Here we go again. After a couple of big trading sessions, gold – for the sixth time in five years – is approaching the $1,350-ish level that has, each previous time, stopped it cold.
It looks like fundamentals, including the Fed’s capitulation to choppy stock markets and trade-war related economic uncertainties, are trumping gold’s usual seasonality (strong in spring, weak in summer) at the moment. And those issues aren’t abating: Recent headlines paint a picture of an increasingly scary world:
There’s a lot more out there, but these four headlines are enough to convey the variety of dark clouds now combining into a perfect storm that has, among other things, spooked the Fed into openly discussing the next round of monetary experimentation. Just this week, Fed chairman Jerome Powell gave a version of ECB chair Mario Draghi’s famous “whatever it takes” speech in which he looked forward to exploring the “effective lower bound” (ELB), the point below which interest rates just can’t go. To have the central bank validating such an experiment – which, since we’ve never been there before, will have to be discovered by trial and error, the error being financial disruptions when rates get too low – is both unprecedented and a sign of how far out of control today’s monetary policy has spun. The markets seem to get this. Hence the pop in safe-haven assets like gold.
SPDR (GLD-NYSE) tonnage surged to the 159 level yesterday. This is clear evidence that US money managers are also going for the gold! Chinese investors are reporting buying additional gold because they believe Trump cannot be trusted in negotiations.
I predicted that Chinese investors would begin buying gold instead of investing in stock markets as the trust issue reared its ugly head, and now it’s happening. The bottom line: It really doesn’t matter whether Trump can be trusted or not.
What matters is what US and Chinese investors believe, and they clearly believe that it’s time to go for the gold!
The lives of gold mines have become so short, it takes longer to discover one and put it into production than the time from the onset of mining to closure.
Combine these supply factors with the demand-side reasons for owning gold right now. To recap, they include the series of economic indicators showing that US growth is grinding to a halt; worsening yield curve inversion; a potential trade spat with Europe waiting in the wings, as the US-China trade war appears no closer to a resolution; and the increasing tension between China and the US over Taiwan and the South China Sea, raising the possibility of war and a flight to safe havens like gold, and you have all the makings of a powerful and prolonged bull market for gold just as we are entering the most active time of the year for junior resource companies.
With all that is going on in the world, we believe the gold price will do well over the next few months
So will the sixth assault on $1,350 be the charm? And what happens when gold finally blows through this long-term resistance? That’s impossible to say, of course. But here’s hoping that old resistance becomes support and new resistance doesn’t form until somewhere in the $1,500s.
via ZeroHedge News http://bit.ly/2K3xvkE Tyler Durden
Former Vice President and Democratic front-runner Joe Biden found himself in the middle of a political quagmire this week after reaffirming his longstanding support for the Hyde Amendment banning federal funding for abortion, and stepping on yet another plagiarism landmine.
After a massive backlash which saw most of his Democratic rivals taking pot-shots when he reaffirmed his support for the legislation, Biden has had a dramatic change of heart – announcing on Thursday evening at an Atlanta DNC event that he can no longer support the 1976 provision.
“I can’t justify leaving millions of women without access to care they need and the ability to exercise their constitutionally protected right,” adding “Times have changed.”
What makes this hilarious is that Biden initially appeared to have dropped support for the abortion legislation in May – telling an ACLU activist that he would repeal the amendment – only to announce weeks later on Wednesday that he “misheard her” and still supports it.
On Wednesday, his campaign said in a statement that the former vice president was sticking with his long-standing support of the Hyde Amendment, which has been routinely added to government funding bills and blocks federal medical programs from paying for abortions except in cases of rape, incest or to save the life of the woman.
After his stance was reported by NBC News, several of his competitors in the campaign highlighted their differences on Twitter. –Bloomberg
No woman’s access to reproductive health care should be based on how much money she has. We must repeal the Hyde Amendment.
And now Biden has seen the light, again, after un-seeing the light. And after Senate legislation to repeal the Hyde Amendment now has 22 Democratic cosponsors, including 2020 candidates Sanders, Warren, Gillibrand, Harris, Booker and Klobuchar.
The former Vice President also found himself getting ripped this week over plagiarism, after a CNN panel called him out over lifting language for his environmental plan word-for-word from environmental nonprofits without attribution.
As we noted on Wednesday, Biden’s 1988 presidential run went off the rails when it was revealed that he plagiarized speeches from a British labour party politician, which brought to light examples of Biden lifting material from other politicians without attribution, and an acknowledgement that he was also accused of plagiarism in law school.
In short, Biden will simply shed longstanding political beliefs when they become unpopular, and has no problem stealing other people’s ideas. Let’s see who brings this up first during the 2020 debates. We already know President Trump will.
via ZeroHedge News http://bit.ly/2ZijXFv Tyler Durden
With the pissing contest between Russia and the US over who will sell Turkey advanced defense missile systems raging, and which the Kremlin appears to be winning, on Friday the US decided to stop accepting any additional Turkish pilots who were set to come to the United States to train on F-35 fighter jets, officials told Reuters in a clear sign of the escalating dispute over Ankara’s plans to purchase Russian air defenses.
The NATO member states have sparred publicly for months over Turkey’s order for Russia’s S-400 air defense system, which Washington says poses a threat to the Lockheed Martin Corp F-35 stealthy fighters, which Turkey also plans to buy.
The US position is simple: Turkey cannot have both, but has avoided taking steps until now to curtail or halt planned training of Turkish pilots in the program, a reprisal that could be seen as an embarrassment in Turkey.
