Week to Jun 1st

Monday May 28

Although markets were closed in the US and UK today, the decline in DAX, driven by Italian concerns was reflected in the FTSE and US futures markets. NKY was down in line. EUR rallied in the Asian session on hopes on resolution in Italy, but then faded the rest of the day to end 0.53% down. However, although AUD and GBP were also down against USD, CAD was flat (along with Oil and Gold), and JPY was slightly up meaning that DXY only put on 0.18% on the day. The bond market was closed.

Tuesday May 29

Concerns about Italy, in particular the prospect of a fresh election in which populists would gain an even larger share of the vote, continued to dominate. Italian bond yields broke the 2% barrier for the first time since 2013, and peripheral markets Spain and Portugal followed suit. All the main equity markets fell hard, as did the EUR. GBP and to an extent risk-on commodity currencies CAD and AUD fell in sympathy, although oil was flat. As money moved into safer US bonds, we saw the triple risk-off test; Gold, JPY and US bond prices (inverse to yields) all up sharply. 

Italy-Germany 10-year bond yield spread

Wednesday May 30

With Monday being a holiday, Turnaround Tuesday was in fact on Wednesday this week. Not as alliterative, but the effect is the same. The trigger was new M5S and Lega coalition talks, ie to avert another election, and the Italian MIB rallied 2.1% after its 8% slide over the previous week, and Italian yields fell, and German and US yields rose, the latter by 7bp to 2.84%

Despite the US misses on ADP jobs (12:15) and GDP and PCE (12:30), US markets also rallied, with SPX recovering all the previous day’s losses, and NKY followed. In Europe, both EUR/DAX and GBP/FTSE similarly recovered, and all currencies were up against USD except JPY which retreated in the risk-on market. Gold followed the weaker dollar, not the risk on, and was up $3 on the day.

Of particular note was CAD which put on an immediate 178 pips (1.37%) on hawkish BoC rhetoric following the rate hold. Oil rallied by 2.4% on reports that the proposed raising of output (mentioned last week) may not be as soon as previously though. This of course also helped CAD.

Brent-WTI spread increasing

Thursday May 31

With Italy out of the way for now, the tariff deadline we mentioned last week arrived, and the US confirmed they would impose steel and aluminium tariffs on the EU, Mexico and Canada. Markets duly retreated again. DAX fell the most (1.4% in the cash session), mainly because of a 7.7% fall in DB after the troubled bank was placed on a US regulator’s ‘problem’ list, but SPX, FTSE and NKY were also down. Currencies were mixed. CAD showed an effect we have seen before. A sharp move in one direction (the hawkish remarks yesterday) is often reversed on the next piece of significant news, in this case the GDP miss (1.3% vs 1.7% est) at 12:30, which faded CAD by 165 pips (1.29%), virtually a complete reversal. Note that this is the kind of move you normally only see with CPI or interest rates, GDP usually has a much lesser effect.

Otherwise it was a dull day for the dollar. EUR was slightly up, JPY and Gold were slightly down, and AUD and GBP were flat. As CAD is only 9.1% of DXY it had limited effect on DXY which closed flat, as did 10-year yields. Oil gave up Wednesday’s gains despite the EIA Stock beat at 15:30. Notably the Brent-WTI spread hit a three year high of $11, reflecting confidence in US shale output. In general non-US oil is priced in Brent.

DJIA repeats futures rally in cash session

Friday Jun 01

Friday saw Italy form a new government, albeit the strange coalition of M5S and Lega, but at least there are no new elections. MIB added 1.5%, and both Spanish and Italian bond yields tumbled. In other good news, NFP figure came in at 12:30 as a healthy beat (223k vs 188k), with average hourly earnings up 2.7% (last month 2.6%) and a beat on unemployment. All indices were up, although of the majors, only SPX and NDX ended with green candles for the week.

The DJIA exhibited a pattern seen many times before on NFP beat, rising in futures immediately after the release, then rising again by the same amount in the cash session. The index took a few minutes before the first rall, so it was particularly easy to trade. Look out for this pattern on future NFP beats.

It was another mixed day for currencies. In general it was a good day for USD, with JPY and Gold down sharply, and Oil continued to fall in line. AUD and CAD were fairly flat, and the only surprise was GBP which rallied all day after the Markit Manufacturing PMI beat (which we signalled last week as significant) at 08:30. Yields were up in line with the dollar, up 6bp at 2.47%.

Please note all figures and percentages given for daily movement on indices cover the entire cash and futures period in that day.

WEEKLY PRICE MOVEMENT

A very flat week for USD on everything except NZD. The best trade would have been to buy NZDJPY for 1.19%, the lowest forex gain for months. Indices were also quieter, with the downward move in the DAX being the largest. Even cryptos were virtually flat.

