Markets Today: Mind the Gap

Ahead of a long weekend US equities ended the week in a relatively subdued note, oil prices recovered a bit of lost ground since the drop in prices post the OPEC’s production cuts extension announcement and US treasury yields were little changed.

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The USD closed the week a little bit stronger largely reflecting GBP weakness as a YouGov poll suggest the Labour Party has narrowed the gap with Conservatives ahead of the June 8 UK general election.

European equities closed the week marginally softer (both the Eurostoxx 50 and DAX were -0.15%) and US equities faired a little bit better with the S&P500 +0.03% and NASDAQ 0.08% while the Dow was essentially flat. The small rises in the S&P 500 and NASDAQ allowed both indices to close at new record highs, 2415.07 and 6205.25 respectively. After the previous week sell, off triggered by the Trump ‘s administration/FBI turmoil, the S&P 500 has had an impressive run of 7 consecutive days of positive returns, up 2,5% over the period and more than reversing the 1.8% drop seen two Wednesdays ago.

Meanwhile the USD has essentially traded sideways over the past few days, still reflecting a bit of softness from US political uncertainty although on Friday it benefited from GBP weakness. On Friday, the pound was already trading with a softer tone during our Asia session, but then a YouGov poll suggested the UK election contest was getting tighter with the Conservative Party’s lead over Labour contracting to just five points, the narrowest since PM May came to power last July. GBP is likely to remain under pressure at the start of the week as additional opinion polls over the weekend appear to confirm the decline of Conservative support and resurgence of the Labour party. A poll for the Sunday Telegraph suggests Labour has narrowed the gap with Conservatives to six points as women voters surge towards Jeremy Corbyn. While a Conservative win still looks like the most probable outcome, recent polls have raised concerns over the possibility of a smaller working majority for the Conservative party or even a hung Parliament. A weak government would make it harder for the UK to negotiate its exits strategy out of Europe.

The Euro has continued to find the air pretty thin above the 1.12 mark and it closed the week at 1.1183, down 0.21% on the day and little changed in the week. Meanwhile the AUD closed the week at 0.7448 almost exactly at the same level where it started the week, despite weakens in iron ore prices (see more below). In contrast NZD was the top performer on Friday, climbing 0.54% on the day and closing the week at 0.7061. The kiwi was in fact the big winner for the week, climbing almost 2% against the USD and 1.175% against the AUD. The AUD/NZD cross has now made a decisive move below 1.06, closing the week at 1.0547, its lowest level since February 9 this year.

In what was a holiday shortened trading session, US Treasury yields closed Friday little changed relative to Thursday’s levels. 2y yields were unmoved at 1.293% and 10y UST closed 0.9bps lower at 2.246%

Looking at commodities, oil prices staged a small recovery on Friday with WTI climbing $1 to $49.8 (1.84%) and Brent gained 1.34% closing the week at $1.3.Iron ore closed Friday 3.9% lower on the day closing the week at $57.91, that’s the first time iron ore has traded below $60/ton since Oct. 24. Lastly gold climbed $11.50 to $1267.11, up just under 1% on the day.

CFTC data from the week ending May 23 shows speculators trimmed their USD longs v.s. G10 by 44k to 136k. The bulk of the decline in USD longs came from an increase of 27k Euro longs and a reduction of 9k shorts in GBP and 8k shorts in JPY. Speculators now have 64.8k Euro net long contracts, the largest since March 2014.  AUD longs fell by -3.7k on the week; marking the 9th week in a row of decline and leaving positioning essentially flat at 2.6k. In US Treasuries, speculators increased their longs in 10y UST by 122k to 362.5k. Shorts in 5y were reduced by 46k to 123.7k and 2y longs of 23.5k flipped to 19k shorts.

The G7 summit in Taormina, Sicily, ended up with the world’s biggest industrialized countries failing to agree a common stance on climate change or trade. U.S President Trump was reportedly the main factor behind the disagreements with the Italian media coining the phrase “G6 plus 1,” reflecting the antagonistic position from the U.S .President.

Later on Saturday via his twitter account President Trump said that he’ll determine next week whether to pull the U.S. out of the Paris climate accord.

Coming Up

The start of the week is likely to be a quiet one with the UK and US observing Memorial Day on Monday while China is out celebrating Dragon Boat Festival on Monday and Ng Festival on Tuesday. That said, later in the week, we could get some market volatility with key domestic and offshore data releases. When China comes back to work on Wednesday, PMI’s and iron ore’s performance (given its dip below the $60 mark on Friday) will be important for the AUD and AU CAPEX and retail sales on Thursday will be closely watch.

ISM and payrolls are also due out this week in the US. See our What to Watch publication for more details

Overnight

On global stock markets, the S&P 500 was +0.03%. Bond markets saw US 10-years -0.89bp to 2.25%. In commodities, Brent crude oil +1.34% to $52.15, gold+0.9% to $1,268, iron ore -3.9% to $57.91, steam coal -0.2% to $74.45, met. coal -0.3% to $173.65. AUD is at 0.7442 and the range since Friday 5pm Sydney time is 0.7422 to 0.7461.

Good luck.

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