Reuters sources said that the decision could still be reversed, if Turkey altered its plans, however so far Erdogan has refused to do so, oblivious of the escalating war of words from the US, which may soon resort to implementing fresh tariffs on Ankara, whose economy has seen a sharp contraction ever since the issue first came to a head last summer. The sources said the decision so far only applied to upcoming rounds of Turkish pilots and maintenance crews who would have normally come to the United States.
According to Reuters, there has not yet been a formal decision to halt the training of the Turkish pilots and maintenance crews now at Luke Air Force Base in Arizona, although a separate report last week said that the step was being seriously considered.
Four Turkish pilots are currently training at Luke. Two additional Turkish pilots are at the U.S. base working as instructors. Beyond those six Turkish officers, there are an additional 20 Turkish aircraft maintainers at the base undergoing training as well, the U.S. military says.
Turkey has expressed interest in buying 100 of the fighters, which would have a total value of $9 billion at current prices; which is why we doubt the US would ultimately refuse to sell them under pressure from US neocons.
Of course, further escalation is not unlikely, and if Turkey were removed from the F-35 program, it would be one of the most significant ruptures in recent history in the relationship between the two allies, experts said. But strains in ties between Washington and Ankara already extend beyond the F-35 to include conflicting strategy in Syria, Iran sanctions and the detention of U.S. consular staff in Turkey.
The announcement of the decision on the pilots follows signs that Turkey is moving ahead with the S-400 purchase. Defense Minister Hulusi Akar said on May 22 that Turkish military personnel were receiving training in Russia to use the S-400, and that Russian personnel may come to Turkey. Separately, president Erdogan said on Tuesday it was “out of the question” for Turkey to back away from its deal with Moscow.
Kathryn Wheelbarger, one of the Pentagon’s most senior policy officials, said last week that Turkey’s completion of the transaction with Russia would be “devastating,” dealing heavy blows to the F-35 program and to Turkish interoperability within the NATO alliance.
“The S-400 is a Russian system designed to shoot down an aircraft like the F-35,” said Wheelbarger, an acting assistant secretary of defense. “And it is inconceivable to imagine Russia not taking advantage of that (intelligence) collection opportunity.”
News of the escalation sent the lira sliding, ending a whopping 10-day streak of gains for the Turkish currency, the longest since May 2014, as traders returned from the 3-day Eid break.
Not helping the currency was an announcement by the country’s finmin (and Erdogan son-in-law) said inflation may fall to single-digit levels (which is impossible unless the government gives the “China” treatment to its economic data), which however would suggest the central bank would be more likely to cut rates sooner.
via ZeroHedge News http://bit.ly/2WSbiMb Tyler Durden
With the market unsure how to trade today’s payrolls number, with both a very strong and a very poor report likely to spark selling, we just got the verdict: at only 75,000 jobs created in May…
… this was not only the worst print since the shocking 56,000 increase in jobs in February, but also 100,000 below the consensus number of 175,000. It was also below the lowest Wall Street forecast, and 4-sigma below consensus as not a single Wall Street analysts guessed a lower number.
Developing
via ZeroHedge News http://bit.ly/2QX6nEn Tyler Durden
With stocks set for the best start to a June since 2000 (and best week since November), one would assume that bond yields must be soaring – all that expectation of growth (fueled by expected rate-cuts and a cessation of trade wars?) – but no, bonds have completely ignored this week’s panic-buying farce.
As former fund manager and FX trader Richard Breslow notes, various asset markets have agreed to disagree on what lies ahead. Will today’s payrolls print be too hot, too cold, or – as usual – goldilocks-esque enough to solve the conundrum of bonds and stocks divorce?
Via Bloomberg,
Non-farm payrolls releases may not be the random number generator that pundits like to claim. And whether they get revised or not, until they do, they stand as the most recent marker of where we stand on the issue. To be later verified or debunked. But how markets react on the day can often be the utter wild card.
Following a definitive beat or miss from the data it’s relatively straightforward to guess what the day’s price action is likely to bring. It’s those results that fall into the statistically-insignificant-from-forecast category where it gets tricky. It’s why a lot of disciplined traders choose to trade the expectations, not the actual number. The former is playing the market, the latter can be more akin to a simple roll of the dice.
So, if the number doesn’t somehow completely change investors’ expectations, you can learn a lot more about the underlying drivers of asset prices from the run-up to a number than the aftermath. And what has been going on? A distinctly ambivalent attitude toward risk versus a realization that the world’s central bankers are much more united with each other than any reference to what their political leaders are saying would suggest.
The Fed has tilted dovish. ECB President Mario Draghi was dovish. No matter how the market chose to clear what it had to on the day. The BOJ certainly isn’t going anywhere. And today, we got an unambiguous reaffirmation from PBOC Governor Yi Gang that his institution has “tremendous” flexibility and tools to provide accommodative monetary policy if required. That was actually a sign of strength that traders should take comfort from. Is it any wonder that global equities can be bid while many an analyst continues to urge caution on global conditions in general?
Markets don’t always provide a simple, unifying theory tying every financial instrument’s movements together. Boo hoo for the correlation matrices. It’s fair to point out the inconsistencies between investor attitudes toward different markets without falling on your sword insisting that one of them has to be wrong. Respecting the price action in stocks while also having a strong desire to own bonds or yen is perfectly reasonable.
Caution, amidst temptation, about owning emerging markets may therefore be the most interesting thing going on here. The potential collateral damage from an escalating trade dispute versus lower for longer rates is being played out most vividly with these assets. How it breaks will possibly be the cleanest gauge of how people really feel about global economic conditions going forward.
