Markets Fish For Fed Clues

Monday August 22: Five things the markets are talking about

Most of the big’ dollars strength has come on the back of a number of ‘bullish’ Fed member comments over the past few sessions.

Late last week, Fed members Dudley and Williams both suggested that they would not completely rule out an interest rates hike in September. Last night, Fed Vice-Chairman Fischer said the U.S economy is close to the Fed targets and a 2016 hike is still under consideration.

With investors continuing to seek guidance, the market will want to focus on the Jackson Hole symposium to be held at the end of the week where Fed Chair Janet Yellen is expected to give a speech on monetary policy.

However, it is a rather uneventful week ahead of the symposium. Investors will be required to digest flash August manufacturing PMI’s for the Eurozone, France, Germany, the U.S and Japan. Midweek, revised Q2 GDP for France and the UK will be released and on Thursday, Germany’s Ifo survey for August will be reported.

1. Global indices mixed as markets brace for Fed comments

In Asia overnight, stocks were largely mixed, with traders bracing for the likelihood of hawkish commentary from Fed officials at its annual conference starting Friday.

The Nikkei Stock Average traded +0.3% higher as the yen slipped, pressured by further negative rate talk from the Bank of Japan’s (BoJ) Kuroda. The Governor speaks tomorrow and the market will be looking for clarification on his NIRP comments.

In Europe, equity trading remains seasonally light, however, bourses are edging higher ahead of the U.S open. Homebuilders are leading the gains in the FTSE 100 along with financial stocks. In the red, commodity and mining stocks are trading notably lower, mostly on the back of lower intraday crude oil prices.

Indices: Stoxx50 +0.8% at 2,993, FTSE flat at 6,860, DAX +0.8% at 10,631, CAC-40 +0.6% at 4,429, IBEX-35 +0.7% at 8,506, FTSE MIB +1.2% at 16,507, SMI +0.7% at 8,187, S&P 500 Futures +0.1%

2. Crude prices splutter, gold slips

Oil prices start the week on the back foot as investors question the ability of producers to reign in “over” supply concerns at next months OPEC meeting.

With crude prices rallying +20% month to date, it’s not a surprise to see a pull back. Soaring exports of refined products from China and the rumored possibility that Iraq will raise oil shipments by +5% over the next few day’s is also pressuring prices.

Brent crude futures are trading at +$49.93 per barrel, down -95c, or -1.87%. West Texas Intermediate (WTI) is down -84c, or -1.73% at +$47.68 a barrel.

With the lack of new crude buyers in the market, this month’s energy price rally has more to do with ‘short’ position covering ahead of September’s producer meetings rather than any fundamental reasons.

With the dollar finding support commodities are under pressure.

Gold is trading atop of its two-week lows as the dollar strengthens from Fed Fischer’s overnight comments that the Fed is close to hitting its targets for full employment and its +2% inflation target.

Spot gold is down -0.6% at +$1,332.80 an ounce. Last week’s COMEX futures positions indicate that speculators have again cut their bullish positions. Also ahead of the U.S open, spot silver has hit a new seven-week low of +$18.77 an ounce.

3. Bullish Fed backs up yields

U.S. Treasury yields are on the move ahead of the open stateside.

In Europe, U.S yields have hit a two-week high this morning on expectations that the Fed will give a signal at Jackson hole this weekend that it is gearing up to raise interest rates.

U.S 10-years have backed up +4bps to touch+1.60% while shorter-dated yields have touched levels not seen since the U.K’s June 23 Brexit vote.

Fed-funds futures on Friday showed a +18% chance of a rate increase in September, up from +15%, while the odds of an increase by December rose to just over +50%, compared with a +46.9% chance last Thursday.

4. BoJ has limited power

The market is starting to get concerned about some of its yen positions.

Currently, the short-term speculators seem to be holding a modest yen ‘short’ position after exiting from their yen ‘long’ positions, and they are getting limited love from BoJ rhetoric.

The USD/JPY (¥100.62) pair is currently being supported by dovish BoJ commentary that there is “technically” room to take rates further into negative territory. However, the yen bears are beginning to become more concerned that the USD is finding it difficult to regain a foothold above the psychological ¥101 especially with rate differentials.

If Ms. Yellen happens to disappoint this week, there is a strong possibility that a USD/JPY fall will accelerate below the strong support ¥99.00 threshold, and force the unwinding of these “short” yen positions all at once.

Under this scenario, it would not be a surprise to see the USD/JPY reach towards ¥95 over the short-term.

4. Rate differentials support dollar

With the lack of fundamentals on show, investors continue to take direction from interest rate chatter. Intraday ranges remain relatively contained, with lower volume trading being reported.

The Fed’s Vice Chairman Fischer provided the ‘mighty’ buck’s early support with his overnight inflation and employment comments. Nevertheless, expect investors to remain wary of buying too many dollars on prospects of a near-term U.S. rate hike, which could be dented by Ms. Yellen’s Jackson Hole speech. Despite U.S jobs data being stronger, inflation has remained somewhat muted.

EUR is down -0.3% at €1.1295, while USD/JPY trades up +0.4% at ¥100.64. Amongst the majors, the outlier remains GBP, which is trading higher (£1.3103) having begun the day lower.

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