Global equities saw some pressure overnight as the market now shifts their focus away from the Fed and back to corporate earnings season and Sino/U.S. trade talks.
Most G10 currency pairs have found firmer footing temporarily against the dollar, while the yield on U.S. 10-year Treasuries fluctuated, trading within reach of its recent highs.
Today sees the start of trade talks between the U.S. and China and the markets are cautiously awaiting the outcome. Recent rhetoric suggests that both sides have dialed back their expectations on the outcome.
Note: The U.S. has even suggested they could leave earlier if there is no traction in negotiations.
There were no surprises that the Fed kept rates on hold yesterday, a June hike is 100% price in by fed fund future. U.S. policy makers admitted that inflation is “near target” without suggesting any need to accelerate its ‘gradual hiking path.’
Elsewhere, oil swung between gains and losses as traders weighed a rise in stockpiles against concern about U.S. sanctions on Iran.
On tap: U.S. payroll is expected to have picked up stateside tomorrow (08:30 am EDT), with the unemployment rate expected to fall to +4%.
1. Dollar’s Deja Vu
The USD has seen similar price action to yesterday as it saw its initial gains evaporate then recover in early U.S. trade.
EUR/USD (€1.1992) is back below the key €1.20 level after softer advance CPI data. The data certainly reinforces the recent ECB cautiousness on growth and inflation.
GBP/USD (£1.3594) initially moved back above the pivotal £1.36 level, however, politics and weaker data is hindering any rally. U.K.’s April PMI Services missed expectations and continued to fuel speculation that the Q1 GDP miss was due to more than just weather. In politics, the U.K.’s government possible ‘customs union plan’ with the E.U. had been put under question, moving the Irish border issue back on top of the political agenda.
EUR/NOK has fallen to €9.6492 after Norges Bank decision this morning vs. €9.7140 beforehand.
2. Stocks under pressure
Stocks in Europe and Asia mostly edged lower overnight following declines in the U.S. Wednesday, as investors analyzed the latest signals from the Fed and a new slate of earnings reports.
Note: Japanese markets will be closed on Thursday and Friday for public holidays.
Down-under, Aussie equities were noted outperformers as rising commodities prices helped the index get close to its best level of the year. Australia’s S&P ASX added +0.8%.
In Hong Kong, the Hang Seng Index fell -1.3%, led lower by tech and real estate companies. Concerns about fresh U.S. sanctions against Chinese telecom-equipment makers as well as renewed weakness in the HKD has sparked concerns about fund outflows.
In China, stocks rallied Thursday, aided by an afternoon rally in tech shares as a U.S. trade delegation arrived in Beijing for key talks over tariffs and other issues. The blue-chip CSI300 index rose +0.8%, while the Shanghai Composite Index gained +0.7%.
In Europe, the insurance sector was among the biggest decliners, after a series of U.S. insurance giants reported results late yesterday.
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U.S. stocks are set to open in the ‘black’ (+0.3%).
Indices: Stoxx600 -0.1% at 387.1, FTSE +0.1% at 7550, DAX +0.1% at 12792, CAC-40 -0.1% at 5523, IBEX-35 +0.1% at 10093, FTSE MIB -0.3% at 24206, SMI +0.1% at 8922, S&P 500 Futures +0.3%
3. Oil prices dip on rising U.S. crude inventories, gold higher
Oil dipped overnight, weighed down by U.S. crude inventories and record weekly U.S. production that undermines OPEC’s efforts to cut supplies. However, expect potential new U.S. sanctions against Iran to keep markets on edge.
Brent crude oil futures are at +$73.31 per barrel, down -5c from their last close. U.S. West Texas Intermediate (WTI) crude futures are down -1c at +$67.92 per barrel.
Pressuring prices is yesterday’s EIA report showing U.S. crude inventories increasing by +6.2m barrels to +435.96m in the week to April 27, the highest level in 2018.
And more U.S. oil will likely flow as U.S. drillers’ added +5 oilrigs looking for new production in the week to April 27, according to Baker Hughes.
Limiting losses is the fact that U.S. President Trump has until May 12 to decide whether to restore the sanctions on Iran that was lifted after an agreement over its disputed nuclear program.
Gold prices have edged a tad higher for a second consecutive session overnight ahead of much awaited U.S./China trade talks, where a breakthrough deal is viewed as highly unlikely. Spot gold has rallied + 0.4% to +$1,309.51 per ounce, while U.S. gold futures for June delivery rose +0.4% to +$1,310.4 per ounce.
4. Norway’s Norges Bank confirms readiness to hike rates
Norway’s central bank left its key policy rate unchanged this morning, leaving the sight deposit rate at a record low of +0.5%. However, policy makers stated that, “the key policy rate would most likely be raised after summer 2018,” and this despite surprisingly muted inflation.
The upturn in the Norwegian economy appears to be “continuing broadly in line with” the picture presented at the policy meeting in March, the Norges Bank said.
Note: If the Norges Bank were to raise its key rate this year, it would likely do so ahead of the ECB – many don’t expect them to hike until mid-2019.
Elsewhere, the Federal Open Market Committee (FOMC) left its target rate range unchanged at +1.50-1.75% (as expected) and indicated that inflation is near its goal. Any risks to the outlook appear roughly balanced – the Fed removed a prior reference to “near-term risks.
The yield on 10-year Treasuries has increased less than +1 bps to +2.97%. In Germany, the 10-year Bund yield gained +1 bps to +0.59%, while in the U.K., the 10-year Gilt yield increased +1 bps to +1.457%.
5. Europe continues to suffer from disappointing data
Data this morning shows that the eurozone’s annual inflation rate fell unexpectedly in April. This is a setback for the ECB as it considers whether and when ending QE.
The E.U statistics agency said that consumer prices were +1.2% higher than in April 2017, a fall from the +1.3% rate of inflation recorded in March.
It noted that the core rate of inflation fell to +0.7% from +1% in March, hitting its lowest level in 13-months.
Note: The ECB halved its monthly bond purchases in January, encouraged by a pickup in economic growth and had hoped it would help raise inflation to its target of just below +2%.
ECB policy makers must now decide whether to extend the program beyond its tentatively scheduled end in September, and for how long.
Digging deeper, the drop in inflation has been driven mostly by a “sharp deceleration in prices paid for services."