EM’s fate will be much more dispositive of expectations than listening to someone try to handicap the base case scenario for how negotiations will eventually play out. And at the moment they look decidedly uncertain. Which seems entirely appropriate. Fear and greed are circling each other quietly.
The real conundrum is that no one really knows how much of the global slowdown is actually tied to trade and how much to the economic cycle.
Which makes settling on an appropriate monetary policy very tricky indeed. What’s transitory and what isn’t is entirely unknown. It’s why we talk so much about “insurance policy cuts.” Equity markets understand that is a signal of having friends in important places.
[but we have seen this pattern of hope before]
While other markets can still worry about what it all means for the real economy.
via ZeroHedge News http://bit.ly/2Wum6k9 Tyler Durden
When the eurodollar futures curve first inverted a year ago in the wake of May 29, 2018, it was the market beginning to hedge against serious and rising risks of something that would force the Federal Reserve to turn around. When that might happen, or how many cuts would eventually follow, those were questions the immediate inversion couldn’t answer.
All the curve said at that point was a serious chance Jay Powell was going to be forced into an involuntarily U-turn at some indeterminate moment in the future. I interpreted this market inversion early in July 2018:
Officials believe right now the economy is “very strong” and that demands the same “rate hike” trajectory. The futures curve is betting there is a good chance they are wrong about that and at some unknown point they’ll have to turn around and face their own mistakes yet again.
This was the middle of 2018, remember, when everyone (in the mainstream) was totally convinced. JP Morgan’s CEO Jamie Dimon had just said the 10-year UST was about to fly upwards to 4% in large part because the Fed was being forced by wage pressures and therefore inflation into becoming more aggressive.
Rate hikes.
For the same man to have his mind changed for him in the space of a year, what would have to happen in the world for this contrary scenario to work out? Nothing good.
Over the last year, “nothing good” has become more and more the baseline.
Over the past week, the “bond market” has surged meaning nominal yields have plunged at the same time expectations for future short-term money rates have, too. We are starting to get some answers about when and how many.
Meaning rate cuts. Soon.
FOMC officials view a second half economic rebound as likely. The market is laughing at them. As of right now, there is a very high probability the first rate cut in what the market is projecting as a series will take place by September. This year.
The Fed meeting during that month is a little over three months from today. Again, what would have to happen in the economy between now and then to force Jay Powell kicking and screaming to propose and then vote for what would be a huge admission of his own huge error?
The headline [Markit Manu] PMI fell to its lowest level since September 2009 as output growth eased and new orders fell for the first time since August 2009. Weak demand conditions and ongoing trade tensions led firms to express the joint-lowest degree of confidence regarding future output growth since data on the outlook were first collected in mid-2012.
Markit’s Manufacturing index was never this low even during the worst of the “manufacturing recession” of Euro$ #3. We are already seeing these sorts of stark negative comparisons which the bond market, eurodollar futures curve included, says is only beginning.
We may already be as bad as the bottom of the near recession of 2015-16 – and Euro$ #4 is just getting warmed up.
If this is the correct view of the economy, then the downside view of eurodollar futures prevails. As those contract prices skyrocket, they increasingly suggest a probability distribution whose downside case is rapidly becoming renewed ZIRP.
What would have to happen in the economy for Jay Powell to kicking and screaming start cutting rates in September 2019 and then keep going all the way back to the zero lower bound? Where full, completed recovery was supposed to be, only more ZIRP and probably more QE.
Even IHS Markit gets the big picture in the quoted passage above. “Weak demand” before “ongoing trade tensions.”
It’s already pretty shaky and the market is saying this is still just the opening phase.
via ZeroHedge News http://bit.ly/2wIvMbE Tyler Durden
Global markets are set to end the week – barring a shock from today’s nonfarm payrolls report – diametrically opposite from how they started it: with global market a sea of green, and the S&P on pace to close 100 points higher compared to where they started largely thanks to Powell’s hint that the Fed is open to a rate cut, one which is almost priced in by the market for the June FOMC meeting.
US equity futures rose with European stocks ahead of a “critical” jobs report, while the dollar climbed following the recent rout and Treasury yields also nudged higher, after Mexican and U.S. officials held a second day of talks on trade and migration on Thursday, with markets rebounding on optimism a deal could be close, although it was unclear if Mexican pledges to curb migration flows were enough to persuade the Trump administration to postpone tariffs.
Yet risks were still present after Vice President Mike Pence said Mexico had offered “more” on Thursday than on Wednesday but that it would be up to Trump – who returns from a European trip on Friday – to decide if it were enough. “There has been some movement on their part. It’s been encouraging,” he said. “The discussions are going to continue in the days ahead.”
As reported last night, Mexican Foreign Minister Marcelo Ebrard said the Mexican government had offered to send 6,000 members of the National Guard to secure its southern border with Guatemala. In a sign of a wider crackdown, the leftist administration of Mexican President Andres Manuel Lopez Obrador said earlier that it blocked the bank accounts of 26 people for alleged links to human trafficking, while it detained on Wednesday at least 350 migrants crossing into Mexico and arrested two prominent migrant rights activists.
U.S.-Mexico migration talks will continue on Friday, Ebrard said, and markets breathed a sigh of relief with Europe’s Stoxx 600 Index headed for its biggest weekly advance in two months, boosted by a rise in oil stocks as crude prices rallied, ignoring the latest dismal data out of German, where the recent rebound in Industrial Production faded, and the May print of -1.9% was the worst going back five years.
