Lack of concrete outcomes from the Trump-Kim summit keeps market suspicious on whether any meaningful steps towards peace has been achieved and ahead of the Fed and ECB decisions markets have treaded water over the past 24 hours. Equities are mixed, the UST yield curve is flatter led by a move higher in front end yields and the USD is stronger across the board. AUD is the G10 underperformer amid mixed commodities and soft EM FX and after a volatile 24 hours Sterling is essentially unchanged.
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After a massive build-up followed by handshakes and shoulder patting the Trump-Kim Summit has left markets none the wiser in terms of any concrete steps towards peace in the Korean peninsula. Of course the fact the Trump and Kim finally met is a positive move, but the lack of any new news in terms of next steps and timing towards denuclearisation has resulted in a muted reaction by markets with the focus now shifting towards the Fed decision this evening (see more below) followed by the ECB tomorrow afternoon. Friday’s US decision on whether or not it will impose $50bn worth of trade tariffs on China is also going to be important.
The US Dollar is stronger across the board with the move higher in shorter dated US Treasury yields a supportive factor. The May US CPI report revealed both headline and core inflation as expected (2.2% and 2.8% respectively), but importantly for markets underlying drivers of inflation continue to point to building price pressures (the six-month annualised core measure is running at 2.5%) and yesterday’s numbers still suggest the Fed’s preferred Core-PCE measure will head above the Fed’s 2% target in H2 2018. Ahead of the Fed decision, the debate on the Fed’s inflation tolerance is gaining more relveance and the inflation forecast numbers will be an important indicator as whether the Fed believes the prospects for higher inflation is merely due to temporary factors and more longer lasting factors. Recent evidence suggest the latter factors are having a greater degree of influence. On this core we note that the NFIB survey released yesterday also suggests building inflationary pressures with the Selling Price Index at a new cycle high and the Actual Compensation Index at a record high.
So US data releases have resulted in a slight move higher in shorter dated US Treasury Yields with the 2y rate edging 1.7bps higher to 2.5387% while the 10y tenor is little changed at 2.96%. Higher shorted dated US Treasury yields have supported the USD dollar with the greenback stronger against all G10 except for SEK and all EM currencies except for the Argentine Peso (ARS). Ahead of the inflation report tomorrow the Swedish Krona has been outperforming the USD and EUR amid expectations of a solid print and underperformance of the SEK relative to Riksbank’s forecasts. Meanwhile the ARS rebounded on news that the Central Bank intervened in currency markets following last week’s announcement of a $50 billion credit line from the IMF
So ahead of key risk events ( Fed/ECB and US trade tariffs decision), the AUD has been the G10 underperformer, down 0.45% and currently trading at 0.7573. Since the start of May the AUD has traded in a 0.7412 and 0.7677 range. After trading to the range highs late last week, the AUD is now back to the middle of the range and although Italian/Euro concerns have eased, the move higher in core yields has brought back the focus on Emerging Markets. This uncertainty appears to be weighing on the AUD, despite still buoyant risk appetite in equity markets. A mixed day for commodities has not helped the AUD either, although steam coal prices are higher, metal prices have struggled with copper easing a little ( -0.40%) after a couple of solid gains in previous days. Oil prices are also mixed with WTI up 0.26% but Brent down 0.86%. Brent softness appears to be driven by news that Russia plans to propose that OPEC and its allies be allowed to return production to October 2016 levels, rolling back most but not all of their output cuts within three months.
Meanwhile the other FX mover has been Sterling trading in a 90pip range, although at 1.3372 the pair it is essentially unchanged relative to levels this time yesterday. Early in the session, UK Employment was slightly higher than expected while wage data were slightly weaker. The Unemployment Rate remained at 4.2%, a level suggesting little spare capacity in the economy, however, the BoE will want to see economic momentum picking up before tightening policy. Then the debate at the Commons on the Lord amendments to the Brexit Withdrawal Bill became the focus. Prime Minister May has a claimed a victory on one of the key votes on the 15 amendments, but looking through the details the government’s concessions effectively mean that the essence from the Lord amendment has been retained. The government now does not have all the say in the Brexit deal and so for markets the good news is that a hard Brexit now looks less likely. The vote means that now Parliament will have a ‘’meaningful’’ say in the final Brexit deal. The government is now expected to present the final deal to MPs sometime in October this year and if they reject it, the government will have 28-days to the end of November to set out plans of how it intends to proceed and then seek the approval of the House for that course of action.
