Politics Lifts Euro, Dollar Fed Focused

Monday June 12: Five things the markets are talking about

Three more central banks are slated to announce their respective policy decisions this week – the Fed (June 14), the Bank of England (June 15) and Bank of Japan (June 15).

The Fed starts its two-day meeting tomorrow and ends on Wednesday at which it is widely expected to increase its fed funds rate by +25 bps to +1% – +1.25%. The focus is on whether the Fed thinks the U.S. economy is robust enough to withstand further rate increases through this year. U.S policy makers are expected to raise interest rates twice more in 2017, but conviction for a move beyond this week has faded for many, along with the outlook for inflation.

Note: The BoE and BoJ are anticipated to maintain their current policy rates of +0.25% and minus -0.1%.

Price data will also be released in the U.K, the Eurozone and Japan. Both the U.K and Australia will be reporting last months labor stats.

Geopolitical risks again will be an issue this week. Ongoing developments in the U.K following last week’s snap election will be keeping U.K capital markets very busy, while Stateside, AG Jeff Sessions will face questions about the firing of FBI Director Comey and undeclared meetings with Russian officials at a U.S Senate hearing tomorrow.

1. Global stocks see “Tech Red”

In Asia, Japan’s Nikkei share average ended lower (-0.5%) overnight, dragged down by declines in technology shares after the Nasdaq 100 -2.4% plunge in Friday afternoons session. The broader Topix was little changed.

In South Korea, the Kospi lost -1%, with Samsung slumping -1.6%. In Hong Kong, the Hang Seng Index declined -1.1% – the most in nearly two months – as tech share selling triggered broader profit-taking in one of the world’s best-performing equity markets this year.

In China, the Shanghai Composite Index retreated -0.6%, after a four-day rally, while markets in Australia, Malaysia and the Philippines were closed for holidays.

In Europe, indices trade lower across the board led by the tech sector continuing to see the brunt of the sell off after the sharp sell off in the Nasdaq on Friday – Nasdaq futures are down a further -1% ahead of the U.S open.

U.S stocks are set to open in the ‘red.’

Indices: Stoxx50 -0.9% at 3556, FTSE -0.4% at 7499, DAX -0.6% at 12735, CAC-40 -0.8% at 5256, IBEX-35 -1.2% at 10845, FTSE MIB -0.6% at 20990, SMI -0.3% at 8818, S&P 500 Futures -0.3%

2. Oil prices supported by future bets, gold shines

Oil spot prices have rallied overnight as futures traders lay bets that the market may have bottomed after the recent -10% falls, and this despite the physical market remaining bloated, especially from an upticks in U.S production drilling numbers.

Brent crude futures is at +$48.29 per barrel, up +14c, or +0.3% from Friday’s close. U.S. West Texas Intermediate (WTI) crude futures is at +$45.95 per barrel, up +12c, or +0.3%.

Note: U.S drillers’ added eight oilrigs in the week to June 9, bringing the total count up to +741, the most since April 2015 (Baker Hughes Inc.).

The drive to find new oil has pushed up U.S output by over +10% since mid-2016, to +9.3m bpd. The EIA expects this number to push above the +10m benchmark next year.

For the oil ‘bear’ U.S production undermines any effort led by OPEC to cut almost -1.8m bpd of production until the Q1, 2018 in order to prop up global prices.

Gold prices (up +0.1% at +$1,266.90 an ounce) have inched up ahead of the U.S open as global stocks fall and as the ‘big’ dollar eases ahead of the Fed announcement that many hope will give clues on the pace of interest rate hikes over the rest of the year.

3. U.S yields back up

Friday’s sell-off in U.S Treasuries suggests that the market is preparing for a crowded U.S auction calendar this week. Dealers backed up yields to make room to take down 3-, 10- and 30-year debt.

Note: The yield on 10-year U.S Treasuries is heading higher for a fourth day, advancing +2 bps to +2.22%.

The pending Fed rate announcement has also put the U.S short-end under pressure in anticipation of another interest rate increase on Wednesday. Fed fund futures are pricing in a +93% chance of a rate hike. The markets focus will be on rhetoric that may give a clue on the pace of future rate hikes.

Dollar ‘bulls’ are concerned that the Fed could come across as ‘dovish’ at this week’s meeting given the lack of domestic wage and inflation pressure.

Elsewhere, U.K Gilt yields are flat (+0.97%) after dropping -3 bps on Friday. French (OAT’s) yields fell -2 bps to +0.60%, while German Bunds are little changed (+0.24%).

4. “Big ” dollar’s mixed results

The EUR is firmer outright (+0.2% at €1.1222) as regional geopolitical concerns ease a little over the weekend.

In France, President Macron’s La Republique en Marche made big gains in the first round of parliamentary elections on Sunday (see below), while in Italy, the anti-establishment 5-Start Movement suffered setbacks in municipal elections.

The focus this week is on a likely U.S Fed rate rise on Wednesday. However, this is widely expected and with investors looking towards the prospect of the ECB scaling back monetary easing, immediate dollar gains are being considered somewhat limited.

In the U.K, “uncertainty” is expected to dominate the various asset prices with risks looking tilted towards further downside pressure for the pound (£1.2700) as investors wait for clues on what might happen next.

The outcome of the election is likely to change U.K Brexit policies now that PM May is trying to enter a coalition with Ulster’s DUP.

USD/JPY continues to straddle atop of the psychological ¥110.00 handle. Ahead of this week’s Bank of Japan (BoJ) meeting, overnight tier II data (May preliminary machine tool orders y/y- 24.4% vs. 34.7% prior) continues to give little justification for rumored discussion about their QE exit process.

5. President Macron wins handily, but on low turnout

A first-round French parliamentary election result is promising President Macron a crushing majority in parliament, however, the result appears on the back of the lowest voter turnout in modern history.

Pollsters said Macron was on course to win as much as three quarters of National Assembly seats in the June 18 second round after +28% of those who voted in first round chose his Republic on the Move (LREM) party.

It’s expected to be France’s biggest majority in decades, and according to analysts it effectively leaves only the trade union movement as a potential obstacle to the Macron’s pro-business he has promised to introduce in a bid to boost domestic growth and jobs.

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