Dollar Direction to be dictated by Climate

Thursday June 1: Five things the markets are talking about

Capital markets are currently experiencing a number of pressure points that are managing to keep investors on the toes.

Sterling remains soft on investor fears that PM Theresa May could lose control of parliament in next week’s U.K General Election (June 8). Yesterday’s YouGov poll showed May could be well short of the number of seats needed to form a government, raising the prospect of political turmoil just as formal Brexit talks are about to begin.

In China, equities closed under pressure after a private survey – the Caixin manufacturing gauge – revealed that the country’s manufacturing activity contracted last month for the first time in nearly a year. The results differed with yesterday’s data that suggested growth remained relatively steady.

In the U.S, aside from Trump’s administration being under FBI scrutiny, a decision by the President on whether the U.S will remain in the Paris agreement – global pact to fight climate change – will keep markets and investors on edge (3:00 pm EST).

At 10:00 am EST U.S manufacturing ISM data is expected to show it expanded at a robust pace last month (54.7).

1. Stocks mixed results

In Japan, the Nikkei snapped a four-day losing run (+1.1%) on upbeat data and a weaker yen (¥110.11). Indicators released overnight showed that corporate Japan picked up the pace of capital expenditures Q1. The broader Topix also traded in the black (+1.1%) after trading up +2.4% in May for its biggest monthly gain year-to-date.

In Singapore, the Straits Times Index climbed +0.5%, while down-under, the Aussies S&P/ASX 200 Index rose +0.2% after swinging between gains and losses amidst economic releases from China.

In Hong Kong, the Hang Seng Index climbed +0.5% after completing its fifth consecutive monthly gain.

In China, the Shanghai Composite Index slipped -0.5% percent, after a four-day rally on investor profit taking.

In Europe, indices are trading higher across the board with notable outperformance in Italy, and France. A number of softer corporate earnings and commodity and energy prices are providing slight pressure to the FTSE 100; however, a weaker pound is capping current losses at the moment.

In the U.S, stocks are expected to open in the black (+0.1%).

Indices: Stoxx50 +0.5% at 3573, FTSE +0.3% at 7545, DAX %+0.4 at 12670, CAC-40 +0.8% at 5325, IBEX-35 +0.1% at 10893, FTSE MIB +1.3% at 20993, SMI +0.6% at 9068, S&P 500 Futures +0.1%

2. Oil rises on U.S stockpile draw, doubts over climate accord

Ahead of the U.S open, oil prices are rallying from yesterday’s three-week low, mostly supported by expectations that the U.S could pull out of the Paris climate agreement and by yesterday’s report that showed U.S stockpiles falling more than expected.

Note: Trump said he would announce at 3:00 pm EST his decision on the agreement.

Brent crude futures are up +58c, or +0.8%, at +$51.34 a barrel – on Wednesday, it fell -$1.53, or -3%, to close at +$50.31 a barrel.

Note: It was Brent’s lowest close since May 10 and the contract dropped -2.7%in May, the third monthly decline.

U.S West Texas Intermediate is up +64c, or +0.8%, at +$48.96 a barrel – it dropped -$1.34, or -2.7%yesterday to settle at +$48.32 per barrel.

Note: It was the lowest close since May 12. The U.S benchmark also fell for a third month in May, declining -2%.

API data yesterday showed that crude inventories were down by -8.7m barrels at +513.2m in the week to May 26. The market was expecting a -2.5m drawdown.

Note: The U.S EIA report is due at 11:00 am EDT, delayed by a day because of the Memorial Day holiday this week.

Gold has edged lower overnight (-0.2% at +$1,266.08 per ounce), but held near the five-week highs hit in the previous session, as expectations that the U.S. Federal Reserve will hike interest rates this month weighed on prices but geopolitical concerns provided some support.

3. Global yield curves little changed

U.S Treasuries have rallied this week on month-end buying adding to demand that has been building along with declining inflation expectations.

The yields on U.S 10’s settled yesterday at +2.198%, and have backed up +1 bps ahead of the U.S open.

Data on Tuesday showed the Fed’s preferred gauge of inflation – PCE – ticked up in April, but on an annual basis, remained stuck below the Fed’s +2% target.

Elsewhere, benchmark yields in Australia backed up +1bps to +2.40%.

4. Dollar looking for direction

USD is trying to find its ‘sea legs’ in the first day of trading in a new month. The next couple of session will see various job-related data (today’s ADP at 08:15 am EDT, and tomorrow’s non-farm payroll (NFP) report at 08:30 am EDT) dictate the greenbacks rate differential direction.

Elsewhere, the EUR (€1.1227) continues to probe its seven month highs supported by the Bundesbank speak that the current eurozone outlook would suggest that the ECB should start to discuss “whether and when to change forward guidance.”

Sterling (£1.2849) trades well under the psychological £1.29 handle as the currency continues to face headwinds ahead of next week’s U.K Parliamentary election.

Note: More polls continue to showing PM May’s Conservative in front, but her lead continues to dwindle.

Times/YouGov general election weekly poll: Conservatives +42% (-1pts), Labour 39% (+3pts)
Sun/SurveyMonkey general election poll: Conservative Party +44% (unchanged), Labour Party +38% (+2pts)

5. Eurozone Manufacturing PMI Unrevised

Data this morning shows that the manufacturing PMI for the eurozone was unrevised at 57.0 in May, up from 56.7 in April and in line with market expectations – (Beats: Germany, U.K, Spain, Russia, Hungary, Turkey; Misses: France, Italy, Sweden, Norway, Poland).

The measure points to robust growth in the sector, with businesses reporting that they added new workers at the fastest pace in the twenty-year history of the survey.

Digging deeper however, businesses raised their prices at the slowest pace in four-months, an indication that the stronger economic recovery may not lead to a sustained rise in inflationary pressures and would suggest that the ECB remains on the side line in the medium term.

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