The stronger US dollar appears to be the key theme in play as hawkish Fed minutes handed the US dollar direction back to the bulls. Apparently, the market has fast forgotten Janet Yellen’s warning last week that the negative rates were not totally off the table. The US dollar index surged to a seven week high, the futures currently price in a 32% chance for a June rate hike. There are nearly 75% chances for a rate hike to happen by September, according to the activity in the US sovereign market. Not all the macro players are convinced that the USD strength could last given that the US earnings season has rather been a disappointment for most of the companies, Moody’s cut the US growth forecast due to a weaker global demand and political risks are incrementally being priced in before the US presidential election.
What is certain is that the stronger US dollar is weighing on oil and commodity prices in general. Losses in materials and energy stocks are leading the market lower in Asia after the Federal Reserve (Fed) meeting minutes revealed a greater confidence that the inflation in the US would rise toward the 2% target in the medium term. Few policymakers thought that a second Fed rate hike in April would have been appropriate, although the majority remained cautious given the downside risks vis-à-vis the inflation outlook.
The FTSE inherited a sour sentiment from the overnight session. Energy stocks opened 1% lower in London and extended losses past 2%; basic materials lost up to 3%. In addition to the Fed effect, the missing EgyptAir flight is having an additional negative impact on travel companies’ stocks today. The FTSE looks like it is back on its way toward 6050/6000 support. In this chaotic environment, the better-than-expected retail sales in April found no buyers in the stock market. Nonetheless, the UK retail sales including auto sales beat the estimates with a 1.5% surge over the last month versus 1.6% contraction a month ago. The pound extended gains to 1.4662 against the US dollar, a two week high. The EUR/GBP tested the 0.7650 support. The pair is now trading in the bearish consolidation zone and is expected to push for 0.75 level as long as the 0.7680 resistance, the major 38.2% retracement on November-April surge, holds.
Oil seen at $50
The more expensive US dollar kept the WTI futures below the $50 level in Asia. Commodities cheapened. WTI eased for a second day and traded below the $48/barrel. The 200-hour moving average at $46.85 is expected to lend some support to July contract given that Fitch downgraded Saudi Arabia’s rating to AA-, which places the world’s most aggressive oil producer’s finances under a further pressure and could limit its capacity to continue pumping at the current speed in size and in time. On a side note, Kuwait’s Finance Minister said OPEC’s action plan is bearing fruit and that the crude will end the year at $50 per barrel.