I’m a believer
The promising US Retail Sales data left a resounding footprint on global markets as US consumers are loosening their purse strings, but perhaps more important from an investor perspective, the data speaks directly and plainly while providing a linear gauge of the trickle-down effects from fiscal stimulus. Indeed, green shoots start to emerge.
The UST 10Y closed above the critical and pivotal 3.05 % area which encouraged the dollar Bulls to hammer the EUR/USD down to critical structural support levels. While the clearest dollar bull signal is from US 10y yields, but with trader humming the iconically cool ”I’m a Believer” this morning, there’s permanence building as waves of fresh dollar longs hit the books.
Oil Markets
Despite OPEC oil demand forecasts amidst China’s unquenching thirst for crude oil rising, bullish Asia sentiment seems to have gone off the boil after China reported weaker-than-expected investment and retail sales in April, muddying its economic outlook suggesting the domestic surge in refinery runs could be short-lived.
The stronger dollar typically causes a bit of indecision as investors usually back off from commodity risk when the US dollar strengthens.
The API reported a surprise inventory build for the week ending May 11 which caused some intraday long positions to cut risk.
But at the end of the day, oil markets remain supported by the usual suspects, Iran and Venezuela and OPEC compliance suggesting oil remains a buy on the dip.
Gold Markets
Gold finally succumbed to the $1300 level as the stronger USD dollar ran roughshod through COMEX gold overnight. But with gold positioning on CFTC significantly reduced against much of the year, mirroring the money flows into the USD over the past month, there wasn’t a lot of market stress on the move from a flow perspective.
Shifting interest rate dynamics on the back of oil-driven inflation expectations with the stronger USD in tow suggests we could see an extension lower. But ultimately the longer term inflationary pressures, especially with real interest rates expected to stay historically low, gold should continue to find support. However.,logic suggests letting et the dust settle, as bullish signals have remained far and few between of late.
G-10 Currencies
EUR: The US retail sales number triggered a massive currency reaction on the back of UST 10 Y yields rocketing higher. While the market is tentatively finding support at the critical 1.1820-25 level, it’s hard to argue the current direction given the surging US yields which suggest we could print in the 1.17 handle sooner than later.
JPY: USD/JPY soared as the US Treasury yield rally spotlight on the interest rate policy divergence between the Bank of Japan and the Fed. USD/JPY rose from 109.91 at the NY open to 110.44. However, Yonhap reported North Korea is cancelling its meeting with South Korea for Wednesday and threatening to withdraw from its summit with Trump – all because of US-South Korea drills. They have seemingly capped, at least for the time being, as USD/JPY gains upward momentum.
Malaysia
The local markets are going through a period of inflexion. After navigating a potentially high-risk election, as investors are taking a well-deserved breather after coming out relatively unscathed.
But with the US dollar trading stronger across the EM Asia Basket and in G-10 space the ringgit will struggle to make any inroads today Especially with the US 10 years UST surging to 3.08 overnight.
Investors are unlikely to flock back into the Ringgit end masse over the next week especially with the USD surging and US yields punching higher and oil prices off their latest high-water mark.
We should expect a bit of a bumpy ride over the next few weeks as soon as the government lays all their policy cards on the table. Yesterday Malaysia’s new Council of Eminent Persons briefed the public on its activities, but the main take away is that fiscal reforms will shade more towards cost cuts to offset GST removal at this stage and should be good enough to keep the prey credit agencies eyes at bay for the time being.