Tuesday June 7: Five things the markets are talking about
Yesterday, traders were fully focused on what Yellen would say in Philadelphia. Was capital markets going to get the inside track on the timing of future rate hikes by the Fed? Would there be any hints that last Friday’s horrid non-farm payroll (NFP) report was all, but an outlier when it comes to data points needed to raise U.S interest rates?
The message from the Fed Chair’s remarks are that the dismal May employment report has raised significant questions about the economic outlook that will weigh on officials as they determine when to lift short-term interest rates.
Yellen said a number of “considerable and unavoidable” uncertainties could affect the outlook for the U.S. economy as well as the appropriate path of monetary policy. With Ms. Yellen repeatedly emphasizing that monetary policy is “not on a pre-set course” – a summer rate hike remains a guessing game.
Fed funds futures now assign just a +4% chance of a hike in June, +26% chance of a move in June or July, and just below a +50% chance of rates being higher after the September meeting.
Despite the backdrop of tempered Fed rate hike expectations, Yellen’s optimism on the U.S is currently fueling a global risk-on rally.
1. Brexit Polls give it all back to Sterling
Trading the pound outright (£1.4606), or on the crosses, is not for the faint of heart. Sterling trading continues to be very volatile, as noted by the retracement of its recent losses in the overnight session. Ahead of the open stateside, the pound has managed to recapture a substantial part of yesterday’s losses (£1.4353 June 6 low).
It’s no surprise that a couple of E.U referendum polls overnight have lent support to the U.K. currency. The new outcomes both point to a narrow lead for the ‘Remain’ campaign. This has reversed some of the momentum that the ‘Leave’ campaign had appeared to be generating in a number of polls published over the weekend.
ORB/Telegraph Brexit Poll: +48% for staying in E.U, +47% for leaving (prior +51% for staying in E.U, +46% for leaving)
YouGov Times Brexit poll: +43% for staying in E.U, +42% to leave (prior poll on June 5th: was +41% for staying in E.U, +45% to leave).
2. Reserve Bank of Australia (RBA) leaves cash rates unchanged
Trying to figure out the RBA’s next move has been a tedious and costly guessing game for analysts and investors alike. Many had been expecting the RBA to stick to its trend of policy easing coming in sets of pairs.
Last nights RBA decision to hold rates steady (+1.75%), and offer little in the form of guidance, has left many individuals scratching their heads on what the next move is? With Aussie policy makers offering few clues to its economic outlook has the AUD rallying above the psychological A$0.7400 handle (A$0.7446) for the first time in a month.
The RBA reiterated that inflation has been low and elevated as exchange rates complicate the country’s transition to a non-mining sector economy, but added that growth continues, despite the decline in business investment.
The RBA also acknowledged the recent recovery in trade components, stating that exports, along with other “areas of domestic demand” are expanding above trend.
On labor, RBA said that while recent indicators have been mixed, they are “consistent with continued expansion of employment in the near term.”
3. Oil prices near multi-month highs
Crude oil prices remain atop of their multi-month highs this morning. The ‘black gold’ is being supported by the broader equity rally, as well as global outages curbing supply.
Brent crude oil was last up +0.3% at $50.69 a barrel after settling at its highest level since October yesterday. West Texas Intermediate crude (WTI) has also added +0.3% in early trade to $49.67 a barrel after closing at its highest price in 11-months last night.
With oil prices settling around the $50 per barrel mark is giving commodity sensitive currencies a lift. The CAD has rallied to its highest level outright in a month at C$1.2780. Fellow oil-linked currency, the Norwegian krone (NOK) is also getting a boost, rising to a three-week high around $8.1260 vs. the U.S. dollar.
4. Hefty rise in SNB reserves
There was a sizable increase reported in the Swiss National Bank’s (SNB) foreign currency reserves last month. The rise would suggest that the SNB has been intervening to weaken the CHF (€1.0981).
Swiss reserves have increased to +CHF602.1b in May from +CHF587.9b in April. Swiss policy makers have for years been fighting a strong franc and this policy will not change any time soon – the currency tends to rise in times of global uncertainty and a Brexit win would be one of those negative outcomes.
If the UK does vote to leave on June 23, investors can expect the EUR (€1.1369) to come under all sorts of pressure, but rest assured investors should be expecting the SNB to stand ready to ensure that the CHF does not bear the burden of those outflows.
5. Risk-on gives indices the green light
Global equity indices are trading higher after Ms. Yellen’s comments or lack thereof yesterday. By not providing any indication on the timings of future rate hikes, while indicating a positive economic outlook irrespective of one months data relating to the recent disappointing payrolls print is persuading investors to again look at stocks. Lower yields for longer are not an attractive return.
Noted sectors leading the rally: Higher oil prices are adding to the risk-on sentiment ahead of the U.S open. In Europe (Stoxx50), financial and banking stocks are outperforming across the region, while commodity and mining stocks in the FTSE 100 also trading notably higher on the back of rising oil prices.
Indices: Stoxx50 +1.4% at 3,048, FTSE +0.7% at 6,315, DAX +1.5% at 10,277, CAC-40 +1.3% at 4,480, IBEX-35 +1.3% at 8,934, FTSE MIB +1.8% at 17,939, SMI +0.6% at 8,212, S&P 500 Futures +0.3%