Rising Yields Keep Stock Markets Subdued

Forex

Summary:

We saw another cautious day for European markets yesterday with little in the way of overall direction, after China exports for May plunged by -7.5% raising concerns about the outlook for global demand, while the Bank of Canada followed the RBA in hiking interest rates by 25bps.

With the prospect of more interest rate rises on the way yields pushed higher, which in turn acted as a drag on equity markets more broadly, even as U.S. markets finished the session mixed, while Asia markets have slipped back

The Russell 2000 finished the day strongly higher, helped by the recovery in regional bank stocks, while the Nasdaq 100 fell sharply, and the S&P500 also closing lower.

With the Federal Reserve, ECB, and Bank of Japan due next week and this week's hikes pointing to further interest rate pain, bets about a Fed pause next week are being taken off the table over concern the Fed may well follow suit.

When the Fed met back in May the removal of the language that signalled that more hikes were coming led to the impression that we'd probably see a pause in June, a view that was given some encouragement a few days ago by Fed governor Philip Jefferson in a recent speech just before the central bank went into the blackout period. This still seems to be the favoured outcome; however, this week's rate hikes have muddied the waters somewhat.

Today we have weekly jobless claims which are only likely to reinforce the hawkish narrative. With ECB officials also adopting a hawkish tone we can still expect another 25bps from the ECB next week even if the Fed does stay on hold.

As for today's European session we look set for a lower open with the only data of note being the final revision of EU Q1 GDP which is expected to see a downward revision to 0% from 0.1% after the downgrade to Germany Q1 GDP at the end of last month.

EUR/USD – still trading between resistance at the 1.0780 highs of last week, and support back at the recent lows at 1.0635. We need to see a break of this range with broader resistance at the 1.0820/30 level.

GBP/USD – chopping around below resistance at the 1.2540 area and last week's highs and support at the 1.2300 level. We have trend line resistance from the 2021 highs at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area.

EUR/GBP – support remains at the 0.8560 level and last week's lows, just above the December 2022 lows at 0.8558. While below resistance at the 0.8660 area the bias remains for a drift lower. We also have major resistance at the 0.8720 area.

USD/JPY – currently undergoing some chop between 139.00 and the recent highs below 140.95. Is the U.S. dollar trying to carve out a top? The main resistance remains at 140.95 area. We have support at the 138.40 area which if broken could see a move back to the 137.00 area.

Source: CMC

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Alex

Forex

The dollar's renewed strength against most major currencies will not fade away anytime soon, according to FX strategists polled by Reuters, who said it would take rate cuts from the Federal Reserve to weaken the currency substantially.

The greenback has recouped all of its roughly 3% losses for the year sustained through April on safe-haven bids related to recent concerns over the U.S. debt ceiling and growing expectations of a July rate hike after a pause in June.

That, along with receding rate cut calls for 2023, will support the dollar in coming months, analysts say, even if Fed policymakers decide to skip a meeting for the first time in an aggressive tightening campaign that began in March last year.

Most major currencies were not expected to reclaim their end-April levels against the dollar at least until September, according to median forecasts from 74 market strategists polled June 1-7. That was a near-across-the-board upgrade compared with a May survey.

"The U.S. economy continues to surprise to the upside, while Europe and China have been weaker than expected...this pattern will have to abate before medium-term shallow dollar depreciation can come back into view," noted Kamakshya Trivedi, head of global FX at Goldman Sachs.

"At current pricing, 'sticking with skipping' in the midst of a buoyant risk backdrop would present some challenge to the dollar, but we suspect that downside will continue to be shallow and limited by U.S. macro performance."

Net USD short positions have eased over the past few weeks as the recent rally dampened bearish investors' mood who were hoping for a sustained weakness in the dollar following last year's multi-decade highs, according to data from the Commodity Futures Trading Commission.

That was contrary to what was predicted by most FX strategists in the May survey. Just over a half of respondents said net short dollar positioning would increase by end-May.

Despite markets expecting the European Central Bank and the Bank of England to go for at least two more rate hikes, versus one from the Fed, the euro and sterling were predicted to make only modest gains over the coming three months.

After declining more than 3% in May, the euro, currently at $1.07, was expected to gain just around 2% and trade at $1.09. Sterling was forecast to change hands at $1.24, broadly unchanged from the current level.

Mostly all major currencies were predicted to trade below their respective 2022 highs against the dollar - which were largely before the Fed began its tightening cycle - in one year from now.

