The US Dollar regained its mojo as the market took most notice of a very strong US non-manufacturing ISM survey, even if traders had to previously contend with the lowest US ADP employment report in over 9 years.
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The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The US Dollar regained its mojo as the market took most notice of a very strong US non-manufacturing ISM survey, even if traders had to previously contend with the lowest US ADP employment report in over 9 years. This mixed bag of economic indicators has led to confusing signals heading into Friday's US NFP report, which is going to be cardinal to re-assess the chances of the Fed cutting its interest rate in the July to Sept window. Before the US NFP lottery event though, traders will be fixated on two fronts. Firstly, the ECB policy decision, set to release updated forecasts on inflation and GDP. Secondly, the market needs clarification on whether the US will impose tariffs to Mexico as Monday's deadline set by Trump approaches. Overall, the risk environment has been friendly once again, especially in the volatile equity market, supported by the notion of a dovish Fed in coming months, as the 69% pricing of a rate cut by the July 31st FOMC meeting clearly depicts. The Yen seems to be defying this rationale by still finding strong demand, which comes to show that the current risk rally is limping of one leg as one would expect Yen selling as part of the 'risk on' procedures. The Kiwi, meanwhile, was the only currency that managed to challenge the pick up in USD demand, spurred by the neutral tone by the RBNZ assistant governor against dovish expectations. The behavior in the Kiwi comes in stark contrast with the poor performance of the Aussie, as the market remains of the belief that there is more easing ammunition to be utilized by the RBA. Ahead of the ECB, and in anticipation of Draghi striking a more pessimistic message that may reinforce their existing dovish stance, the market has been selling Euros. Sandwiched in between the currency crosscurrents we find the Canadian Dollar and the Pound, unstimulated by the absence of fundamental developments.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Markets remain buying into the notion that the US and Mexico will reach an agreement to avoid tariffs judging by the behavior of risky assets. Talks on border issues began Wednesday, which means in the next 48h headlines on new developments will likely act as yet another catalyst for a pick up in volatility.
While China has been clearly ramping up the domestic propaganda as a way to retaliate against the US, Trump notes every signal is that China wants to make a deal.
The European Commission has triggered a disciplinary process against Italy over public debt, noting that Italy is backtracking from structural overhauls, pension reform.
A very weak ADP employment report at 27k vs 185k expected (lowest in about 9y) was offset by an upbeat US non-manufacturing ISM survey coming at 56.9 vs 55.6 expected. Looking at the details, the ADP miss was mainly caused by small firms, which should appease the nerves.
Oil suffers further losses after the EIA reported the largest build up in oil product inventories in almost 30 years as fears of a global slowdown grow.
The shockingly low ADP report has led to some banks to immediately downgrade the estimates for this Friday’s US NFP, even if the sub-component of the non-manufacturing ISM came strong, which suggest a still relentless labor market. A mixed lead heading into Friday's NFP.
Ahead of the FOMC meeting on June 18-19, the Fed’s ‘Beige Book’ concluded that regional US economic conditions showed a modest pick-up in growth in April and May.
US Treasury Secretary Mnuchin is scheduled to meet with PBOC Governor Yi Gang in Japan in the context of a G-20 meetup from June 7-9. It’s the first time, ever since the US-China trade impasse, that a high-profile US official will try to break the impasse in the trade war with China.
Further evidence of a slowdown in China’s economic activity after the May Caixin services PMI came at 52.7 vs 54.5 prior, mainly due to subdued business confidence.
Australia’s Q1 GDP came lower than expected at 0.4% q/q vs 0.5%. Household spending was a key contributor to the modest 0.1 percent slide in growth as spending in discretionary goods such as furnishing and household equipment, recreation and culture take a hit.
The Kiwi found strong demand after RBNZ assistant gov says Bank needs to adapt to changing conditions to meet its objectives Wed 5 Jun 2019 01:24:45 GMT Author: Eamonn Sheridan | Category: Central Banks Reserve Bank of New Zealand said the Bank's central view is for rates to remain broadly around current levels for the foreseeable future, which took the market by surprise as expectations were for NZ to follow the path of lower rates in Australia.
The ECB policy meeting is the next major focus, with the Central Bank set to release updated forecasts on inflation and GDP, with most analysts calling for downgrades. It will also be critical to understanding the ECB position amid the escalation in trade tensions as well as the revelation of new details around the next round of TLTRO and other unorthodox tools to support the EU.
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
The more the market prices in a cut in the Fed’s fund rate, more of an excuse exist to justify a recovery in equity valuations, as clearly reflected by the reversal in the micro and macro flows via the bullish slope of the 25 and 125-HMAs. According to the CME Fedwatch tool, the market is pricing a 69% chance that the Fed will lower its interest rate in its July 31st FOMC meeting. As a secondary culprit behind the renewed buying interest, hopes that the US and Mexico may strike a deal that will avoid the imposition of tariffs by next Monday also contributed to the ongoing momentum in equities, putting the tensions between the US and China on trade temporarily on the backburner, even if such impasse remains the key macro issue to be fixated with casting a major shadow in this risk recovery.
The state of play in US equities runs the risk of growing disjointed to other risky assets as the paradigm that seems to be evolving is one where the Fed lowers rates to stimulate growth, which would only occur if the US and China fail to breach the major gap on trade. In this scenario, equities may still stay supported. Remember though, that paradoxically, one of the triggers for the Fed to be pushed into easing action in the July to Sept window, would be a deterioration of financial conditions, hence why it still may take fresh rounds of selling pressure in equities for the Fed to be fully convinced that they must act in order to circuit break the bearish trend in stocks.
On the currency front, it’s interesting to note that the Yen and the DXY both traded firm, especially the latter, despite the rejuvenated risk appetite currently present, implying there is a disparity between how equities and bond traders view current dynamics and the state of affairs, especially in the Yen. Other measures of risk such as the S&P 500 vol index (VIX) or junk bonds do justify the rise in equities, even if by assessing the valuation in Chinese assets, it’s clear that the market’s renewed ‘risk on’ profile is not built upon hopes of the US and China addressing the trade conundrum. Remember, we have a new driver for risk to be supported in the form of expectations for a more accommodative Fed, a factor that is being discounted through higher valuations in equities as large companies’ dividends become more attractive in an environment of lower rates by the Fed.
Latest Developments In FX (Technicals, Fundamentals, Intermarket)
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