Yesterday, the average implied volatility on G10 currencies, an indicator of expected swings over the next month, fell to its lowest level since January 2015. That, of course, is when the SNB lifted its cap on the CHF.
The Fed and other Tier 1 central banks have played a massive part in stabilizing capital markets. Nonetheless, their calming influence continues to fuel a flight to riskier assets that include equities and EM currencies even as expectations for economic growth remain depressed.
Trading has been relatively quiet the past few weeks, even as global indices have hit new highs. The S&P 500 hasn’t moved at least 1% in either direction since July 8.
After today’s Reserve Bank of New Zealand (RBNZ) rate decision there are no other major central bank rate announcements slated for the month of August. What should investors be expected to focus over the remaining three-week’s?
Aside from the pound hobbling towards its Brexit lows (£1.2796), crude prices are expected to keep investors busy with the rumored chatter of a possible production freeze.
Depending on how the dollar fares, an overvalued equity market will have speculators looking at hard assets, like gold, for a possible ‘punt’.
Fixed income dealers are expected to recalibrate their respective yield curves after Fed Chair Yellen’s appearance at Jackson Hole (August 26) and then we are into September, where the markets focus will be back to non-farm payrolls (NFP) and the Feds pending rate announcement (September 16).
1. Oil inventories to dictate next price move
Prior to the overnight session, crude prices had rallied steadily over the last week on production freeze rumors, with WTI retaking the $43 yesterday, after briefly dipping below $40 last week, while Brent has tested above $45.50.
Yet, investors doubt about a significant market tightening and an ongoing overhang supply in crude and refined fuel products again has provided for a double top in prices in the overnight session.
U.S. West Texas Intermediate (WTI) are trading at +$42.43 per barrel, down -34c, or -0.79%, while Brent crude futures are at +$44.62 per barrel, down -36c, or -0.8% ahead of the U.S open.
Yesterday, OPEC confirmed that it has scheduled an informal meeting in Algiers on the sidelines of an energy forum on Sept 26-28, consolidating talk that Russia, Saudi Arabia and Iran might be able to set aside their differences and put in place some sort of production ceiling. However, these meeting are like herding cats, with self-interest tending to trump the ‘oligopoly’ approach.
An upgrade in U.S. oil production forecasts by EIA is also weighing on sentiment. EIA is now expecting U.S. output to reach +8.31m barrels per day in 2017, up from its forecast of +8.2m barrels per day in July.
Expect this morning’s EIA report (10:30 EDT) will influence oil prices over the short term. Dealers anticipate a drawdown of -1.5m barrels (last week an increase of +1.4), but also look out for the gasoline stocks – it caused the market stir last week with a surprise draw of -3.3m, this week expecting a draw of 1.3m.
A weaker dollar in the overnight session has allowed gold ($1,352) and silver ($20.28) to shoot higher again with both over a +1% higher ahead of the open stateside.
2. Global stocks take a breather
Asian equity markets ended mixed overnight after a flat session on Wall St. yesterday as conflicting indicators and seasonally thin trading (Japan begins a public holiday) environment resulted in another lackluster session.
The Nikkei closed down -0.2% as the yen (¥101.40) strengthened around +0.5% against the dollar, raising the hurdle for local exporters. Elsewhere, Hong Kong’s Hang Seng Index shed gains to decline -0.1%, while the Shanghai Composite Index fell -0.1%. South Korea’s Kospi ended the day flat.
Similar story in Europe, stocks are pulling back from a five-session winning streak in cautious trade. Energy and oil stocks trading lower in the FTSE 100 attributed to WTI and Brent contracts trading this morning while financial stocks are generally trading higher in the Eurostoxx.
S&P futures are showing modest risk-off for this Wednesday morning.
3. Short yields trade lower in disappointment
Yesterday’s weak U.S productivity data has again questioned the ability of the Fed to hike interest rates as soon as next month. With Q2 productivity falling by -0.5%, versus the improvement +0.4% the market expected (this indicator is little watched, but the degree of the disappointment is having a material impact in current thin trading conditions), suggests that there is no need for the Fed to be hiking rates anytime soon. Currently, December futures contracts indicate a +32% chance of a Fed hike, down from even odds on Monday.
Further out the curve, sovereign bonds have found a bid after the Bank of England (BoE) had trouble with their bond buy back program. U.K’s 10-year gilt yield has fallen to a record low of +0.533% as the BoE failed to buy as many government bonds as it had hoped in its reverse buy-back – investors are unwilling to give up highly coveted yield bearing debt, despite its low returns. U.S 10-year notes have dipped to +1.535% from Monday’s two-week high of +1.615%.
4. Dollar sees red under the cloud of lower productivity
The mighty buck has slipped lower in thin trading, pressured by U.S’s disappointing productivity numbers that have money markets readjusting their curves.
Note: the magnitude of the dollars decline has been exaggerated by the beginning of Japan’s summer holiday season.
The DXY dollar index trades down around -0.4%, while USD/JPY falls -0.4%. EUR/USD gains +0.3%, GBP/USD rises +0.4%. Even riskier and higher-yielding currencies are outperforming, with AUD/USD up +0.6% and NZD/USD up around +0.7%.
5. Be wary of Reserve Bank of New Zealand (RBNZ) announcement
The RBNZ is widely expected to cut its official cash rate by -25bps to a fresh low of +2.00% from its current setting of +2.25% this afternoon (5:00pm EDT). With fixed income dealers now pricing in almost -70bps of cuts to the official cash rate, the risks around this evening’s meeting are therefore likely tilted toward the RBNZ not sounding sufficiently “dovish” relative to markets expectations.
With thin trading conditions, trading around the RBNZ announcement will be tricky. Market disappointment could see the Kiwi knee jerk higher towards technical resistance (NZ$0.7370). An aggressive -50bps is not being mentioned, but it would be a bold move and coupled with a dovish statement will see the Kiwi significantly struggle (NZ$0.7120)S, especially after having been in such high “carry” trade demand this month along with its Aussie partner.