AUDUSD 0.7565 (+0.27%)

EURGBP 0.8731 (-0.32%)

EURUSD 1.1657 (+0.08%)

GBPUSD 1.3342 (+0.36%)

NZDUSD 0.6986 (+1.07%)

USDCAD 1.2952 (-0.14%)

USDJPY 109.49 (+0.12%)

DAX     12743 (-1.45%)

FTSE     7704 (-0.13%)

NIFTY   10696 (+0.86%)

NKY     22361 (-0.40%)

SPX    2731.6 (+0.52%)

GOLD  1293.78 (-0.53%)

OIL     65.69 (-2.54%)

BTCUSD   7522 (+1.65%)

ETHUSD 579.58 (+1.53%)

(Crypto prices are given as at 0000GMT Saturday, two hours after the other markets close.)

NEXT WEEK (all times are GMT)

Monday June 04

There are no Fed speakers this week as they are in the purdah period prior to the rate decision next week. Data is also light, although as the UK Manufacturing PMI boosted sterling last week, the Construction PMI may also have a larger than normal effect. BoE Etheridge speak at 15:45, and BoE MPC member Tenreyro (voter, centrist) is on at 17:00.

Tuesday June 05

Australian yields rose sharply last Friday in anticipation of a possible hike today, although consensus is still for a hold. Notably the bank has said that falling house prices (Australian house prices have fallen for eight months in a row) are not a consideration. We now have a partially priced in hike, so expect AUD volatility whatever happens. Also, in addition to a raft of PMIs is the US JOLTS Job Openings report at 14:00. ECB President Draghi speaks along with his predecessor Jean-Claude Trichet in Frankfurt at 13:00. BoE Cunliffe (dove, voter) speaks at 11:00.

Wednesday June 06

Following the rate decision, Australian GDP is estimated to be twice last month’s figure at 0.8%. A miss on this ambitious estimate could reverse any movement upward from the rate decision (or vice versa on a beat after a rate hold). We have three ECB speakers today Praet (dove, voter) at 07:00, Hakkarainen at 13:30, and Angeloni at 16:10. BoE Tenreyro speak again at 09:00, and BoE McCafferty (hawk, voter) is scheduled to do a vox pop Q&A on London LBC Radio.

Thursday June 07

Eurozone GDP rarely makes much of a splash and usually comes in as estimated, as the individual nations have already reported. Of more interest are the CB speakers, BoE Ramsden (voter, position unknown and therefore interesting) at 14:00, and BoC Poloz discussing the contents of the Canadian Financial System Review. Another former CB leader is on today, Ben Bernanke discusses “Lesson Learned from 10 Years of QE” at 18:00. NDX component (1.302%) AVGO reports after the bell.

Friday June 08

Today sees Canada’s NFP and other employment figures, a week after the US NFP. The jobs estimate is not available at the time of writing, but an improvement of last month’s negative figure is likely. USDCAD sharp movement is still expected. Staying north of the 49th parallel, the two-day G7 Summit opens in Quebec. The only CB speaker today is ECB Mersch (hawkish, voter) at 07:15. Markets will also start to position themselves for the following week’s all important US (and EU) rate decisions, where a US hike is widely (91.3% per FedWatch) expected.

CALENDAR (all times are GMT). High volatility items are in bold

Mon Jun 04

01:00 AUD Australia HIA New Home Sales (MoM)(time approx)

01:30 AUD Australia Retail Sales s.a. (MoM)

08:30 GBP UK PMI Construction

14:00 USD US Factory Orders (MoM)

23:30 JPY Japan Overall Household Spending (YoY)

Tue Jun 05

23:01 GBP UK BRC Like-For-Like Retail Sales (YoY)

01:45 CNY Caixin China Services PMI

04:30 AUD RBA Rate Decision/Statement (est hold 1.5%)

07:55 EUR Germany Markit Services/Composite PMI

08:00 EUR Eurozone Markit Services/Composite PMI

08:30 GBP UK Markit Services PMI

13:45 USD US Markit Services/Composite PMI

14:00 USD US ISM Non-Manufacturing PMI

14:00 NZD NZ GDT Price Index (time approx)

20:30 WTI API Stock

Wed Jun 06

01:30 AUD Australia GDP (est 0.8% prev 0.4%)

12:30 USD US Trade Balance

12:30 USD US Nonfarm Productivity/Unit Labor Costs

12:30 CAD Canada International Merchandise Trade

14:00 CAD Canada Ivey PMI

14:30 WTI EIA Stock

22:30 AUD AiG Performance of Construction Index

Thu Jun 07

01:30 AUD Australia Imports/Exports/Trade Balance

05:00 JPY Japan Leading Economic Index

09:00 EUR Eurozone GDP (est 2.5% prev 2.5%)

12:30 USD US Jobless Claims

15:15 CAD BoC Governor Poloz Speech

19:00 USD US Consumer Credit Change

Fri Jun 08

02:00 CNY China Imports/Exports/Trade Balance (time approx)

06:00 EUR Germany Industrial Production/Trade Balance

12:15 CAD Canada Housing Starts s.a (YoY)

12:30 CAD Canada NFP/Participation/Unemployment

17:00 WTI Baker Hughes US Oil Rig Count

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