Japanese and South Korean shares advanced, while China’s markets were closed for a holiday. Traders are closely watching developments in U.S.-Mexico trade talks after Vice President Mike Pence said his country still plansto impose tariffs on its neighbor next week.
On the other hand, if the tariffs do go ahead, the United States would be in a serious trade dispute with both China and Mexico – two of its three top trading partners. Analysts have warned that tariffs could spark a recession in Mexico. Credit ratings agency Fitch downgraded Mexico’s sovereign debt rating on Wednesday, citing trade tensions among other risks, while Moody’s lowered its outlook to negative.
Separately, the White House has drafted a document for Trump that would declare a new national emergency to implement the Mexican tariffs, according to a copy of the order seen by The Hill, however the head of the U.S. House of Representatives Ways and Means Committee vowed to take steps to block such a move.
In terms of immediate catalysts, all eyes are on the U.S. jobs report in an hour looking for clues on the strength of the economy, after Powell signaled this week he’s open to easier policy as trade tensions persist, and as investors are pricing in a 92% chance of a rate cut by September, Fed fund futures show. Powell’s counterpart in Europe, Mario Draghi, indicated Thursday he will react to any deterioration in the outlook for the region’s economy, though some had expected a clearer signal he’s willing to further loosen policy.
“It appears too early to call for the next round of liquidity-on fueling all asset classes,” said Alexander Kraemer, head of cross asset strategy at Commerzbank AG. “Markets are apparently not yet fully giving in to the central bank put.”
In FX news, the dollar advanced and Treasuries stabilized as traders awaited the U.S. jobs report. The euro dropped following a miss in German data while the pound led gains among G-10 currencies as the race for the U.K. prime minister’s post took center stage. The offshore yuan tumbled to its weakest level since November 2018 as PBOC governor Yi Gang said in an interview with Bloomberg that the nation has “tremendous” room to adjust policy.
In geopolitical news, the Russian Pacific Fleet issued a formal protest to the US regarding dangerous manoeuvring by a US ship, Russia said that one of their ships was forced to make a dangerous manoeuvre to avoid collision in the East China Sea. Subsequently, the US Navy says that a Russian destroyer made and unsafe and unprofessional approach to a US Missile cruiser in the Philippine Sea, which put the safety of US sailors at risk.
Other expected data include wholesale inventories. No major earnings releases are scheduled.
Market Snapshot
S&P 500 futures up 0.3% to 2,853.50
STOXX Europe 600 up 0.7% to 376.60
MXAP up 0.07% to 153.69
MXAPJ unchanged at 501.43
Nikkei up 0.5% to 20,884.71
Topix up 0.5% to 1,532.39
Hang Seng Index up 0.3% to 26,965.28
Shanghai Composite down 1.2% to 2,827.80
Sensex down 0.2% to 39,452.02
Australia S&P/ASX 200 up 1% to 6,443.89
Kospi up 0.2% to 2,072.33
Brent futures up 1.8% to $62.79/bbl
German 10Y yield rose 0.5 bps to -0.234%
Euro down 0.1% to $1.1263
Italian 10Y yield rose 1.8 bps to 2.118%
Spanish 10Y yield fell 2.8 bps to 0.582%
Gold spot up 0.05% to $1,336.01
U.S. Dollar Index up 0.05% to 97.09
Top Overnight News
Vice President Mike Pence said the U.S. still plans to impose tariffs on Mexico next week, as American and Mexican officials planned further talks aimed at defusing a crisis between the two countries over the flow of undocumented migrants into the U.S.
The main U.K. opposition Labour Party unexpectedly held onto its Peterborough seat, slowing the march of Nigel Farage’s new pro-Brexit movement which bookmakers’ had expected to win Thursday’s by-election. The result will alarm members of the U.K.’s ruling Conservatives — who were beaten into third place
German industrial production plunged the most in almost four years in April and the nation’s central bank gave a gloomy assessment of the outlook, suggesting a persistent slump in Europe’s largest economy
China has “tremendous” room to adjust monetary policy if the trade war with the U.S. deepens, People’s Bank of China Governor Yi Gang said. Asked about his scheduled meeting with U.S. Treasury Secretary Steven Mnuchin this weekend, Yi said it would probably be a “productive talk, as always,” though the trade war topic would be “uncertain and difficult”
New York Fed President John Williams said the outlook for the U.S. economy remains solid while acknowledging that risks are rising and investors expect the central bank to lower interest rates
President Trump said he’ll decide whether to enact tariffs on another $325 billion in Chinese imports after the Group-of-20 meeting
U.S. Vice President Mike Pence said the U.S. still plans to impose tariffs on Mexico next week, as American and Mexican officials planned further talks
Bank of Japan increased purchases of bonds due in 10-to-25 years by 40b yen at its regular operation on Friday
Boris Johnson received a boost to his bid to become Britain’s next prime minister after a leading Conservative donor promised to give funds to his campaign
Asian equity markets were mostly higher following the tailwinds from US where sentiment was underpinned by hopes of averting tariffs on Mexico after reports the US was considering delaying tariffs as time for a deal was running short. However, White House Press Secretary Sanders later cast doubts on this and stated the US is still moving ahead with tariffs, while President Trump reportedly plans to declare a national emergency to impose the tariffs on Mexico. ASX 200 (+1.0%) was positive with the index led by the energy sector after similar outperformance stateside following a rebound in oil prices and Nikkei 225 (+0.5%) gained as exporters coat-tailed on favourable currency flows. KOSPI (+0.2%) eventually shrugged off the early indecisiveness and conformed to the upbeat tone but with gains capped across Asia-Pac bourses amid holiday closures across the Greater China region, ongoing trade uncertainty and ahead of the key NFP jobs data. Finally, 10yr JGBs traded marginally higher despite the gains in stocks as prices edged back above the 153.50 level and as yields declined in which the 30yr yield fell to its lowest since August 2016. The BoJ were also present in the market today for JPY 720bln in the belly to super-long end in which it increased its buying amount in 10yr-25yr maturities, although this was after it had already announced to reduce frequency of those purchases for the month.
