Tuesday July 18: Five things the markets are talking about
The U.S dollar, equities and Treasury yields are all under pressure on signs the American health-care reform bill is effectively dead in its current form as two more Republican Senators (Moran and Lee) are set to vote against it.
Where does this leave President Donald Trump’s broader economic revitalization agenda? With Congress expected to continue to work on the bill could delay their next action on the debt ceiling and hinder President Trump’s broader economic revitalization agenda.
Latest FX positioning data suggest investors are also turning even more ‘bearish’ on the dollar with the first U.S. dollar future shorts evident in 13-months. However, the ‘carry’ trade is flourishing with JPY shorts at its highest level in two-years, after last week’s U.S inflation data has dampened expectations of another Fed rate hike in coming months.
1. Global equities under pressure
Ahead of the U.S open, European markets have opened lower, while Asian stocks overnight have basically halted a six-day rally that pushed them to the highest in nine-years.
In Japan, the Nikkei share average fell -0.6%, a one-week low, as a stronger yen (having dropped to trade at a two-week low of ¥111.97 vs. ¥114.495 a week ago) hit cyclical stocks and sliding support for PM Abe added to the negative mood. The broader Topix Index dropped -0.3%.
In Hong Kong, stocks rose for a seventh straight session as gains in the technology and energy sectors offset losses in financial stocks. The Hang Seng Index rallied +0.2%, while down-under, Australia’s S&P/ASX 200 Index slid -1.2%.
In China, stocks steadied overnight, the blue-chip CSI300 index rose +0.1%, while the Shanghai Composite Index added +0.3% as investors hunted for bargains after an intense sell-off in small-caps in the previous session.
In Europe, indices have rebounded off earlier lows after a flurry of mixed earnings being reported. A fall in U.K CPI (see below) is supporting the FTSE 100, while earnings again will be the dominant theme in the U.S today – (Goldman Sachs and BoA are due to report).
U.S stocks are set to open little changed.
Indices: Stoxx600 -0.3% at 386, FTSE +0.1% at 7414, DAX -0.4% at 12533, CAC-40 -0.1% at 5222, IBEX-35 +0.2% at 10670, FTSE MIB +0.1% at 21503, SMI +0.4% at 9075, S&P 500 Futures +0.1%
2. Oil steadies as ample supply meets firm demand
Currently, oil markets are trading steady, supported by firm demand, but weighed down by high supplies from OPEC and from shale producers in the U.S.
Benchmark Brent crude is down -10c at +$48.32 a barrel, while U.S. light crude oil (WTI) is -10c lower at +$45.92.
Crude bulls took solace when short-term demand was noted from yesterday’s data from China which showed domestic refineries increased crude throughput in June to the second highest on record.
However, with many markets being well supplied, oil for immediate delivery is trading at heavy discounts to forward futures. Net result, crude oil prices are trading at -50% the levels seen three years ago.
Note: Short-term direction will depend on today’s U.S API (04:30 pm EDT), and tomorrow’s figures from the U.S EIA (10:30 am EDT) and Ecuador’s announcement that it will start increasing oil production this month, saying it needs the money.
Gold prices have hit a two-week high overnight as the USD falls on fading prospects of an imminent increase to U.S interest rates and expectations of stronger demand from the physical market. Spot gold is up +0.2% at +$1,236.10 an ounce, having touched $1,238.76 in Europe, its highest since July 3.
The price of copper hit a four-month high yesterday after upbeat Chinese economic data dampened fears of a slowdown in the metal’s largest market.
Copper for September delivery was up +1.7% at +$2.7355 a pound on the Comex division, the highest level since early March.
3. Yields – ‘carry’ trades trending
The Reserve Bank of Australia’s (RBA) meeting minutes overnight showed that the board spent some time discussing the “neutral” interest rate, noting that it equated to a neutral nominal cash rate of around +3.5%.
The board also argued that estimates of the neutral real rate suggested that Aussie monetary policy had been clearly ‘expansionary’ for the preceding five-years. Members also see some probability of an increase in the cash rate by mid-2018. The AUD (A$0.7935) remains better bid on the ‘hawkish’ view and “carry” trade.
The market does not expect German Bunds to suffer from bouts of volatility over the rest of the summer, as the ECB is expected to leave policy decisions for September.
Note: The ECB is to meet Thursday (07:45 am EDT) and no change is expected, and no rate hikes before 2019.
Eurozone bond yields have surged since a speech by ECB’s Draghi in late June, it was seen as a hint toward QE tapering – 10-year German benchmark is trading at +0.57%.
In the U.K, ten-year Gilt yields have slide to +1.24% vs. +1.284%, the lowest in nearly three-weeks after this morning’s disappointing CPI data – annual CPI inflation unexpectedly fell to +2.6% in June vs. +2.9% m/m.
Note: It’s well above the BoE’s +2.0% target, the drop may make policymakers less inclined to hike interest rates, given the squeeze on household incomes as wage growth remains well below inflation.
Ahead of the U.S open, U.S 10-year Treasury yields are down -1 bps to +2.31% after dropping -5 bps last week.
4. U.S dollar in trouble
The U.S. dollar is holding at/near 10-month lows outright against some of the majors, while high-yielding currencies such as the AUD (A$0.7934) rallies to two-year peaks as investors pile into leveraged bets.
The pound is under pressure after this morning’s lower U.K CPI reading. Sterling is currently trading atop £1.3029 against an otherwise weak dollar, down -0.2% on the day, from around £1.3079 before the data.
Euro/sterling has rallied +0.6% on the day to €0.8848, up from €0.8811 beforehand. The EUR/USD approached the ¥1.1553 area before consolidating.
Dealers note that ECB chief Draghi faces a difficult challenge of preparing investors/market for a “gradual” change in the monetary policy while, at the same time, preventing yields from continuing to surge excessively (German yields have moved from +0.25% to +0.58% since Draghi’s June speech).
5. German economic sentiment
The ZEW indicator of economic sentiment for Germany fell slightly last month (-1.1 points) and now stands at 17.5 points.
Note: The headline indicator remains below the long-term average of 23.8 points.
The assessment of the current economic situation fell by -1.6 points in July, but remains at a high level of 86.4 points.
This morning’s headlines suggest that the medium term outlook for German economic growth continues to be positive.