This morning on the Economic Front we have UK CPI and PPI at 9.30 am. This is followed at 10.00 am by Euro-Zone Industrial Production. Next we have US MBA Mortgage Applications at 12.00 pm and PPI at 1.30 pm. Finally we have the FOMC Rate Announcement at 7.00 pm and the Powell press conference at 7.30 pm. The FOMC releases its policy rate decision along with a new set of forecasts and dots. The market unanimously expects a 25bps lift in the Fed Funds rate target to 1.75% -2.00% (and 20bps lift to the Interest On Excess Reserves) and so the market’s focus is likely to be on whether the median dots shift up and how the Statement and Fed Powel choose to characterise the forward-guidance language (i.e how far are we from neutral?)
June S&P 500
Following the lack of substance after the Trump/Kim Summit ended the S&P went on hold , trading sideways in a narrow range ahead of today’s FOMC Statement which is not due until 7.00 pm followed by Fed Chair Powell’s press conference which follows 30 minutes later. I am still flat the S&P and given how overbought the market is trading I am reluctant to chase S&P higher and today I will leave my buy level unchanged from 2760/2768 with the same 2753 stop. I will also leave my sell level unchanged from 2799/2809 with a 2815 stop. Again if I am taken short and subsequently stopped out of this position I will be a more aggressive seller from 2825/2845 with the same 2853 stop.
The Euro has traded either side of 1.18 for the best part of the last 10 days and I am still flat. Today I will now lower my buy level slightly to 1.1635/1.1675 with a 1.1595 stop. I will also lower my sell level to 1.1860/1.1920 with a higher 1.1955 stop.
September Dollar Index
No change as I am still a seller on any rally higher to 93.90/94.30 with the same 94.65 stop.
I am still flat the DAX and just like the S&P above I am reluctant to chase this market higher especially as we have essentially traded sideways for the last two weeks. Today I will leave my buy level unchanged from 12660/12730 with the same 12600 stop. Ahead of the ECB Meeting tomorrow, I still do not want to be short the DAX at this time.
I am still flat the FTSE which came close to my 7680 buy level just before the New York close before rallying small. Today I will now lower my buy level to 7610/7650 with a 7570 stop. I still do not want to be short the FTSE at this time.
Dow Rolling Contract
After months of volatile price action, the Dow has traded sideways in a narrow range for the last 10 days as we wait for the FOMC Statement this evening. I am still flat the Dow and I will continue to be a buyer on any dip lower to 25030/25170 with a 24950 stop. Even though the Dow has underperformed both the S&P and NASDAQ I still do not want to be short the market at this time.
No change as I am still a seller on any rally higher to 7270/7320 with a 7365 stop. I will also leave my buy level unchanged from 7080/7130 with a 7040 stop.
I had the wrong big figure on my Bund buy level yesterday. It did not matter as the Bund missed this buy range before rallying into the close. Today my buy range will be from 159.00/159.40 with a 158.60 stop. Ahead of the ECB tomorrow I still do not want to be short the Bund at this time.
Gold Rolling Contract
The boring price action in Gold continues and I am still flat as the market is still struggling to break and close over 1300. Today I will leave my buy level unchanged from 1281/1288 with a 1274 stop.
Silver Rolling Contract
Silver traded lower to my 16.80 buy level with a 16.74 low print. As I wanted to bank some points for yesterday’s trading session I emailed my Platinum Members to exit their long Silver position at my revised 16.91 T/P level and I am now flat. Today I will again look to buy the market on any dip lower to 16.45/16.75 with a 16.15 stop and a 16.95 T/P level if executed.