Top Asian News
Turkish Traders Return Just in Time for End of Lira’s Hot Streak
European equities are higher across the board [Eurostoxx 50 +1.0%] as the region continues the positive handover from Asia with sentiment buoyed by reports that the US is considering delayed tariffs on Mexico. European sectors are all in the green with energy names outperforming as the oil market continues to recover from recent lows, whiles other sectors are showing broad-based gains. In terms of individual movers, Bpost (-9.7%), Deutsche Wohnen (-6.6%) and Royal Mail (-5.9%) all rest at the foot of the Stoxx 600 amid negative broker moves. Meanwhile, Sanofi (+4.9%) are higher after the Co. appointed Paul Hudson as CEO effective 1st September after the current CEO retired. Finally, MediaSet Espana (+8.6%) spiked higher in European trade amid reports that that the company is considering options in Spain, including a potential combination with its parent company MediaSet (+2.6%)
Top European News
Pound May Fall 2% If Boris Johnson Becomes U.K. PM, Survey Shows
Real Estate Extends Slump as German Rent Freeze Fears Persist
U.K. House Prices Unexpectedly Rise in Sign of Stabilization
Labour Wins U.K. By-Election as Farage Warns Tories Over Brexit
In FX news, the DXY index is holding just above the 97.000 level in a very tight range (97.007-124) into NFP, with the Dollar firmer or steady vs most major counterparts and racking up heftier gains against EMs. Clearly the upcoming US jobs data will provide the next big directional pointer for the Greenback and currency markets as a whole, but from a technical perspective the DXY is highly likely to remain well within nearest support and resistance around 97.745 (Wednesday’s low) and 97.546 (late May base) on the charts in advance.
GBP/CHF – The G10 outliers, as Cable continues to consolidate above the 1.2700 handle, though faces some resistance in the form of the 21 DMA at 1.2730, while the Franc is underperforming and still meeting offers ahead of the psychological 0.9900 mark as Eur/Chf eyes 1.1200 ahead of next week’s SNB Quarterly Policy review and post-Thursday’s ECB action.
CAD/NZD/AUD/EUR/JPY – All narrowly mixed vs the Usd, with the Loonie straddling 1.3350 and awaiting Canada’s labour report that should provide some independent impetus alongside the aforementioned US release, while the Aussie and Kiwi remain in flux following RBA and RBNZ inspired moves earlier this week, the former meandering between 0.6969-82 and latter from 0.6615 to 0.6626. Elsewhere, the single currency seems content or merely relieved to conform to the usual quieter pre-NFP trading environment after yesterday’s post-ECB whip-saw price moves, as Eur/Usd skirts 1.1258 and 1.1284 bounds, but is also ensconced in hefty expiries – 8.6 bn spanning 1.1200-1.1325, and 3.4 bn running off between 1.1250-60 and 1.1275 alone. Conversely, the Yen looks free from option interest after Thursday’s cluster stretching from 108.00 to 109.00, but has lost a bit more safe-haven premium as the broad recovery in risk appetite enters its 4th day. Hence, Usd/Jpy has probed above 108.50 to test the weight of supply reportedly close by.
EM – As noted above, further depreciation or bullish retracement across the region, and in particular the Cnh after dovish PBoC commentary overnight and with no official Cny midpoint fix to anchor the offshore Yuan. Accordingly, Usd/Cnh has hit highs just over 6.9600 and cleared option barriers at 6.9500 on the way. Meanwhile, Usd/Zar has extended through 15.0000 to 1.1650+ as the Rand suffers even more pronounced angst from ANC wrangling over the SARB’s mandate.
In commodities, WTI and Brent prices are firmly in the green and recovering from a five-month low amid reports of more engaged US-Mexico talks, which lifted sentiment during the US session. In the EU session, upside was exacerbated as Russian Energy Minister Novak and his Saudi counterpart Al-Falih participated in a panel discussion alongside a few CEOs from energy giants. Al-Falih noted that the precise volume of output (i.e. any potential revision to the OPEC+ deal) is still up for discussion and any decision taken at the upcoming meeting can be adjusted in H2 2019 (which was then echoed by the Iraqi Oil Minister), but he is sure that OPEC+ will extend the output pact. Furthermore, Al-Falih acknowledged that the Kingdom is “already cutting deeper”, referring to the overcompliance noted at the JMMC meeting last month, which comes in the context of sources noting that the Russian and Saudi Energy Minister discussed a scenario which would see an elimination of over-compliance (currently over 150%, equating to output cuts of just under 2mln BPD, according to calculations). This would mean a continuation of the current deal and an increase in production of around 0.8mln BPD. Finally, regarding the date of the next meeting, Novak spoke of consensus among “many oil producers” are skewed towards a July 2/4 meeting in Vienna, i.e. a delayed to the original June 25/26 date. Elsewhere, precious metals are uneventful and largely tentative ahead of the key US labour market report (Full preview available in the Research Suite), although the yellow metal is poised for its biggest weekly gain in six-months. Elsewhere, copper trades with marginal gains but with upside capped ahead of the US jobs numbers and the absence of China. To provide some colour, Codelco, the largest miner of the red metal, notes that copper demand “remains good” despite recent trade-sparked decline in prices, but the price rout could discourage mining companies from making investment decision, which could lead to tightened supply, while a potential strike at one of the Co’s main mines could add to the global deficit.
