This week should be all about contesting and consolidating last week’s significant breakouts in 10-year UST, EUR/USD, USD/JPY, and oil prices. We’ve seen a weekly close in U.S. 10-year above 3.05% - and with the Baker Hughes rig count holding steady, the tumultuous trifecta of U.S. yields, U.S. dollar, and oil prices, should resume their upward trajectory.
While significant economic data fixtures will be far and few this week, markets will be inundated with central bank speakers, including four central bank governors (Fed Chair Powell, RBA Governor Lowe, Riksbank Governor Ingves, and BoE Governor Carney). Markets will also watch the May FOMC minutes, April ECB minutes and Riksbank Financial Stability Report.
The May FOMC minutes will be of particular interest after the markets shaded the May 2 FOMC meeting dovish. But with the market now slightly leaning into the four rate hikes camp this year, any hawkish glean would raise that conviction and should propel the dollar to new yearly highs.
The latest statement on the China-U.S. trade suggests both parties are happy to avoid the dreaded tit for tat escalation while working towards a more market-friendly bilateral trade agreement. The intentional vagueness delivered by both party’s statements suggests a great divide, but there’s a hint of a consensus to bridge that gap. Given the possible worst-case scenario was avoided the market should view the latest market discussions as a favorable and equity market should be in that happy place, at least for today.
The U.S. and China agreeing to no trade war will be positive for Oil prices given that the possibility of a full-out trade war would have dealt a significant blow to global growth.
The well-documented dual supply disruptions from Iran and Venezuela continue to drive current sentiment. But with the pipeline constraints in the Permian Basin in focus and continuing to factor, the supply side dynamics suggest prices will remain firm through 2018. And throw in a positive demand fillip from a de-escalation of trade wars and prices could run higher for longer.
No change in U.S. oil rig counts this week holding steady at 844 and about half of the heyday numbers of the Oct 2014 high, when oil was at $80.
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Gold prices rebounded off weakly lows as the U.S. dollar eased on the back of profit-taking ahead of the weekend. With geopolitical premiums getting exhausted, gold bulls are in search of the next significant catalyst. But, gold remains under pressure from the U.S. dollar and utterly vulnerable to higher U.S. bond yields, which are showing signs of a strong topside breakout after the 10-year Treasury note, yield breached 3.1 % last week. The inflationary overtones from oil prices coupled with a strong U.S. retail sales print have increased Fed rate hike expectations. This week FOMC minutes could be a key driver for near-term USD sentiment so we should expect Gold and the USD to remain relatively rangy head of the release.
The depth of USD appreciation in recent weeks has exceeded virtually everyone expectations. What started as a purge of long EUR/USD positioning has manifest into a full USD bull. I think G-10 dealer will go AUD and JPY route to express stronger U.S. dollar bias from a catch-up perspective. EURO could start to take cues from the USD/JPY which could assert itself as the dominant driver near-term.
JPY: With equities stabilized and 10-year yields in the U.S. breaking out of 3.05, USD/JPY has arguably underperformed so we could see USD/JPY lead the USD bulls to charge over the near term. Correlation with fixed income remains robust and USD/JPY touching 111.00 as U.S. 10 year yields reached 3.125.
MYR: Oil prices remain high but so too does political risk, particularly the discussion around GST and SST and how the Credit agencies will view the drop in budget finances
Also, the USD continues to firm against all Asian currencies, and this may be caused by U.S. and China trade negations that will carry on tomorrow.