A majority of respondents who answered an additional question said a rate cut by the Fed, which economists do not expect to come until next year, or a pause in its tightening cycle could lead to a sustained weaker dollar.

But a majority of economists in a separate Reuters survey predicted the Fed would pause in June for the first time in more than a year and keep its key interest rate at 5.00%-5.25% then and for the rest of the year.

A growing minority, however, expected at least one more hike between the June and July meetings.

"As the U.S. economy continues to demonstrate resilience in the face of higher rates, the rates market is pricing out rate cuts and could yet contemplate the idea that a June Fed pause, or skip, could be followed by another jump," said Kit Juckes, chief FX strategist at Societe Generale.

"The FX market is tracking short-term rates more closely than ever in the face of wider uncertainty, and with positioning still short USD, the current uptrend can continue for a while longer."

Source: U.S. News

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Warren Takunda

Traders' Opinions

In a surprising turn of events, the latest data from the Energy Information Administration (EIA) Petroleum Status Report revealed a significant decline in US crude oil inventories. The unexpected drop comes amidst market expectations of an increase in supplies, potentially impacting the energy markets. Additionally, distillate stockpiles, including diesel and heating oil, experienced a substantial surge, raising concerns about the future trajectory of the industry.

According to the EIA report, US crude oil inventories recorded a decrease of 0.451 million barrels during the week ending June 2, 2023. This decline caught analysts off guard, as they had anticipated an injection of 1.022 million barrels into stockpiles. The unanticipated reduction in crude oil inventories could potentially influence oil prices and disrupt the equilibrium of global energy markets.

US Crude Inventories Experience Unexpected Decline, Distillate Stockpiles Soar: EIA_1

Meanwhile, crude stocks at the Cushing, Oklahoma delivery hub saw an increase of 1.721 million barrels. This rise followed a previous week's growth of 1.628 million barrels, further contributing to the unexpected shift in inventory dynamics. The Cushing hub serves as a vital delivery point for various crude oil contracts, making this increase a crucial development to monitor in the coming weeks.

Gasoline inventories, another significant component of the petroleum market, experienced a substantial increase of 2.746 million barrels. This figure exceeded market expectations of a more modest 0.88 million barrel rise. The surge in gasoline inventories could potentially indicate either a decrease in demand or an oversupply situation, potentially influencing consumer prices and the overall economy.

The most striking observation from the EIA report, however, is the significant surge in distillate stockpiles. The data revealed a staggering increase of 5.075 million barrels, the highest since early December. This surge surpassed market consensus, which had predicted a rise of 1.328 million barrels. Such a notable upswing in distillate stockpiles could have wide-ranging implications for industries dependent on diesel and heating oil, such as transportation, agriculture, and manufacturing.

Analysts and industry experts will closely scrutinize these inventory changes, as they could impact various facets of the global economy. The unexpected decline in US crude inventories could potentially stimulate upward pressure on oil prices, affecting the profitability of oil producers while simultaneously impacting consumer prices at the pump. Moreover, the surge in distillate stockpiles raises concerns about potential oversupply and demand trends, warranting attention from market participants and policymakers alike.

As market participants digest this unexpected data, it remains to be seen how these inventory dynamics will shape future energy prices and industry dynamics. The outcomes could have far-reaching consequences for the energy market's equilibrium and potentially influence the wider economy, warranting continued monitoring and analysis by investors, economists, and industry stakeholders in the coming weeks.

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Thomas

Central Bank

Malaysia's inflation currently isn't misbehaving, giving the central bank room to keep up its "conditional pause", according to a senior official.

"If it's food prices and all the supply shocks, we have a history of seeing through those shocks," Bank Negara Malaysia (BNM) assistant governor Fraziali Ismail said in an interview with Bloomberg Television's Haslinda Amin on Thursday (June 8). "What matters is how it stokes demand. At this juncture, again, we don't see inflation misbehaving in Malaysia."

When asked if there is a case to continue hiking rates, Fraziali said "that depends on how inflation behaves". Fraziali, who's worked at the central bank for almost three decades, reiterated the central bank's 2023 average inflation forecast of between 2.8% and 3.8% in the interview in Kuala Lumpur.

"What we have seen so far, as I've mentioned earlier, inflation is a function of both supply and demand," Fraziali said. "We have seen, for example, demand-driven inflation staying quite strong at this juncture. We don't have an inflation problem."

Easing inflation will give BNM the scope to ease monetary policy should the economy lose momentum. Consumer prices rose 3.3% in April from a year earlier, the slowest pace in 11 months.

While inflation has mostly moderated, boosting market bets that borrowing costs in the region have peaked, price growth is still proving persistent in some places. Canada delivered a surprise interest-rate hike on Wednesday, and earlier this week Australia unexpectedly increased its key rate for a second straight meeting and kept the door open for more hikes.

Malaysia's central bank has delivered five rate increases in the past year, with a surprise hike early last month bringing borrowing costs back to pre-pandemic levels. Policymakers warned then that inflation may flare up again, with commodity prices and an adjustment to subsidies among the factors to watch.

"Many central banks have taken the step, us included, to have an intermittent pause, to reevaluate what has been the effects of our measures on the economy," said Fraziali, who also sits on BNM's Monetary Policy Committee. "In a way, when we do a conditional pause, let me stress it is a conditional pause — it depends on incoming data as well."

A policy pause in Malaysia will offer the economy some relief, as analysts predict that the pace of expansion will slow to 4.2% this year, from 8.7% in 2022. Traders think the rate-hike cycle has ended, with ringgit one-year, one-day swaps reflecting bets that BNM will stand pat over the next 12 months.

Still, an impending reduction in subsidies may rekindle price pressures, and Fraziali noted that inflation depends on subsidy timing. Moody's Investors Service has warned that a heatwave could translate into faster food inflation and another interest-rate hike.

Source: Bloomberg

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Warren Takunda

Traders' Opinions

In the face of impending inflation data and the highly anticipated Federal Reserve decision next week, the US dollar index (DXY) demonstrated resilience, maintaining a stable position around 104. Market sentiment remains cautious as investors carefully assess the potential impact of consumer inflation figures for May, projected to reflect a 0.3% price increase. The outcome of this data release could significantly influence the Fed's decision-making process. Additionally, market participants are closely monitoring the unwinding of long dollar bets, which were initially taken as a hedge before the US government raised the debt ceiling. Let's explore the factors shaping the currency market and the implications for investors.

Fed's Monetary Policy

The Federal Reserve is widely expected to keep interest rates unchanged this month. However, market speculations indicate a growing probability of a rate hike in July. Investors will be scrutinizing the Fed's decision closely, seeking insights into the central bank's stance on inflation and its potential monetary tightening measures. A cautious approach by the Fed could bolster the dollar's position in the short term, as investors seek stability amid uncertain market conditions.

Inflation Concerns

The release of May's consumer inflation data holds considerable significance, as it will play a crucial role in shaping the Fed's decision-making process. With projections pointing towards a 0.3% increase in prices, any deviation from these expectations could trigger market volatility. A higher-than-anticipated inflation reading may raise concerns about the Fed's transitory inflation narrative, potentially prompting a more hawkish response from the central bank. Such a development might strengthen the case for an earlier interest rate hike and potentially lend support to the US dollar.

US Treasury Issuance and Potential Demand Concerns

Investor attention is also focused on the US Treasury's increased issuance of Treasury bills, which aims to rebuild the government's cash balance. Any potential demand problems arising from this strategy could have repercussions in the market. If there is insufficient demand for the increased issuance, it could create headwinds for the US dollar, possibly leading to a depreciation. Therefore, market participants will closely monitor the Treasury's actions and assess their impact on overall market sentiment.

Trade Deficit and International Factors

Recent data revealed a widening US trade deficit in April, driven by increased imports and decreased exports. Furthermore, the recent rate hikes by the Bank of Canada and the Reserve Bank of Australia have attracted investors away from the dollar. These international developments, along with the evolving global economic landscape, contribute to the overall sentiment towards the US dollar. As global central banks adjust their policies, investors reassess their positions, resulting in potential shifts in capital flows that may impact the dollar's strength.

The US dollar index (DXY) has maintained stability around the 104 level, reflecting cautious sentiment among investors ahead of crucial events in the coming weeks. The release of May's inflation data and the Federal Reserve's decision will likely determine the short-term trajectory of the dollar. With markets pricing in the potential for a rate hike in July, any surprises in the inflation figures could have significant implications for the Fed's monetary policy. Moreover, investors will continue to monitor the US Treasury's issuance of Treasury bills, ensuring that demand remains adequate. As international factors, including rate hikes by other central banks, shape the currency market, investors must remain vigilant to potential shifts in capital flows.