Looking at the day ahead, we’ve got the May employment report as well as April wholesale inventories and April consumer credit data. Away from that, the ECB’s Nowotny and Rimsevics are due to speak.
US Event Calendar
8:30am: Change in Nonfarm Payrolls, est. 175,000, prior 263,000
8:30am: Unemployment Rate, est. 3.6%, prior 3.6%
8:30am: Average Hourly Earnings MoM, est. 0.3%, prior 0.2%; YoY, est. 3.2%, prior 3.2%
8:30am: Average Weekly Hours All Employees, est. 34.5, prior 34.4;
10am: Wholesale Trade Sales MoM, est. -0.2%, prior 2.3%; Wholesale Inventories MoM, est. 0.7%, prior 0.7%
3pm: Consumer Credit, est. $13.0b, prior $10.3b
DB’s Jim Reid concludes the overnight wrap
It’s my birthday next week and last night summed up all that is wrong about getting old. My wife was helping to shave my (mostly) bald head and told me that my eyebrows were growing a bit wilder these days. Then she said “I know what I’ll get you for your birthday… an eyebrow comb”. Part of me died as I heard that. As an example of how things have changed for my 21st birthday my university friends got me 21 bottles of my favourite 2 litre bottles of cider which came in handy post my finals which finished on the same day. As I’m now about to turn 45, an eyebrow comb is clearly seen to be the most suitable present. How depressing and underwhelming.
“Underwhelmed” is probably the best way to describe how markets felt post the ECB yesterday. Slightly more generous than expected terms on TLTRO3 wasn’t matched by an “or lower” reference to rates guidance that some had been looking for. Draghi’s press conference failed to really deliver the dovishness that the market hoped for either and it begs the question of what will it take for the ECB to really pivot that way now. To be fair I don’t think you should conduct policy by what the market wants to hear, but the problem for the ECB is that we do live in a very “financial conditions” sensitive world and one which they have themselves encouraged in various sugar rush policies of the past. Central banks have created monsters that they now have to try to look after or face a backlash. More on the ECB later, but trade is likely to be a big dictator of what they eventually do next and yesterday we heard President Trump confirm that he will decide on whether or not to trigger the next round of tariffs on China after the G20 meeting at the end of this month. So that will be a big focal point for markets.
The end result of all that was a bit of quiet session for equities with the S&P 500 and NASDAQ ending +0.61% and +0.53% higher, respectively, amid lower-than-average trading volumes. Markets in Europe had traded well pre-ECB, but fell sharply after Draghi. The STOXX 600 finished -0.02% (highs +0.71%) while European Banks slumped -1.42% and were -2.96% down from their intraday highs. The sector is now down -16.80% from the April local peak and therefore only a few bad sessions away from a bear market. Italian Banks also reversed to close down -1.15% and -3.13% from their highs. Meanwhile 10y Bunds ended -1.3bps lower at -0.239% after trading in an intraday range of a little over 5bps. 10y Treasuries ended -0.5bps lower at 2.130% while 2y yields finished +3.6bps higher, flattening the 2s10s curve back to 23.5bps. The euro (+0.47%) was a shade firmer while EUR 5y5y inflation expectations dipped to touch their 2016 lows, but rose just before European markets closed to end the session flat at 1.29%
Overnight, the PBoC Governor Yi Gang said that China has “tremendous” room to adjust monetary policy if the trade war with the US deepens and on the yuan depreciation said that no “numerical number” is more important than another while adding, “recently, it’s a little bit weaker, because the tremendous pressure from the US side.” The offshore Chinese yuan is trading a touch weaker (-0.16%) this morning at 6.9384. Elsewhere, US Vice President Mike Pence is now scheduled to deliver his speech on US-China relations at Washington’s Wilson Centre on June 24. His speech could be significant given the hawkish remarks he had made on China in October last year at the Hudson Institute.
This morning in Asia markets are largely trading up with the Nikkei (+0.58%), Kospi (+0.30%) and S&P ASX (+0.62%) all higher. Markets in Hong Kong and China are closed for a holiday. Elsewhere, futures on the S&P 500 are up +0.14% while WTI crude oil prices are up +1.37% this morning. In other overnight news, President Donald Trump repeated his criticism of the Fed’s interest rate hikes saying that the stock market would be 10,000 points higher had the Fed kept rates lower.
Meanwhile, here in the UK, Theresa May will be stepping down today as Conservative party leader but will carry on as PM until late July when the new leader will be elected. Elsewhere, in the Peterborough by-election yesterday, the Labour party was able to defend the seat by taking 30.9% of the vote and beating candidates from the Brexit Party (28.9% votes) and Conservative party (21.4%).
Back to the ECB now, where the main takeaways included a commitment to keep rates unchanged at least through the first half of 2020 but without an “or lower” reference to forward guidance. The pricing terms for TLTRO3 was set at depo+10bps for banks meeting lending targets and MRO+10bps for those that don’t, better than what our economists and the market more broadly expected but still not as generous as TLTRO2. Growth forecasts were revised down for 2020 and 2021 and inflation revised down one-tenth for 2020, but left unchanged for 2021. Draghi’s press conference included a number of repeats from the last meeting with little reference to any new global risks to the outlook initially or a willingness to acknowledge market pricing, however later on he did cite that council members had raised the possibility of rate cuts, a restart to APP and/or a further extension to forward guidance which was at least somewhat welcome to markets. There was also an abrupt effort to play down the next move being a hike rather than a cut however this all felt a little late in the press conference.
