Dollar Diddles in the Middle

Tuesday July 25: Five things the markets are talking about

The mighty U.S dollar is looking for conviction and that is not expected to come ahead of tomorrows FOMC rate decision (2:00 pm EDT).

The markets this week are moving to the beat of company- and industry dynamics as investors brace for the tomorrows Fed decision, when U.S policy makers will weigh robust global growth against meagre inflation and mixed U.S economic data. Expectations are for policy makers to keep rates on hold, as the market searches for clues to the fate of the Fed’s balance sheet, which should be key.

Overnight, the dollar has surrendered some of its short-lived gains as concerns about the U.S economy and politics returned to the fore. Global equities trade mixed, while gold is heading for it’s first loss in four sessions, and crude oil gets a lift for a second day supported by the Saudi’s promise yesterday to further cut crude exports.

1. Stocks mixed bag

In Japan, the Nikkei share average edged down -0.1% overnight in choppy trade as investors braced for the outcome of the Fed’s two-day policy meeting that begins this morning. The market is also concerned that the long-term rising trend in the broader Topix maybe somewhat hitting toppish levels – it fell -0.3% in the session.

Note: The techies note that the Topix is falling below its 25-day moving average on a closing basis for the first time in three-months.

In Hong Kong, stocks finished flat as gains in the technology sector were outweighed by declines concentrated in energy and industrials stocks. The Hang Seng index ended up +0.02% after yesterday’s posted two-year high on Monday. The Hang Seng China Enterprises Index was down -0.35%.

In China, the major stock indexes retreated overnight, led lower by resource firms after their recent strong rally. The blue-chip CSI300 index fell -0.6%, while the Shanghai Composite Index lost -0.2%.

In Europe, most indices are trading in the black, led higher by the Spanish Ibex and the FTSE100, which have rebound after sharp falls yesterday. Investor sentiment has been further boosted following a strong German Ifo reading for July (see below) marking a post reunification high. Earnings continue to be at the forefront.

U.S stocks are set to open little changed.

Indices: Stoxx600 -+0.5% at 381.0, FTSE +0.8% at 7433, DAX +0.3% at 12248, CAC-40 +0.6% at 5159, IBEX-35 +1.1% at 10556, FTSE MIB +0.7% at 21478, SMI +0.6% at 8955, S&P 500 Futures flat

2. Oil extends gains as Saudi pledges export curbs, gold lower

Oil prices have extended yesterday’s gains after Saudi Arabia pledged to curb exports from next month. Gains have also been supported by a warning from Halliburton that the growth in North America’s rig count was “showing signs of plateauing,” a possible threat to U.S shale oil production.

Brent crude for September delivery is up +22c, or +0.5% at +$48.82 a barrel after settling up +1.1% yesterday. U.S West Texas Intermediate (WTI) futures are up +23c, or +0.5% at +$46.57 a barrel.

In Russia yesterday, OPEC and non-OPEC producers discussed extending their deal to cut output by -1.8n bpd beyond March 2018 if necessary.

The Saudi’s indicated that they would limit its crude exports to +6.6m bpd next month, almost -1m bpd below the levels of a year ago, while Nigeria voluntarily agreed to join the deal by capping or cutting its output from +1.8m bpd, once it stabilizes at that level – up to now, Nigeria had been exempt from the output cuts.

Crude price direction now looks forward to today’s U.S API oil inventory numbers (04:30 am EDT). The market is expecting a drawdown of -3m barrels last week.

Ahead of the U.S open, gold prices are a tad softer (-0.3% to +$1,251.87 an ounce), after hitting a one-month high in the previous session, buoyed by political uncertainty in the U.S, as investors wait for tomorrow’s Fed decision.

3. Yields – EU/US spreads widen

U.S Treasuries are drifting about in a narrow range, with looming debt supply creating a bias toward slightly higher yields.

Note: The U.S Treasury will sell +$26B 2-year notes today, +$34B 5-year notes tomorrow and +$28B 7-year notes Thursday.

Aside from traders having to make room to take down supply, global yields direction will depend on tomorrows FOMC meeting and Friday’s initial report on U.S Q2 GDP.

The Fed is not expected to hike rates, but the market is looking for any change in tone from policy makers, especially since they have leaned towards being a little ‘dovish’ in recent weeks. U.S 10-year yield is trading atop of +2.27%.

Euro data yesterday showing Germany’s private sector growing at a slower pace in July, while French business activity slowed more than expected last month to a six-month low gave investors another incentive to move back into fixed income that have been rattled by concerns over tapering.

German Bunds have backed up +1 bps to +0.52%, while French OAT’s are little changed at +0.75%. U.K Gilts have added less that +1 bps to +1.191%.

4. Dollar diddles in the middle

The EUR (€1.1652) got a lift this morning after Germany’s Ifo business sentiment surged (see below) to a record high in July, but it stays short of Monday’s 23-month peak of €1.1683, with investors cautious ahead of tomorrow’s FOMC rate announcement. Some EUR ‘bears’ remain wary that the single units recent strong rise may soon dampen German exporter sentiment.

Overnight, USD/JPY hit a five-week lows below ¥110.85 before rebounding. The two new Bank of Japan (BoJ) board members (Kataoka and Suzuki) in their inaugural press conference showed that they are a “team player” under Governor Kuroda and helped the pair regain a foothold above the psychological ¥111.00 level to trade at ¥111.44.

Note: The new board members replace Kiuchi and Sato, who were dissenters. Yen ‘bears’ believe that the incoming members will support the camp for QE.

The AUD (A$0.7923) is little changed. However, attention now turns to two key events later this evening down-under, June quarterly inflation data (09:30 pm EDT) and a speech on the labor market and monetary policy from Reserve Bank of Australia (RBA) Governor Lowe (11:05 pm EDT).

5. German Business Sentiment Surges to Record High in July

Data this morning showed that German business sentiment surged to a record high last month, and the Ifo institute described the mood among German companies as “euphoric.”

The Ifo’s business climate index rose to 116.0 points, comfortably beating June’s record of 115.2 points and the markets forecast of 114.9 points.

Digging deeper, German companies were more upbeat about their current business situation and their six-month outlook.

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