The event risk ramps up from here now, although I would argue that the upcoming hearing from former FBI Director James Comey should be a non-event for markets. After the overnight testimony, in which Comey repeated Trump’s demands for “loyalty”, there is still not enough in what we have heard to make us question Trump’s intent, which is really what the Intelligence Committee will be debating.
The bigger issue for traders is clearly the ECB meeting at 21:45 aest, although the direct effect of this event will likely be contained to European equities, fixed income and subsequently the EUR currency. The secondary effects could be a move in markets directed from a change in the USD index, but I would be looking first and foremost at EUR-denominated assets. The overnight headlines (quoting “sources”) are that the “ECB likely to nudge up growth forecasts, trim inflation” and “ECB forecast changes likely to be small”.
So obviously no changes in its monetary policy settings, but there would be some still expecting and positioned for a change in the ECB’s forward guidance around the quantitative easing program. I would caution in positioning trades for an outright change to occur and feel the balance of risks is for a steady as she goes stance, with the statement largely saying the risks to growth are balanced and the chance of even lower rates have diminished.
EUR/GBP is the must-watch pair over the two days, where tactically I still feel there are downside risks given the elevated possibility the ECB disappoint and the Tories get a majority in the UK election. If we look at implied volatility in the GBP we can see that the options market (assessing a GBP/USD ATM ‘straddle’ expiring Friday) suggests we see a move in cable of 175 points (in either direction) from the current spot price. This suggests GBP/USD is likely to test and break the May highs of £1.3048 on a Tory majority, however, any further follow through moves into £1.3250 to £1.3300 (likely led by a strong majority well north of 100 seats) would be a great opportunity to sell and fade moves in cable.
If we do see a hung parliament, given the market has is priced for a Tory majority of 50-80 seats, then I would expect a move far in excess of 175 points to the downside.
Our own tradable markets suggest the Conservative Party getting a majority of 383 seats and therefore a majority of 58 seats. The betting markets have a 94% probability Theresa May retains office, and we have seen the likes of The Sun and Evening Standard throwing their weight behind the Tory camp. There seems little doubt that calling the snap election has been Theresa May’s undoing and even she has admitted that her campaign has been poor, with her stock among peers and the wider public being decimated through a number of ill-conceived moves that have pushed the idea of losing an unlosable election to a real possibility.
The exit polls start rolling in at 07:00 aest tomorrow and recall the exit polls in 2015 predicted a Tory win, which was not expected at the time, but they understated the extent by which David Cameron won. One variable that we should follow is the turnout for younger voters. They will likely vote Labour and a high turnout could be a tailwind for Jeremy Corbyn.
Turning our focus to the Asia market open and we are set to start the equity session on a fairly soggy note. The S&P 500 may have closed +0.2%, however, we are calling the ASX 200 at 5652 (SPI futures are down 14 points) and the Nikkei 225 at 20,004. There has been some selling in US fixed income, with the US ten-year Treasury up a few basis points at 2.17%, while high yield credit has been very calm and spreads here are still the key to understanding the direction to equities. Recall equities always follow credit.
The energy sector will get a bit of working over today, with crude having its second-worst day of the year and closing down 5%. Yesterday’s API inventory data were proven to be a terrible lead in for the overnight (DOE) official crude inventory data, with a huge draw in the API data, superseded by a sizeable 3.295 million build seen in the Department of Energy print (consensus called for a 3.1 million drawdown). Gasoline inventories grew 3.32 million barrels, again well above consensus and the result was the oil bears went to town on oil futures.
Gold has also found sellers on two factors, one being a rise in ‘real’ (or inflation-adjusted) yields, while the failure and rejection of the April high of $1295 have brought a few technical sellers. All is not lost though as the selling has been contained at the five-day exponential moving average, the gold bulls need a close above $1295 before they can get really excited. Spot iron ore was sold off to the tune of 1.1% and now trading at the lowest levels since July 2016. BHP is likely to open around 0.2% lower.
In terms of event risk, we get Aussie April trade data at 11:30 aest, with calls for a surplus of $2 billion, while China also releasing trade data, although there is no set time here. The analyst consensus here is expecting a $47.8 billion surplus driven by a 7.2% increase in exports and 8.3% increase in imports. Through Asia trade, I feel the downside in AUD/USD should be limited to $0.7516, although the pair is getting a touch stretchered here with price closing two standard deviations from the 20-day moving average.