Wednesday August 17: Five things the markets are talking about
Today’s is FOMC minutes reporting day. Will investors get the granularity on the timing of U.S. rate normalization they so much crave? Market odds are leaning towards a resounding ‘no’.
Already this week, investors have been served up some mixed messages from voting and non-voting members. Net result, the market remains sceptical that the central bank would increase rates before the end of 2016. As questionable U.S. data of late (inflation and retail sales) provides a strong argument preventing a rate increase at the Fed’s meetings in September or December.
On Monday, Fed President Williams (San Francisco) suggested that the central bank should be considering new tools to deal with a stubbornly slow economic growth, including raising its inflation target.
Yesterday, New York Fed President Dudley counter argued that the U.S economy should pick up in H2 and that the November presidential election should not factor into the Fed’s decision to raise interest rates. In translation, gradual rate rises are warranted.
This push/pull from Fed members certainly makes it more difficult to trade in these already “thinly” traded holiday sessions. Expect this afternoon’s minutes release at 02:00pm EDT to not make it any easier for capital markets.
1. Crude and commodities look to the Fed for direction
Crude prices remarkable August rally (+20%) has been fuelled by the possibility of OPEC and non-members states curtailing production at a meeting next month. However, oil’s price moves over the past 24-hours has mostly been dollar driven, which is being influenced by the markets interest rate guessing.
Ahead of the U.S open, Brent crude is down -55c at +$48.68 a barrel, while U.S. West Texas Intermediate (WTI) trades at +$46.13 a barrel, down -45c.
With record ‘short’ positions still evident, the oil markets ‘pain trade’ remains higher oil prices. From a technical perspective, with Brent now only +$1 away from the psychological $50 handle, do not be surprised to see a few weaker shorts being squeezed.
Gold prices remain elevated this morning (+$1,345) as investors wait for clues about whether the Fed would raise interest rates before year’s end. The ‘yellow metal’ tends to shine more brightly when compared with yield-bearing assets when interest rates are low. Today’s FOMC minutes will provide support for the next leg in price direction.
2. Stock indices stay close to home
It no surprise to see the Euro bourses little changed or slightly under pressure as investors wait for this afternoons Fed minutes.
Currently, the Stoxx Europe 600 is swinging between small gains and losses and was last down -0.4%, dragged mostly lower by financial and technology shares. With commodity and mining stocks trading generally lower as metals and oil trade lower is pressuring the FTSE 100.
Futures point to a small opening loss for the S&P 500, extending Tuesday’s declines
Indices: Stoxx50 -1.0% at 2,993, FTSE -0.1% at 6,885, DAX -0.8% at 10,591, CAC 40 -0.8% at 4,427, IBEX 35 -0.8% at 8,550, FTSE MIB -1.5% at 16,547, SMI -0.5% at 8,178, S&P 500 Futures -0.1%
3. U.K. Gilts lead the way
Presently, U.K. is the driving force in global bond markets. Gilts have become the most actively traded bonds in Europe since the U.K’s historic Brexit vote.
The average daily trading volume of the U.K. 10-year note is +£6.75B so far this month – that’s roughly seven times higher than it was during the first three-months of year. This is not bad, considering August historically is one of the lightest trading volume months of the year.
The average daily volumes in the benchmark U.S. 10-year note is +$1.87B so far in August, down from +$2.25B last month, while trading in German bunds has more than halved to +€640m. The uptick in U.K product has more to do with the BoE’s aggressive monetary policy and its QE bond buy-back program.
The yield on 10-year gilts has tumbled from around +1.37% before the referendum to +0.59% yesterday, just above their record low. U.S 10-year yield is at +1.58%, down from +1.74% before the vote, as investors bet on global central banks keeping interest rates lower for longer.
4. U.K. labor markets unruffled by Brexit
This week’s data out of the U.K is post-Brexit focused.
Data this morning indicates that the number of people claiming out-of-work benefits in the U.K. fell in July (-8.3k to +763k), a sign suggesting that the country’s labor market held up well after its historic vote.
Digging deeper, the number of vacancies in the job market also fell slightly on the month (+741k), however, analysts indicate there were still more available positions in July than a year ago.
Net result, today’s headline print adds to a mixed picture of the U.K economy since Brexit and probably justifies the BoE’s aggressive stance.
The record ‘short’ sterling positions will be most interested in tomorrow’s U.K retail sales data for July. It’s expected to offer the first concrete evidence of post-vote consumer spending.
5. More Jawboning from Tokyo makes little impact
The ‘mighty’ dollar, despite being under pressure yesterday from mixed Fed official messages, is content to remain confined to a tight range ahead of this afternoon’s FOMC minute’s release.
Not surprisingly, the only action of note in the overnight session was in the yen pairs. The yen (¥100.44) came under some pressure outright after jawboning by Tokyo’s top currency bureaucrat. With the lack of fiscal measures to combat the currencies strength, any veiled threat of direct intervention in the currency market is the method being used to try and force the yen lower for this export-dominated economy.
Japanese officials will probably be disappointed that they did not get more “bang for their buck” from the intervention threats. The market showed only a modest reaction as the trading volume remains thin and many investors are still away on summer vacation.
