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 main take away from the last 24h, even if sadly not translated on a pick up in currency volatility, is the notion that the Fed may be preparing the market for a potential shift in policy. That’s the only sensible conclusion if one listens to what Fed’s Vice Chair Clarida, the most important voice at the helm of the Fed after Chair Powell, had to say. The policymaker opened the door for the Fed tuing more accommodative if certain pre-conditions are met, which on its own, is a strong statement of intentions. The fixed income market was again a sea of healthy buy-side volatility (lower yields), translated in the recovery of the Yen from the lowest levels it’s traded this week. The USD, surprisingly, was rather unperturbed by the dovish remarks from Clarida, and with month-end FX hedge rebalancing skewed towards moderate to strong USD buying due to the underperformance in US equities as the trade war escalates, the price action in the EUR/USD is already acting as a precursor of the combatant stance by the DXY into Friday. Interestingly, even as Crude Oil keeps selling off, the Canadian Dollar has followed in locksteps the USD as the currency managed to navigate quite successfully the BOC test after the Central Bank sounded quite neutral, which by default should be interpreted as rather positive in a world of dovish Central Banks. Along these lines, the next one set to bite the bullet, especially after the latest Capex reading, is the RBA, an outcome the market has fully priced. The Aussie is still putting in a fight. With regards to the European currencies, the Euro enjoyed firmer pockets of demand, while the Sterling is still on selling mode as Germany mulls a veto on extending the Brexit process beyond October.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
- There is no denying that the psyche of the market has transitioned into a glass half empty when it comes to the outlook for growth, both in the US and globally. That’s what the resumption in the US yields downtrend predicates, as well as a market in disbelief about the ability of the Fed to keep its policy neutral (cuts expected).
- Federal Reserve Vice Chairman Richard Clarida made a statement in line with the market pricing (anticipation) of heightened risks of a more dovish Federal Reserve. The policymaker seems to have opened the door to a rate cut by stating “downside risk could call for more accommodative policy”, outlining the marked retreat in the global growth outlook.
- The month-end FX hedge rebalancing model from banks such as Barclays or Citi favor moderate to strong USD buying due to the significant underperformance in US equities.
- Germany vows not to flex its muscle by allowing another extension in the Brexit process beyond October this year unless major progress made, according to the Telegraph. Not a time-sensitive piece of information at this stage but something to factor in.
- News by Bloomberg that China is reportedly putting US soy purchases on hold is yet another piece of evidence that vindicates the unstoppable escalation in trade tensions.
- Defiant words from China’s commerce ministry once again, noting that China will fight till the end if the US keeps threatening the sovereign pride of China.
- Vice President Mike Pence sends a bold statement to China, implying that if the US sees no end to the conundrum in trade talks, it could ‘more than double; tariffs if needed. Pence left up in the air whether or not Trump will meet Xi at the G20 summit in Osaka (Japan) in June.
- A less than expected draw in US crude oil inventories (-282k vs -1,360k) sends the price of Oil further down, which combined with the headwind risks of a decrease in demand as the global economy slows down, keeps sellers firmly in control in line with falling yields.
- US April pending home sales fell by 1.5% vs +0.5% exp, which has some analysts scratching their heads as the backdrop of a firm job market and low rates is conducive for a pickup. Meanwhile, US Q1 GDP (2nd reading) came a tad improved at +3.1% vs 3% exp, even if business investment continues to be one of the weakening components.
- The significant revision down in the core PCE deflator in the US by 0.3% from 1.3% to 1% reinforced the conviction to sell yields as it implies higher risks of low inflation.
- Bank of Canada senior deputy goveor Wilkins, threw mixed comments, on one hand stating that solid growth in jobs/wages must be reconciled with weak consumer spending, adding that clouds over trade disputes could clear, which would be an upside risk to Canadian and global economies. On the latter, a big ‘IF’ at this stage.
- Australia’s Capex spending slid by -1.7%Q in Q1 vs expectations of a jump with most sectors softening, which adds to the case for the RBA to cut rates next week. Spending intentions for FY19 and FY20 were barely changed suggesting a slow down in growth. The Economics Team at Morgan Stanley notes that “including this into our tracker for Q1 GDP next week suggests another weak print (0.3%Q).”
- Today’s China manufacturing PMI will set the tone for the risk environment in Asia. China economic data has been on a downtrend in Q2 after an encouraging pickup in Q1. The most recent UBS data shows that “the economy continued to decelerate further in May, as our indicators for industrial production, consumption sales ex-autos, property sales, and auto sales look worse than April.”
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
Lingering dark clouds for the global growth outlook is the resounding and unambiguous message sent by the hammering of US yields, further intensified by Fed’s Vice Chair Clarida. By stating “downside risk could call for more accommodative policy”, I personally consider IT to be a rather bold ‘off-the-cuff’ hint that the Fed may indeed start preparing the market for a rate cut down the road. The immediate response by market forces has been to depress even further the US yields as larger pools of capital flock off to fixed income as the option of last resort to get paid amid expectations of lower rates. In the equity market, with the S&P 500 our global guidance to take the pulse in sentiment, a shallow bounce has allowed the 25-HMA, which serves as our micro trend cue, to tu mildly positive.
When it comes to crosscurrents in the currency market, the DXY is largely unchanged, benefited by the bearish trend in the Euro since the fragmented European parliamentary election results, while the Yen keeps the firm bullish structure intact. As every day, we also can look at the Chinese assets’ performance to decipher the mood of investors around the trade standoff between the US and China. Price action still suggests pessimism prevails as the USD/CNH consolidations around 6.93, a level that manages to offset the 10% tariffs via a cheaper Yuan exchange rate, while the Shanghai Composite trade within a range at year lows. Lastly, with a VIX (implied vol in the S&P 500) finding a firm footing at elevated levels around the 17.00 mark, and with junk bonds in the US on a clear downtrend, the risk outlook remains as poor as it’s been this week.
Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)
EUR/USD: Balanced Flows In Line With Bearish Context
GBP/USD: Sell Strength If Vol Profile As Indication
AUD/USD: FakeOut At The Edges As Single Distributions Persist
USD/JPY: Dubious Uptrend As Volume + Value Unsupportive
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- Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
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