U.S Dollar Seeks Central Bank Guidance

Tuesday June 12: Five things the markets are talking about

The Trump-Kim summit came and went with little market movement. Instead, investors and dealers remain focused on a plethora of macro-events and data coming over the next few days. The meeting has produced much positive symbolism, but little in the way of substance as vague pledges just doesn’t cut it for markets.

Overnight, stocks have climbed; Treasuries prices have edged a tad lower, while commodity prices remain range-bound. Safe-haven assets including the yen and gold have slipped as Trump and Kim signed a document pledging to work towards peace on the Korean peninsula.

Elsewhere, sterling (£1.3404) remains very nervous as PM Theresa May’s landmark Brexit legislation goes to a parliament vote today and tomorrow (June 12/13).

Investors focus has shifted to a number of Tier I central banks monetary policy decisions – tomorrow, the Federal Open Market Committee (FOMC) is expected to hike interest rates, while the European Central Bank (ECB) officials are poised to hold the first formal talks on ending it’s bond-buying program (QE) Thursday, while the Bank of Japan (BoJ) meets early Friday, with no change to policy expected.

On tap this week: U.S inflation (June 12), U.K inflation, FOMC statement & AUD employment (June 13), U.K retail sales, ECB rate announcement, U.S retail sales & Bank of Japan (BoJ) rate announcement (June 14).

1. Stocks see the light

In Japan, the benchmark Nikkei average advanced +0.3%, its highest closing since May 22 and not far from its four-month intra-day high as U.S-N. Korea’s summit fuelled progress. The broader Topix added +0.3%, also hitting a near three-week high.

Note: The BOJ will conclude a two-day meeting on Friday at which it is widely expected to keep its loose monetary policy intact.

Down-under, Aussie shares ended higher overnight, propped up by strength in consumer and pharmaceutical firms and amid a positive outcome at the Singapore Summit. In S. Korea, the benchmark Kospi index, which briefly inched back into positive territory mid-session, closed virtually unchanged, down -0.05%.

In Hong Kong and China, stocks ended higher on Tuesday, after the U.S and N. Korea signed a ‘comprehensive’ deal aimed at the denuclearisation of the Korean peninsula.

The Hang Seng index closed up +0.1%, while the China Enterprises Index ended +0.3% higher.

In China, the CSI300 index rallied +0.8%, while the Shanghai Composite Index gained +0.5%.

In Europe, regional bourses trade mixed, following Asia’s example overnight. Some equities have found traction on the positive tone from the Trump-Kim meeting in Singapore.

U.S stocks are set to open in the ‘red’ (-0.1%).

Indices: Stoxx600 flat at 388.1, FTSE -0.2% at 7719, DAX +0.1% at 12856, CAC-40 -0.1% at 5462, IBEX-35 +0.2% at 9918, FTSE MIB +0.1% at 22104, SMI flat at 8621, S&P 500 Futures -0.1%

2. Oil edges up, but bulls remain wary ahead of OPEC meeting, gold lower

Oil prices are rallying for a second consecutive day, as investors prepare for a key meeting of the OPEC producer group next week (June 22).

Crude remains in a tight trading range and in line with the broader financial markets, which were largely unphased by a U.S-North Korea summit.

Brent crude futures are up +17c at +$76.63 a barrel, while U.S West Texas Intermediate (WTI) crude futures have rallied +11c to +$66.21.

OPEC, together with partners including Russia, has cut oil output by -1.8m bpd since January 2017 in an effort to boost the market.

With U.S. sanctions threatening to cut Iranian exports and the potential for more declines in Venezuelan production, OPEC’s Saudi Arabia and Russia have indicated they would be willing to raise output to make up for any supply shortfall.

Data last Friday showed that the number of new rigs drilling for oil in the U.S rose by one last week to +862, it’s highest since March 2015, according to Baker Hughes. This would suggest that U.S crude output, already at a record high of +10.8m bpd, could climb even further.

Ahead of the U.S open, gold prices have edged lower as the ‘big’ dollar strengthened following a positive U.S-North Korea summit, with markets now waiting for a likely interest rate hike by the Fed. Spot gold is down -0.1% at +$1,297.96 per ounce. U.S gold futures for August delivery, are -0.1% lower at +$1,301.90 per ounce.

3. Yields little movement

With the Fed expected to hike rates tomorrow, investors are focused on how the U.S policy makers will describe its monetary policy as borrowing costs return to more normal levels amid an ongoing economic expansion.

Will the Fed drop language it has used over the past two-years that says rates would remain below historical levels “for some time” to come? That small change alone would mark a broad acknowledgement that both U.S monetary policy and the economy in general are starting to look increasingly “normal,” both domestically and abroad.

The yield on U.S 10-year Treasuries has climbed +1 bps to +2.96%. In, Germany, the 10-year Bund yield has gained +1 bps to +0.50%, the highest in almost three-weeks, while in the U.K, the 10-year Gilt yield has increased less than +1 bps to +1.411%, the highest in almost three weeks.

Note: In Italy, the 10-year BTP’s yield fell -1 bps to +2.829%, the lowest in a week.

4. Dollar seeks central bank guidance

Dealers and investors are shifting their focus from the Singapore Summit – which is naturally short on details – to the upcoming policy meetings this week (Fed, ECB & BoJ).

Overnight, the USD index hit a one-week high during the Asian session, but has since seen its gains slip away as the Euro morning progresses.

GBP/USD (£1.3408) focus turns to politics ahead of the Parliamentary vote on the E.U Withdrawal bill. U.K data this morning (see below) has allowed the pound to remain on firmer footing for now.

Note: U.K Tory member Lee (pro-remain) resigned as a U.K Minister over Brexit ahead of tomorrow’s parliamentary vote on the E.U Withdrawal bill.

EUR/USD (€1.1797) continues to hover atop of the psychological €1.1800 handle as investors turn to the central banks rate decisions this week for direction.

5. U.K employment rises but wage growth flattens

U.K data released this morning showed that the number of people employed in the U.K. continued to rise in the three months to April, while wage growth slowed.

Data released by the ONS showed that the number of people in work in the U.K. rose in the three months to April to +32.4m, which is a record, while the unemployment rate held steady at +4.2%.

Add today’s release with the tepid numbers for Q1 and Q2 should further fuel questions about the prospects for an interest-rate rise by the BoE this year.

Wage growth in the three-months to April slowed slightly, to +2.8% from +2.9% in the previous three months. Market expectations forecasted a growth rate of +2.9%.

Add today’s report to yesterday’s weaker U.K economic figures, which showed a sharp fall in manufacturing output in April, suggesting the weakness the economy displayed in Q1 has extended firmly into Q2.

Other Euro data this morning showed that German economic sentiment dropped in June, extending its losing streak. The ZEW’s measure of economic expectations fell to -16.1 in June from minus -8.2 in May – the lowest reading in six years.

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