Our economists have a full review of the ECB fallout and the roadmap moving forward ( here ). They re-emphasize that their base case is still for the ECB to keep its policy stance unchanged this year, as conditions are accommodative and inflation is still expected to rise gradually back toward target. They also argue that we’re approaching the point where Draghi’s comments lose significance, given his impending departure. Our economists will therefore be watching the rhetoric from his potential successors and from new Chief Economist Lane for clues about the policy outlook. Finally, they note three potential scenarios that would likely prompt the ECB to deploy new policy measures: 1) a major risk materializing, e.g. no-deal Brexit, trade war escalation, or Italy crisis; 2) a deeper slowdown in broader economic activity relative to expectations; or 3) a shift in relative policy stance, i.e. policy easing from the Fed that results in a stronger euro and undermines euro area inflation.
So the baton passes to the Fed with the next meeting to mark in your diary being June 19th. It goes without saying that data between now and then will be finely picked apart and it starts with the US employment report this afternoon. In terms of what to expect, following a stronger-than-expected 263k last month, the consensus for today is 175k with a spread amongst economists of 65k to 228k. A reminder that we got a very, very weak ADP this week (27k) albeit offset by improved employment component readings from both the ISM surveys. Our US economists expect a 160k reading which should be enough to keep the unemployment rate steady at 3.6%. As for earnings, they forecast a +0.3% mom reading. Needless to say that with the Fed and market both locked in on the data at the moment, there will be plenty of focus on today’s report.
We got another few snippets of Fedspeak yesterday before the start of their regular blackout period tomorrow. NY Fed President Williams repeated that his “baseline is a very good one” but that he is “prepared to adjust views” as necessary. He also said that the yield curve sends “a pretty strong signal” but that it’s not an “oracle.” Notably, he also said that he’s not worried about the big divergence between market pricing and the fed’s median interest rate projections. Dallas Fed President Kaplan also argued for patience, saying he wants “to give this a little more time” to let events unfold. One interesting tidbit from his remarks, however, was his emphasis on credit spreads rather than equities as the most relevant metric to gauge financial tightening. San Francisco President Daly is due to speak today, then there’s nothing on the calendar until the June 19th meeting.
Turning now to trade, where we are plowing ahead toward President Trump’s Monday deadline for his planned Mexico tariffs. Although the White House has not publicly made any specific demands, they have asked that Mexico “step up and help solve” the issue of illegal immigration. In talks yesterday, Mexican Foreign Minister Ebrard said that the two sides have made “advances.” Anonymous US sources in the media said that the tariffs may be delayed, while simultaneously other sources said that they are likely to be implemented, even if just briefly. Vice President Pence then confirmed that as of now, tariffs are set to be imposed on schedule, though bilateral talks are set to continue today.
Yesterday’s data didn’t really add much to the debate. Claims were unchanged at 218k and marginally higher than expected. The April trade balance showed a deficit of $50.8bn, narrowing from the month prior, while final Q1 revisions for nonfarm productivity and unit labour costs were confirmed at 3.4% and -1.6%, respectively – the latter revised down. That said, the Atlanta Fed’s nowcast model for second quarter GDP growth did inch +0.2pp higher yesterday to 1.5%, its highest level in a month.
To the day ahead now, where data this morning includes April industrial production prints in Germany and France as well as trade data in the former. In the US we’ve got the aforementioned May employment report as well as April wholesale inventories and April consumer credit data. Away from that, the ECB’s Nowotny and Rimsevics are due to speak.
via ZeroHedge News http://bit.ly/2R2k5WN Tyler Durden
Only four days remain until the Trump Administration imposes its first round of tariffs on Mexican imports. And analysts from across Wall Street have waned that imposing these tariffs will inflict serious pain on markets, unless negotiators can change Trump’s mind and stop the tariffs from taking effect..
Here’s a sampling of what some analysts are saying about the tariffs, according to Bloomberg.
RBC, Lori Calvasina
The Trump administration failing to reach a truce with Mexico on Wednesday adds to concern “the market’s pullback from the April highs isn’t finished,” Calvasina wrote in a note. RBC has been optimistic an all-out trade war with Mexico would be avoided, but “one of the most important things we’ve learned about covering the U.S. equity market during the Trump presidency is that it pays to be prepared for the worst, unthinkable outcomes,” she said.
Calvasina still views the second-quarter reporting season as a “pivotal test for stocks and an opportunity for markets to stabilize as 2019 earnings expectations are reset.’
Cowen, Chris Krueger
Cowen’s base case remains that the tariffs go into effect, though the situation is “very fluid and entirely dependent on Trump’s mood on Sunday.”
Krueger sees negative read-through for China and other trade talks, as “who wants to sign deals (USMCA) only to be knee-capped weeks later with arbitrary tariff threats?” He added that “whether or not the tariffs go into place on Monday, we believe that real and lasting damage has been done to the broader Trump trade grand strategy.”
AGF Investments, Greg Valliere
“Can Trump take yes for an answer?” Valliere asked in a note, adding that “even Trump’s hard-line trade hawk, Peter Navarro, said yesterday that the U.S. has obviously gotten Mexico’s attention, and that an agreement could be reached that avoids new tariffs.” That means “there’s room for Trump to spin Mexican concessions as a victory.”
