECB interest rates to remain at ‘present or lower levels’ for an extended period of time.
1. Stocks mixed results
The aforementioned geopolitical worries have many investors wading to the sidelines to seek sanctuary, at least until there is more market clarity.
In Japan, both the Nikkei and broader Topix closed flat in thin trade as investors continued to shun riskier assets ahead of tomorrow’s geopolitical events.
Down-under, Australia’s S&P/ASX 200 Index also finished flat, after closing yesterday’s sessions at its lowest level in four-months.
In Hong Kong, the Shanghai Composite jumped +1.2% to its highest level in four-weeks, while Hang Seng retreated -0.3% from its two-year high print recorded Tuesday.
In Europe, regional indices are trading mixed, with both Italy and France outperforming while the DAX and Swiss SMI and IBEX trade slightly lower. U.K’s FTSE 100 is little changed in thin trade ahead of tomorrow’s Parliamentary vote.
Indices: Stoxx50 flat at 3555, FTSE +0.2% at 7539, DAX -0.1% at 12681, CAC-40 +0.3% at 5287, IBEX-35 -0.4% at 10838, FTSE MIB +0.5% at 20855, SMI -0.1% at 8899, S&P 500 Futures flat.
2. Oil dips on concerns about rising U.S output, OPEC tensions
Ahead of the U.S open, oil prices have dipped on concerns about the usefulness of OPEC-led production cuts due to rising tensions within the export group over Qatar and growing U.S output.
Currently, Brent crude prices are at +$49.79 per barrel, down -33c. Brent is about -8% below its open on May 25, when OPEC and other producers agreed to extend oil output cuts through to Q1 2018. U.S. light crude (WTI) prices are at +$47.89 per barrel, down -30c.
Yesterday, the EIA said that U.S crude oil production could hit a record +10m bpd next year, up from +9.3m bpd now, putting it nearly on a par with top exporter Saudi Arabia.
Investors will take their cue from today’s inventory report from the EIA at 10:30 am. The market is expecting another drawdown (-3.1m vs. -6.4m m/m).
Ahead of the U.S open, gold is holding steady (-0.1% to +$1,292.92), hovering close to its six-week high print in yesterday’s session, on weaker global stocks and amid dwindling expectations for aggressive U.S rate hikes this year.
3. U.S Treasury China demand
Yesterday, U.S 10-year yields (+2.147%) closed at its lowest level for 2017, extending its big slide since reaching this year’s peak in March (+2.60%).
Aside from the safe haven demand aspect ahead of ‘Super Thursday’ for product, another boost for debt prices came from ‘hearsay’ that China is preparing to increase its holdings of U.S product, judging that stateside assets are becoming ‘more attractive than other sovereign debt and as the yuan stabilizes.’
Elsewhere, Aussie government notes with a similar maturity rallied +1 bps to +2.38%, while French (OAT’s), German (Bunds) and U.K (Gilts) yields were little changed after losing at least -4 bps in yesterday’s session.
4. Dollar drifts before D-Day
Overall forex price action remains rather subdued ahead of tomorrows ‘Super Thursday’ – U.K Parliamentary elections, ECB rate decision and former FBI chief Comey testimony in Congress.
The EUR/USD (€1.1270) trades atop of its seven month high. The single unit has gained strongly since mid-May on market expectations the ECB will announce plans to scale back monetary stimulus tomorrow. This leaves the possibility for ‘disappointment,’ but the EUR is not expected to ease notably short-term, as the market is assuming deposit rates will start to rise next year.
USD/JPY (¥109.23) is a tad softer – the yen’s strength has been driven by risk and safe-haven flows. Lower U.S yields, supported by China’s hearsay demand for treasuries, are not supporting the dollar on rate differentials.
The pound’s (£1.2920) value is wholly dependent on what happens tomorrow in the U.K election. A strong majority will favor sterling and strengthen PM May’s own position ahead of Brexit negotiations.
The pound is expected to plunge to as low as £1.20’ish, a level last seen in January, should the U.K snap election lead to a hung parliament or a Labour win.
Opinium U.K general election poll: Conservatives +43% (unchanged), Labour +36% (-1).
Ashcroft U.K election model: UK conservatives to win total 357 seats in Parliament for a 64-seat majority
Note: compares with 60 projected on June 2.
5. OECD calls for ECB taper and lowers U.S growth
The OECD has reversed its March position on the Eurozone stating this morning that the ECB should taper its bond purchases in 2018, and raise its deposit rate by the end of that year. It was only three-months ago that the research body suggested that Draghi and company should ‘continue with what it is doing.’
It has also cut its economic growth forecasts for the U.S for this year and next, stating that the ‘stimulative measures it had expected from the Trump administration would now likely be implemented later than it had previously anticipated.’ It lowered its projection for 2018 to +2.4% from +2.8%.
‘Stronger business and consumer confidence, rising industrial production and recovering employment and trade flows will help global GDP grow +3.6% in 2018, up from +3.0% in 2016.’
