Dudley installs USD selling & Cable reaches 2015 high

Any optimism that global indices could be set to continue what was appearing to be a positive start to the week has been erased following a sharp sell-off in bonds, dragging equity markets substantially lower. With the exception of the Shanghai Composite, all of the major global indices look vulnerable to further losses with the gains in Shanghai themselves being linked to the continued stimulus measures from the People’s Bank of China (PBoC) more than anything else. I will be keeping a close eye on how the Shanghai Composite performs over the remainder of the week because even if the upcoming Industrial Production and Retail Sales data hints that we are in jeopardy of falling below the government’s GDP target of 7%, Shanghai can rally on any optimism that the PBoC will continue to ease monetary policy. Either way, I am expecting the PBoC to act aggressively when it comes to defending the 7% GDP target.

The gains the FTSE 100 encountered after the UK election ended with a Conservative majority have also come to an end, with losses occurring despite positive data being released from the United Kingdom earlier today. Both Manufacturing and Industrial Production data came in above expectations, with the Industrial Production figures really impressing with an annualised 0.7% gain in comparison to expectations for just 0.1%. The UK fundamentals continue to perform consistently strong and now the UK election is finally out of the way, I am expecting investors to redirect their attention back towards the UK’s economic outlook. Indices across Europe have also been handed punishment, with this likely being due to a combination of the sell-off in bonds and the never-ending Greece talks still failing to present anything tangible.

The US markets look set to open with losses, and this could be a theme for the next couple of days if economic data continues to highlight that the economic recovery has not been as strong as investors were previously pricing in. Stocks would be vulnerable to further losses if tomorrow’s retail sales release continues to highlight that there has been no correlation between consistent job creation and improved consumer confidence transitioning into additional spending. While there is no doubt that the job creation the US has experienced over the past year has been impressive, other economic data could still improve and the bulls got far too carried away with interest rate optimism.

Currency Markets

The USD is taking a hammering and trading lower against all of its major trading partners. While it’s likely that the USD has been pressured by the action in bonds, the dovish comments from Bill Dudley (Federal Reserve New York Chief) that he was unsure when the Federal Reserve will hike interest rates has installed bearish momentum. Dudley indicated that the FOMC would not commit to a timeline despite the US job growth, which should provide the markets with a gentle reminder that it is monitoring all aspects of the US economy. Although March’s NFP being revised down to just over 80,000 should have removed absolutely any remaining optimism that June is still a possibility, another weak retail sales reading tomorrow should push interest rate expectations further back.

The main eye-catcher has been the GBPUSD, with the Cable rallying to a new 2015 high at 1.5710. It looks all but confirmed that the GBPUSD will close above 1.55 this evening, which would provide the bulls with a similar green light to what they encountered when the pair closed above 1.50 around three weeks ago. While the impressive Industrial and Manufacturing Production data provided another reminder how strong the UK fundamentals remain, any hawkish language from BoE Governor Mark Carney during the upcoming inflation report could send the bulls into a complete frenzy. Although Carney is notoriously known for offering strict views on inflation, the price of WTI has rebounded significantly since the last time he spoke. This means the GBP bulls will be hoping for a more upbeat BoE Governor and the return of some interest rate optimism for later this year.

The EURUSD is also trading higher after suffering its first three-day of consecutive losses of the month, with the pair reaching as high as 1.1278. If I am honest, the EURUSD can only really gain from further USD softness because ongoing negotiations in Greece have become a constant drag to investor sentiment. The chances of an agreement being reached over the upcoming days are probably as weak as they have been for as long as negotiations have been occurring, and for as long as the ongoing Greece situation continues to drag on the Euro will remain vulnerable to sudden declines.

Commodities

Gold has managed to jump back above $1195, with the metal benefiting from USD weakness. I do think that Gold will continue to benefit from any indications that US interest rate expectations will be pushed further back, meaning I will be keeping a close watch on how the metal traders behave after Wednesday’s retail sales announcement. If we continue to encounter no correlation between substantially improved job creation and consumer confidence transitioning into expenditure, the Federal Reserve will be provided with a further reason to remain cautious on interest rate policy and this would likely improve the prospects for the Gold bulls.

WTI Oil is also benefiting from the USD weakness and has been able to bounce back above $60 at $60.52. The 2015 high can be found at $62.25, but we would need to see further indications of declining oil rigs resulting in lower inventories for the bulls to continue charging forward. The weekly US inventory data will be monitored by investors and although the surpluses are now shrinking, there is still an aggressive supply in the markets and I do think we remain vulnerable to pull backs.


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