At the same time, there’s “no clear end-game,” Valliere wrote. Trump “can’t possibly think that the flood of immigrants will be reduced to zero in one month, so what’s his objective? A sharp reduction? We’ll be glued to the Sunday talk shows, because the outcome won’t be clear until Monday — if then.”
Height Capital Markets, Clayton Allen
Some Mexican positions, including asking the U.S. to stem a flow of guns across the border, pose “significant challenges to a deal,” Allen wrote in a note. “Efforts to impose restrictions and enforcement measures on gun sales in the U.S. are a non-starter for Trump’s base and probably unsupportable for the White House.”
Mexico’s rejecting U.S. demands that they house Central American asylum seekers also presents a challenge, and may “draw the ire of conservative groups who accuse Mexico of being a ‘free rider’ in the asylum debate,” he said. Conservative attention limits Trump and raises the risk he’ll be “backed into the same corner he was over government funding in late 2018, which resulted in a shutdown.”
via ZeroHedge News http://bit.ly/2EXDUte Tyler Durden
After a period of unnatural stability, in which the offshore Yuan traded in a tight range of 6.90 and 6.95 since May 13 the Yuan finally broke out of the channel and tumbled 0.5%, the most in three weeks to at low as 6.9625 vs the dollar, the lowest level since November 2018, after the chief of China’s central bank said Beijing has “tremendous” room to adjust monetary policy if the trade war with the U.S. deepens, and hinted there’s no line in the sand for the currency, meaning the key “psychological” level of 7 does not exist in times of trade war.
The yuan had stabilized in recent weeks as authorities voiced support for the currency, following a rout in early May that pushed it near 7 per dollar level not breached since the global financial crisis. It still lost about 2.5% in May, among the worst in Asia.
“We have plenty of room in interest rates, we have plenty of room in required reserve ratio rate, and also for the fiscal, monetary policy toolkit, I think the room for adjustment is tremendous,” PBOC governor Yi Gang in an interview with Bloomberg in Beijing.
When asked if his upcoming meeting with Steven Mnuchin this weekend would get negotiations with the U.S. back on track, Yi said it would probably be a “productive talk, as always,” though the topic of the trade war would be “uncertain and difficult.” The two are scheduled to meet on the sidelines of the G-20 meeting in Japan. This is the first publicly announced meeting since the trade talks fell apart last month and could pave the way for a meeting between Presidents Donald Trump and Xi Jinping, who will likely be in Japan at the end of the month for the G-20 leaders’ summit.
Commenting on the recent yuan move, Yi said that “recently, it’s a little bit weaker, because the tremendous pressure from the U.S. side.” When asked if there’s a red line for the exchange rate, Yi said no number is more important than another.
That was all FX traders needed to hear to start selling the yuan.
“The trade war would have a temporary depreciation pressure on renminbi, but you see, after the noise, renminbi will continue to be very stable and relatively strong compared to emerging market currencies, even compared to convertible currencies,” Yi said, using the yuan’s official name. “I’m very confident renminbi will continue to be stable at a more or less equilibrium level.”
“A little bit of flexibility of renminbi is good for the Chinese economy and for the global economy because it provides an automatic stabilizer for the economy,” he said. “The central bank of China is pretty much not intervening in the foreign-exchange market for a long time, and I hope that this situation will continue, not intervening.”
A growing number of economists predict that the worsening trade war and job market outlook could prompt the central bank to take bolder easing steps.
“Looking forward, our base case is that an escalating trade war will push key gauges below the PBOC’s tolerance threshold, triggering 50 basis points of rate cuts and another 150-200 bps of reserve requirement cuts by year-end,” David Qu, an economist with Bloomberg Economics in Hong Kong, wrote in a recent report. That would most likely send the yuan below 7.00 for the first time in years and provoke a furious response from the White House.
In his Bloomberg interview, Yi gave no indication that the government was considering more fiscal stimulus now to counteract the effect of the trade war.
“Our fiscal policy this year is probably the largest and strongest fiscal reform package, in terms of the tax cuts, and also in terms of having more efficient fiscal resources allocation between the central government and the local government,” Yi said. “The current package is able to cover the cases where the situation is getting a little bit worse, but of course, if the situation gets tremendously worse, they will open the discussion. But right now they haven’t discussed that scenario yet.”
Discussing the plunge in the yuan, Bloomberg’s Benjamin Dow writes this morning that “Yi’s failure to set a red line is rightly scaring money out of the CNH, but it should come as no surprise. 7/$ was already in view back in 1Q before the market became overly optimistic about a U.S.-China trade deal, and little has changed since then.” He then explains China’s strategy in terms of the Russian response to Western sanctions:
The calculus the PBOC and other policymakers can employ is redolent of what the Russian government did earlier this decade amid the oil crash and Western sanctions — let the ruble slide to help exports, and also stretch forex reserves that come from dollar-priced commodities and energy sales. China’s forex pile in the form of U.S. Treasuries and other reserves play a similar role for Beijing, and that means a chance for weaker local currency in order to stretch that stimulus.
And so with China one step closer to allowing the yuan to slide below 7, one can be sure it won’t go unnoticed by the White House, BBG’s Richard Jones writes. And, “as much as the U.S. administration has been waging war by using tariffs, don’t be surprised if the White House starts trying to jawbone the USD lower too.”
via ZeroHedge News http://bit.ly/2XAiCt2 Tyler Durden
