June 21, 2017

Markets Today: Under pressure

Almost out of default, the USD is higher in a night of virtually no key data, but not getting any clear support from a mixed set of Fed speak, Charles Evans (voter) sounding dovish and Kaplan too.

It’s been a night of more UK political uncertainty with still no government formed (and with the Queen’s speech to Parliament tonight that is going to be voted on), a dovish Mark Carney (hot on the heels of last week’s surprise three votes on the MPC to hike), overlaid with further pressure on the oil price that’s now down 20% so far this year.  WTI now has a 43 handle having tested below 43 overnight.  With oil lower (as have base metals; iron ore rose 0.3%), the AUD and the CAD have been on the back foot as has sterling, the Aussie off 0.30% and the CAD off 0.15%, sterling down 0.30%.  The Kiwi has also lost a little ground, notwithstanding that the overnight Global Dairy Auction saw world dairy prices almost unchanged, down 0.8%.

In the upshot, almost out of default, the USD is higher in a night of virtually no key data, but not getting any clear support from a mixed set of Fed speak, Charles Evans (voter) sounding dovish and Kaplan too.  Evans said that while he still expected to see inflationary pressures, he acknowledged that he was getting very nervous in the light of a multi-month run of low inflation readings.  Even aside from the deflationary impact of oil prices, he said that big corporate deals (Amazon/Whole Foods) could exert downward pressure on inflation.  Toward the other end of the policy spectrum, Eric Rosengren (non-voter) spoke of his financial stability/search for yield dangers of low rates.  Robert Kaplan (voter), spoke again this week, saying that he wants more evidence that recently low inflation are temporary before pushing on with more monetary tightening.

These more mixed comments from Evans and Kaplan who voted for a hike last week come after an almost hawkish sounding Fed Chair at her press conference last week and similar comments from the NY’s Bill Dudley earlier this week.  Stanley Fischer, Deputy Chair at the Fed, and who is extremely influential, spoke overnight but shied away from any comments on the US economy or monetary policy.  Instead he spoke on the role of housing and related policy in financial crises at a macro-prudential policy event at the Dutch central bank.

The decline in oil and continuing uncertainty on Fed policy has seen bond yields lower across the board and along the curve.  The US OIS market is pricing in barely a 50% chance of a hike by Christmas and not even one is fully priced by the middle of next year.

BoE Governor Carney gave a speech at the Mansion House and laid his cards on the table as far as his worrisome outlook for the economy is concerned.  While there were three MPC voters at last week’s BoE meeting, he signalled he is in no hurry to raise rates, highlighting the weaknesses in the economy as Brexit negotiations get underway, also worrying also about the sustainability of the UK’s current account deficits.  UK interest rate markets quickly unwound a lot of the more post-BoE aggressive near term rate expectations, the market now pricing in a 47% chance of a hike by the end of the year, down from a 77% chance before he spoke.  Added into the mix, S&P Chief Ratings Office Moritz Kraemer said that they would not have to wait till Brexit negotiations are concluded should they wish to revise the UK’s rating (currently AA).

US Treasury Secretary Steve Mnuchin did an interview on CNBC, spoke of their continuing work to progress with the tax reform agenda to free capital and lift growth from 2 to their aspirational 3%, that they are working on it every week, and that they hope to get it done this year.

Coming Up

The event calendar is rather Japan-centric today.  It starts with the BoJ Minutes from their April 26-27 meeting at 9.50 this morning, followed this afternoon with a speech from Governor Kuroda at just after 4.30 AEDT.  Japan also releases its All Industry Activity Index and Machine Tool Orders reports today.

Realistically, Japan’s monetary policy settings are very unlikely to be changed for quite some time yet.  Even so, the market is taking note of the Bank’s evolving and somewhat improving view on the domestic economy and how an improving global economy may be helping to support Japanese trade.  On the policy front, Kuroda did acknowledge in a press conference last week that scaling back ETF purchases could be “possible in theory” as a tweak to policy before they meet their 2% target objective.  But he did though remind the market that reaching and then maintaining their inflation objective is paramount.  He said that it remains “generally unthinkable” that they would keep most parts of their easing program but quit another, all arms of policy needing to be devoted to meeting their 2% inflation target.

It’s very much second tier today as far as local AU data is concerned with the Leading Index and Skilled Vacancies out at 10.30/11 AEDT.

Tonight, there will be continued focus tonight on sterling with the Queen’s speech to Parliament still scheduled and to be voted on, Labour indicating it will oppose it.  There are no big releases tonight with only the UK monthly public finances report and US Existing Home Sales for May ahead of New Home Sales on Friday.


On global stock markets, the S&P 500 was -0.67%. Bond markets saw US 10-years -3.14bp to 2.16%. In commodities, Brent crude oil -2.34% to $45.81, gold-0.3% to $1,241, iron ore +0.3% to $56.45, steam coal -0.6% to $80.75, met. coal +0.0% to $145.00. AUD is at 0.758 and the range since yesterday 5pm Sydney time is 0.7571 to 0.7624.

Good luck.

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