FTSE -4 points at 7450
DAX -12 points at 12795
CAC -20 points at 5397
Euro Stoxx 50 -7 points at 3633
The US dollar depreciated against all of its G10 counterparts, as the Federal Reserve (Fed) hawks lost some field over the last couple of sessions. Although there has been no major news that could’ve demotivated the Fed hawks, the activity in the US sovereign markets hinted at a lower incentive to push the US dollar and the US yields higher.
The probability of a June interest rate hike eased to 97.5% after hitting 100% a week earlier. The US 10-year yields hold the ground at the 2.30% level, yet investors readjust their forecasts in favour of a more balanced view. As an example, Pimco lowered its 2017 core US inflation forecast to 2.0% from 2.3%.
The stagnation in the US yields drives the capital toward popular carry currencies, such as AUD and NZD and to non-interest bearing assets, such as gold.
Gold extended gains to $1’237 on Monday and could be expected to aim for a further recovery towards $1’245/1’247 (major 38.2% retracement on April – May decline / 200-day moving average). Soft US yields are supportive of the yellow metal. Softer June Fed rate hike expectations could encourage a short-term bullish reversal in gold this week. Though, long-term investors would seek opportunities to sell the tops, given that the Fed is still expected to raise interest rates two more times this year.
The yen (+0.30%) gained the most against the greenback in Tokyo. Nikkei and TOPIX were flat to positive.
The Chinese stocks gave back gains as the Belt and Road initiative bumped into major political and financial concerns. In one hand, China’s increasing influence on world economics prevent several world leaders including EU and India, from voicing further enthusiasm about the project. India even boycotted the ‘project of the century’ warning that the latter ignored ‘core concerns about sovereignty and territorial integrity’. On the other hand, investors are reluctant to jump in with both feet due to the capital controls and other financial restrictions imposed by the Chinese government. Although China has certainly more in its hat in terms of liberalisation and collaboration, global stock investors preferred keeping clear from the Shanghai Composite (-0.38%) for another day.
The AUD/USD remained bid above the 0.7405, yet the unconvincing bounce in iron ore prices are still a concern. News that hedge funds are ‘giving up on the Australia dollar' (source: Bloomberg) could keep the topside limited pre-0.7488/0.7500 (major 38.2% retrace / psychological resistance).
The EUR/USD advanced to 1.1000. The EUR-bulls are comfortably in charge of the market before the German ZEW data, a first indication of sentiment in May. The EU-positive outcome from the French election, the rally in German stock markets and the recovery in euro hint at a satisfactory read, which could further sustain the euro in return. The next natural target against the US dollar stands at 1.1023 (post-Macron high) before 1.1074 (minor 23.6% retrace on post-Trump sell-off). The golden cross formation on the hourly chart (50-hour moving average crossed above the 200-hour moving average) encourages traders to buy into minor price pullbacks. Dip-buyers are touted at 1.0975/1.0950 area.
Likewise, the GBP/USD recovered above the 1.2900 mark. The sudden appetite loss in US dollar will likely prevent the post-Bank of England (BoE) downside correction from developing further. The $1.30 hurdle is back on the radar and could be successfully taken out today, if the UK’s inflation print is in line with analysts’ expectations. The headline inflation in the UK may have advanced to 2.60% on year to April, as the core inflation, excluding food and energy, may have bounced to 2.2% for the first time since October 2013.
Rising inflationary pressures should revive the BoE-hawks, yet to a limited extent, given that in its Quarterly Inflation Report, the BoE warned that the inflationary pressures could increase throughout 2017, but should ease starting from next year. Of course, the market’s reaction will depend on how fast the inflation rises. If the inflationary pressures are thought to grow beyond the MPC’s tolerance levels, the pound would be handed back to bulls’ hands.
The quick comeback in the pound market could dent the positive momentum in the FTSE stocks, as some investors could refrain from buying the FTSE at historically high levels, the price being further enhanced by the stronger pound for foreign investors.
Copper futures trade in the red after extending gains to $2.55/lb. Iron ore is still seeking a bottom.
The WTI crude traded just shy of the $50 level on Monday, amid Saudi Arabia and Russia reiterated their plans to extend the production cuts into 2018. Oil prices currently factor in nine-month expansion in output cuts from the OPEC, Russia and Iran. New elements, such as deeper cuts, measures on exports are needed for a sustainable break though the $50 a barrel. Solid offers are presumed at $53/55 into the May 25 meeting.
According to Bloomberg, the OPEC and Russia’s commitment to nine-month extension in production cuts should bring the oil inventories by 10 million barrels below the five year average in March 2018. In April, the OECD inventories were more than 3 billion barrels above this average.
Quick glance at technicals on LCG Trader:
GBP/USD intraday: continuation in the rebound. Long positions above 1.2880 (pivot) with targets at 1.2940 and 1.2960 in extension. Below 1.2880, downside potential to 1.2860 and 1.2840.
NZD/USD intraday: bullish bias above 0.6855. Long positions above 0.6855 (pivot) with targets at 0.6920 and 0.6950 in extension. Below 0.6855, downside potential to 0.6835 and 0.6815.
Gold intraday: Long positions above 1230.30 (pivot) with targets at 1237.30 and 1240.00 in extension. Below 1230.30, downside potential to 1228.30 and 1226.50.