Dollar And Yields Define Market Direction

Wednesday May 8: Five things the markets are talking about

All assets are on the move. Despite the lack of fundamental releases this week, multi-month records are been made across the various asset classes. Both Brent and WTI crude trade through the psychological $50 a barrel handle, a 34-week high. Global indices are encroaching on record high prints for the year. Earlier this morning, German Bunds slipped to record low yields, while the U.S dollar index straddles its lowest print within a month.

1. Stocks inch closer to record highs

Global equities are trading near their highest levels of 2016, having rallied since February as commodities recover from a 25-year low to enter into a ‘technical’ bull market this week.

Further signs of stability in China and this despite the U.S data painting a mixed picture seems to be supporting positive investor sentiment. Last weeks horrid NFP print is curbing speculation that the Fed will raise interest rates anytime soon. A low rate environment has been a boon for equities as investors scour the world for returns.

The gains briefly boosted the Dow industrials above 18,000 yesterday for the first time in more than a month, while the S&P 500 closed within +0.9% of its record, driven by energy shares that have climbed with the price of oil in recent months.

However, the World Bank has managed to muddy the water for stocks this morning by revising down its global GDP target forecasts. Euro bourses trade subdued ahead of the U.S open after these lower revisions have managed to impede the progress of the ‘risk on’ trading strategies that had been supported by the markets interpretation of Fed funds remaining ‘lower for longer’ after last week’s disappointing non-farm payroll (NFP) report.

Indices: Stoxx50 -0.7% at 3,018, FTSE +0.2% at 6,271, DAX -0.6% at 10,227, CAC-40 -0.6% at 4,444, IBEX-35 -0.7% at 8,824, FTSE MIB -0.4% at 17,893, SMI -0.6% at 8,156, S&P 500 Futures flat.

2. World Bank cuts projections

After trading on Tuesday, the World Bank lowered its global growth forecast for this year and next year, citing disappointing economic prospects in the Eurozone, Japan and some major emerging economies that offset the benefit of lower oil prices. Among the emerging markets, Brazil and Russia in particular weighed on the bank’s global growth predictions.

Like many analysts, the World Bank had been expecting the drop in global oil prices over the past 12-months would be a “net positive” for the world economy, boosting oil-importing countries. They now believe that the “positive price shock” could take several years to feed into its growth outlook.

It slashed global GDP target to +2.4% from +2.9% as a result of “more pronounced weakness” and rising risks. The U.S outlook was reduced to +1.9% from +2.7%, Euro area was trimmed to +1.6% from +1.7%, while China was affirmed at +6.7%.

3. Crude prices extend their gains

Yesterday, West Texas Intermediate crude prices closed above $50 for the first time in nearly a year. This morning crude oil (Brent $51.88, WTI $5076) is extending their gains as the dollar weakens and production outages curb supply.

U.S crude prices have nearly doubled since hitting their 13-year low in mid-February as companies have cut spending on new drilling and unplanned outages in Nigeria and Canada help shrink the global oil glut.

Currently, crude prices are not been driven by OPEC, but by U.S data supply numbers. Yesterday, an EIA (Energy Information Administration) report revealed that U.S. crude production fell by -250k barrels a day in May from April, the largest one-month decline in years.

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$1.2716. Fellow oil-linked currency, the Norwegian krone (NOK) is also getting a boost, rising to a three-week high around $8.1114 vs. the U.S. dollar.

4. Low yields go lower in Europe

Yields on the 10-year German bunds (+0.036%) and the U.K. gilts (+1.25%) have fallen to all-time lows.

Record low global yields are a constant reminder to investors that central banks and their respective governments continue to have issues with inflation/deflation, weak growth and an outsize monetary policies.

Putting further pressure on German product this morning is the ECB beginning its corporate bond purchase program portion of its QE bond-buying program.

U.K yields being so low are extraordinary – the BoE has not moved interest rates in seven-years, nor has it changed its bond-buying program in four-years. Certainly it seems the upcoming E.U referendum (June 23) is influencing debt demand. A vote to ‘leave’ may cause economic disruption – are investors betting that BoE’s Governor Carney will be required to cut rates if that happens?

5. Dollar index falls to a five week low

The dollar continues to trade under pressure across the board as investors adjust to a diminished outlook for U.S. interest-rate increases.

The dollar index has edged down -0.1% to 93.74 as we head to the open stateside. The mighty buck is expected to continue to struggle at least until incoming data beats expectations.

In a speech Monday, the Fed’s Yellen affirmed that the Fed would hold off on raising rates until new uncertainties about the economic outlook are resolved. Fed funds futures now assign just a +2% 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.

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