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Cohen

Bond

Global bonds are slumping after two shock interest-rate hikes this week served traders a reality check that central banks are far from done fighting inflation.

Shorter-maturity Treasury yields are close to their highest since March, while their Australian equivalents have jumped to levels last seen more than a decade ago. Investors are back ditching sovereign debt after the Bank of Canada joined the Reserve Bank of Australia in surprising markets with more rate hikes to combat stubbornly fast consumer-price gains.

The tightening is convincing traders to rethink their bets of US rate cuts later this year, underscoring the threat that the battle against inflation may be far from over.

Fresh jitters over a prolonged rate hike cycle risk paving the way for a renewed surge in volatility across global risk assets. But just like during last year's hikes, the concerns also put traditional havens in the firing line — a gauge of US Treasuries fell more than 1% in May as funds repositioned.

"The Reserve Bank of Australia defied economist predictions to increase the cash rate again this week, which may put more pressure on the European Central Bank, US Federal Reserve (Fed), Bank of Japan and Bank of England," said Colin Graham, the head of multi-asset strategies at Robeco. "Expectations for July have now shifted from an expected cut to an expected rise" for the Fed, he said.

Treasury yields were little changed in Asia on Thursday (June 8), with the 10-year just below 3.8%, up about 10 basis points this week. Australia's three-year yield jumped as much as 17 basis points to 3.87%, the highest since 2011.

More hikes

Investors briefly priced in a full quarter-point rate hike by the Fed by July and though they still expect some easing by year end, multiple rate cuts have being priced out of markets. That's triggered a renewed flattening of sections of the US yield curve.

All eyes will be on US inflation data next week, which will provide further clues on the Fed's policy path.

"With inflation having proved more stubborn than we'd thought, we now think the central bank will keep its policy rate higher for longer than we had previously projected," Diana Iovanel, an economist at Capital Economics, wrote in a note.

While some firms including Societe Generale SA reckon US interest rates may already be at their peak, the same can't be said for those in Europe. Traders are pricing in half a percentage point of hikes by the European Central Bank in the next three months, swaps data show.

The ECB is "behind the curve in terms of inflation pressure, in terms of rates", Guy Stear, the head of fixed income research at SocGen told Bloomberg Television. "They have to keep going."

Source: Bloomberg

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Warren Takunda

Traders' Opinions

In a report released today, the United States Department of Commerce revealed that the nation's trade deficit reached a six-month high of $74.6 billion in April 2023. While the widening gap indicates challenges for the US economy, it managed to fall slightly below market expectations, which had projected a shortfall of $75.2 billion. The latest data reveals a complex mix of declining exports and rising imports, influenced by various industries and key trading partners.

Exports from the United States experienced a notable decline of 3.6% to reach $249 billion in April. Among the leading export categories that contributed to this contraction were crude oil, fuel oil, pharmaceutical preparations, gem diamonds, jewelry, financial services, and government goods and services. On the positive side, sales in the travel industry witnessed a rise during this period.

Meanwhile, imports into the United States increased by 1.5%, reaching $323.6 billion in April. The surge in imports was primarily driven by passenger cars, industrial supplies and materials, finished metal shapes, nonmonetary gold, organic chemicals, cell phones, and other household goods. However, there was a decline in purchases of crude oil, natural gas, as well as transport and travel services.

Analyzing the trade imbalances, it becomes evident that the largest deficits were recorded with China, amounting to $24.2 billion, followed by the European Union with a deficit of $17.3 billion. Mexico and Vietnam also contributed significantly to the trade gap, with deficits of $13 billion and $8.5 billion, respectively. On the other hand, the United States managed to achieve trade surpluses with the Netherlands ($4.2 billion), South and Central America ($4.1 billion), Belgium ($1.9 billion), and Hong Kong ($1.6 billion).

The widening trade deficit in April raises concerns about the impact on the overall US economy. A persistent trade gap could put pressure on domestic industries, potentially leading to job losses and affecting economic growth. Efforts to address the imbalance in trade, such as exploring new export markets and reviewing trade policies, may be crucial in the coming months.

Economists and market analysts will closely monitor future trade data, looking for signs of stabilization or further widening of the gap. The United States continues to navigate a complex global trade landscape, marked by evolving geopolitical dynamics and economic uncertainties.

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