Capital markets, thus far, have ridden out the latest rise in tensions around North Korea this week. Expect this temporary timeout to continue as investors’ attention now shifts to today’s FOMC minutes (02:00pm EST) from their June meeting. It should provide the latest clues for investors on the path for U.S interest rates ahead of Friday’s key non-farm payroll (NFP) report.
Despite a shift towards more ‘hawkish’ language by several major central banks (ECB, BoJ, BoE, BoC and Riksbank) dominating proceedings over the past six-business days, expect today’s Fed minutes to provide some clarity on U.S rate normalization.
What to look for:
In June, the Fed laid out its plans for how it will shrink its portfolio, but stopped short of telling the market when that process would start. Investors are looking for a clue on timing.
The Fed minutes should also be searched for signs of concern among policymakers about a downturn in inflation. The minutes could provide more detail on the internal debate. Look for signs of a split among officials over how to react to disappointing inflation numbers.
Also, a new concern is being focused on ‘financial conditions’ – resurfaced in recent weeks in Fed officials’ public remarks – the Fed’s June statement and Yellen’s press conference did not suggest any concern about loose conditions, however, it is possible officials addressed the matter at greater length behind closed doors.
Note: Friday’s non-farm payroll (NFP) report is expected to add around +175k workers last month and wage growth probably strengthened.
1. Stocks trying to rebound from political tension
In Japan, the Nikkei share average (+0.3%) has bounced back from an intraday three-week low as demand in cyclical stocks offset fears from tensions following North Korea’s ballistic missile launch (ICBM). The broader Topix index advanced +0.6%, erasing its own session intraday loss.
Down-under, Australia’s S&P/ASX 200 Index fell -0.4% after soaring +1.8% Tuesday, the most since Nov. 10, when the RBA left overnight benchmark rates unchanged.
In Hong Kong, the Hang Seng climbed +0.3%, while the Hang Seng China Enterprises Index rose +0.6%.
In China, the Shanghai Composite Index rallied +0.8%, helped by a wider quota for Hong Kong institutional investors and a cabinet paper promoting the use of commercial pension money in capital markets.
In Europe, stocks have opened broadly flat. Risk sentiment seems to be improving despite ongoing concerns over North Korea. However, liquidity remains thin ahead of the U.S open.
Note: U.S markets were closed for 4th of July holiday, to re-open this morning.
Indices: Stoxx50 -0.2% at 3,479, FTSE +0.1% at 7,362, DAX +0.1% at 12,448, CAC-40 +0.2% at 5,185, IBEX-35 flat at 10,567, FTSE MIB -0.4% at 20,949, SMI -0.3% at 8,940, S&P futures flat.
2. OPEC supplies rise again, gold little changed
Brent crude oil prices remain below the psychological +$50 per barrel, weighed down by another rise in OPEC supplies despite a pledge to cut production – however, geopolitical tensions from North Korea and the Middle East is providing support on these pull backs for now.
Brent crude futures are at +$49.60 per barrel, little changed from yesterday’s close. U.S West Texas Intermediate (WTI) crude futures are down -6c at +$47.02 per barrel.
Note: Both markets have recovered around +12% from last months lows on June 21.
However, oversupply remains the key issue for the market. Data from Thomson Reuters yesterday showed that oil exports by OPEC members climbed for a second month in June – in breach of its pledge to hold back production between January this year and March 2018 to prop up prices.
OPEC exported +25.92m bpd in June, +450k bpd above May’s final count and +1.9m bpd more than its 2016 figures.
For now, rising geopolitical risks is providing some support for gold. The precious metal has edged up a tad overnight as tensions on the Korean peninsula stoked safe-haven demand for the metal (+0.2% to +$1,225.59 an ounce, paring an earlier gain of +0.5%). However, dollar strength is expected to provide weight for some metal prices.
3. Bond yields under pressure following central bank rhetoric
In the U.K, benchmark yields advanced +2 bps to +1.27% after BoE’s Saunders said, ‘households should prepare for rates to go higher at some point’ and ‘if rates do go up it will be in context of economy doing O.K and unemployment being low and probably falling.’
Down-under, Australian 10-year yields backed up +1 bps to +2.63%, after dropping -5 bps yesterday when the RBA held rates steady.
Elsewhere, French (OAT’s) and German (Bund) yields were flat, while the yield on U.S 10-year Treasuries fell -2 bps to +2.33%. The rate rose +5 bps Monday, after surging +16 bps last week. Markets were closed in the U.S yesterday.
Yesterday, Sweden’s Riksbank dropped its 3 bps easing bias in the rate path – it’s the first time since negative rates began in February 2015 that the Riksbank doesn’t have an easing bias in the rate path. The move reflects higher inflation in Sweden and the changed tone from other central banks.
4. Dollar trades little changed ahead of minutes
The EUR (€1.1317) is seeing some weakness after comments from an ECB official stating that ECB has not discussed ‘halting easy monetary policy.’ Longer-term EUR ‘bulls’ are looking for better levels to own the single unit. EUR/USD has outperformed the tightening spread between the 10-year German bund yields and 10-year Treasury yields. Stronger support appears at €1.1275 and resistance at €1.1360.
GBP (£1.2906) has resumed its downtrend with a four-month low post PMI reading (see below) helping to weigh on sterling. Dealers note resistance at £1.2950 level, while support lies at £1.2835-40. Recent support for the pound came from Bank of England (BoE) Governor Carney suggesting a near-term rate increase was possible.
5. Eurozone picks up speed in Q2, U.K disappoints
Data this morning shows that European services PMI’s were generally positive – Germany, France and Spain all beat estimates while Italy missed.
In the U.K, service PMI’s (53.4 vs. 53.6) slightly missed consensus and was lower from the prior month with many noting that momentum in the U.K economy may be slowing. The average over the three-months through June was the same as in Q1, and is consistent with growth of +0.4%. This raising question whether the Bank of England (BoE) can afford to raise rates any time soon.
Other data showed that Eurozone retail sales were stronger than expected during May, with Eurostat recording a +0.4% rise, twice the expected rate of increase.
Note: Data is consistent with other indicators that point to a further pickup in growth during the Q2, including the composite PMI, which was revised up.
However, this faster growth is ‘not’ translating into a sustained increase in inflation, which will provide further mixed news for the ECB.
