Fed Rhetoric On Markets Radar

Thursday May 26: Five things the markets are talking about

To the neutral observer, it’s not a surprise to see the mighty dollar encountering some profit taking of its recent gains ahead of Fed chair Yellen’s speech tomorrow.

The bulk of this week’s USD rise has come from consistent jawboning from the Fed’s team.

Will Yellen be as ‘hawkish”? Only time will tell, but it’s prudent for the unconvinced to lighten up their positions ahead of the event and a long weekend stateside.

1. Crude oil breaks psychological handle

Brent crude prices (July $50.26) have rallied to a new seven-month high this morning after U.S data yesterday revealed that weekly stockpiles declined more than forecast at a time when production has fallen in regions like Nigeria and Venezuela.

The EIA crude inventory number (stocks fell -4.2m w/w) confirmed the API data drawdown on Tuesday. This is supporting some analyst’s theory that the market supply is currently in deficit.

It’s not a surprise to see that crude sensitive currencies like the NOK (€9.2679) and CAD (C$1.2985) have led the gains amongst G10 pairs.

2. Sterling pares gains after U.K data

The pound (£1.4688) is off its intraday highs after data this morning showed annual Q1 GDP revised down to +2.0% and unchanged at +0.4% q/q. Other data also pointed to weaker business investment.

U.K GDP growth continues to be entirely dependent on the services sector on the output side, and heavily reliant on consumer spending on the expenditure side. Many would argue that this is a recipe of an unbalanced economy.

The pound has not been directly impacted by BoE policy maker’s testimony before U.K. lawmakers earlier this week, who warned a Brexit would have a material negative impact on “growth and inflation.”

Support for currency has come mainly from the lead to remain within the E.U in the latest polls.

The latest Brexit ORB/Daily Telegraph poll has opened up a double-digit lead for the ‘stay’ campaign: +55% in favor of remaining in the E.U, while +42% is in favor of leaving.

3. G7 summit kicks off in Japan

PM Abe has warned his G7 counterparts of the possibility of heading towards a crisis on the scale of ‘Lehman Brothers.’ Is the Abe laying the groundwork to again delay an increase in Japan’s national sales tax?

Abe presented data at today’s opening session of the G7 summit in japan showing that commodities prices have fallen -55% in 24-month, the same margin they fell during the global financial crisis.

The PM has pledged to raise Japan’s sales tax to +10% from +8% in April 2017 as planned, unless there is a financial crisis on the scale of the Lehman collapse or a major natural disaster.

Investors should expect further G7 updates to potentially have a market impact.

4. Fed rhetoric on markets radar

U.S Fed officials continue to ‘jawbone’ the market to be prepared for more rate hikes, perhaps as early as next month.

Last weekend, Boston Fed’s Rosengren (voter) said that most of the conditions for more rate hikes that were laid out in the FOMC minutes seem to be on the verge of broadly being met.

Earlier this week, San Francisco Fed’s Williams said it would be a good idea to raise rates with inflation below target, due to the lag in policy impact, and warned that the Fed sets policy based on the direction inflation is headed, not where it is now.

Today, the market hears from two voting FOMC members, Jerome Powell and James Bullard. Bullard has been very vocal this week – tries to remain relatively balanced while appearing to show a preference for a summer rate hike.

Powell is considered amongst the neutrals at the Fed – Can he toe the somewhat “hawkish” line?

Bond prices are little changed, but short rates continue to edge higher once again and flatten the U.S yield curve.

5. Global indices see mixed results

Ahead of the U.S open, Euro bourses are trading mixed, very much shadowing Asia’s session.

Initial gains in the session are being attributed to rising crude oil prices – both Brent and WTI atop of the psychological $50 handle.

In the U.K, commodity and mining stocks are contributing to the bulk of the FTSE 100 gains, while energy stocks are trading higher in the Eurostoxx on the back of the rising oil prices.

The net loosing sector again appears to be financial stocks across Europe.

Indices: Stoxx50 -0.1% at 3,046, FTSE -0.1% at 6,252, DAX +0.2% at 10,229, CAC-40 +0.1% at 4,451, IBEX-35 -0.7% at 9,038, FTSE MIB -0.4% at 18,123, SMI -0.1% at 8,168, S&P 500 Futures flat

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