Overnight Headlines
- US military has no interest in ‘new conflict’ in the Middle East; Iran denies responsibility
- Pentagon releases video claiming it shows Iran boat removing mine
- Over 600 companies urge Trump to resolve trade dispute with China
- UK’s Leadsom considers backing Sajid Javid in leadership race
US Markets
US equities posted small gains yesterday and are holding near their recent highs, now above long-term moving averages. Energy stocks bounced on the jump in oil with large tech stocks also recovering. Stocks are generally thought to rise at the start of Fed cutting cycles with Goldman Sachs suggesting health care and consumer staples outperform, whilst IT consistently lags.
US bonds look to be rolling over on geopolitical concerns with the recent lows (2.059% in the 10-year) in sight . There’s not much willingness to bet against a dovish Fed at next week’s meeting with markets assigning over an 80% chance of a rate cut by July and near 80bps of easing over the next 12 months. There is a notable disconnect between market pricing and what analysts think the Fed will do. In a Reuters poll this week, a consensus of analysts believed the Fed will hold rates steady this year, whereas Fed funds futures price in a near zero-percent chance of no rate cut by the December meeting.
USD remained resilient yesterday with DXY trading just above its 100-day moving average, having bounced off its 200-day MA last week. Rising geopolitical tension in the Middle East means the dollar is currently holding up relatively well. It does seem though that it is not fully reflecting the aggressive shift we’ve seen in the bond markets. Higher yields have so far compensated investors but Fed cuts may eventually signify smaller spreads between short-end USD and other major economies. In the case of the euro, there is the risk of an appreciating currency, which would not be good news for the ECB.
Currency Majors
EUR/USD weakened for the second straight session and has struggled to get beyond the first resistance we highlighted earlier this week around 1.1366, the 200d MA. In fact, Wednesday’s candle was a bearish outside day. Poor industrial production and 5y/5y inflation swaps falling to all-time lows have certainly not helped this week. The latter will be an increasing concern to Draghi and co and his speech at the Sintra conference next week will garner alot of attention. The previous May highs and neckline, plus the 100d MA offer the first line of support around 1.1265, then 1.1200.
GBP is tracking sideways, having failed at the breakout level of the inverse head and shoulder pattern on a couple of occasions. Boris Johnson is the standout favourite to be the next UK PM after the first round of voting in the Conservative leadership contest yesterday. Remember though that the favourite in these contests has not got the top job in the past six races. The next round of voting takes place on 18 June.
AUD is weak again today for the third consecutive session with 0.70 proving to be very strong resistance. Numerous aussie crosses hit multi-month lows yesterday after unemployment remained stuck at 5.2% and aussie yields hit all-time lows. 0.6864 is the near-term target for AUD/USD and we’re also watching AUD/JPY as it now looks to have decisively broken down lower through 74.96 – a soft weekly close will be instructive.
Key Events
US retail sales will be the main focus with a bounce in the headline figure expected (+0.6%) after a disappointing April (-0.2%). June US consumer sentiment will also be released, which is expected +98 from +100 in May.
European stocks are set to open flat even as the bond rally intensifies on both trade war issues and new geopolitical tensions in the Gulf. US Secretary of State Michael Pompeo said on Thursday in Washington that Iran had threatened earlier to restrain oil transport in the Strait of Hormuz. Oil prices are choppy after their initial surge higher.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.The trading of Foreign Exchange, and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Before deciding to trade forex, commodity or Index based CFDs you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that Capital Index (UK) Ltd is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters.