After rallying into the historic Singapore summit, stock indexes are little changed and for the most part trading sideways as we enter the business part of the week. Dealers have switched hats, discarding well-worn geopolitical “Tams”, in favor of the lightly used central bank” Porkpie Hat” and taking dead-eye focus on the trio of central bank meetings that includes the BoJ, but with the lion's share of attention centering on both the Fed and ECB. Still, the mood in the equity market is robust despite the looming Fed hike.
Lots of ink has been spilled regarding the summit, and whatever political end of the spectrum you sit, this is a fantastic first start as Trump will now correctly hand the baton over to Mike Pompeo and team to do the heavy lifting. In other words, the US-NK summit was little more than a prologue to a long drawn out and lengthy process as North Korea now embarks on a very welcoming path to prosperity. While providing a significant boost to regional ASEAN risk, there are too many moving parts including a critical White House deadline for finalizing tariffs on Chinese goods (June 15) for dealers to send out the regional party hats just yet.
It’s not too much of a stretch given current price action in currency markets to suggest traders are nimbly scooping up some FOMC under-priced hawkish risk premium which is lending support to the USD. US economic data has been steady, and while last night’s core CPI came in on target, it’s still moving higher.
On the other hand, the proverbial cat is out of the bag on ECB expectations that the ECB will discuss reducing QE. Hardly a watershed notice for the market but yet again eurozone data weakness was confirmed this week so it’s implausible the ECB can surprise on the hawkish side.
So, handicapping the central bank probabilities suggests the Fed are the ones that could surprise on the hawkish side which should support a stronger US dollar vs EUR, AUD and JPY. All eyes will be on the 2018 section dot plot projections on whether the Fed nudge from 3 to 4. But given it will only require one member to shift the median, with the robust employment data, rebounding GDP and the uptick in retail sales there is a strong sense that we could see a shift on the 2018 curve, but the question is will we get a hawkish shift along the 2019 curve?
Oil Markets
A mixed bag in oil markets as the US benchmark initially moved higher after the API reported a crude draw, but again prices remained capped by uncertainty over OPEC supply increases and higher US output.
Brent crude labored after a monthly report from the OPEC indicted higher output from the cartel, led by Saudi Arabia.
The smoke signal from both Russia and Saudi Arabia camps all but confirm they will increase production on a coordinated basis as they have demonstrated their alliance can influence the market despite the US shale oil torrent.
As we’re on the cusp of OPEC week, "The showdown in Vienna” discussions will start to center on the number of barrels OPEC will add and given the full range of assumption from 500 K b/d to 1.5 K b/d there remains a high level of uncertainty so price action will stay volatile especially to headline risk.
Gold Markets
Pre-FOMC jitters are entering the picture as the markets start to factor in the prospect of a more hawkish Fed. But adding to gold woes are equity markets and risk in general which remains extremely buoyant on the significant decline in geopolitical angst. But as history tells us, gold usually remains a good buy on a dip post-FOMC provided that in this case, the Fed does not shift the four-dot plot scenario for 2018 or more importantly do not move 2019 interest rate expectations higher. In this type of environment, traders are more prone to take profit or just cut their losses short.
Currency markets
EUR: It’s all about the FOMC but the markets are not leaning too aggressively in either direction on the EUR. So unless a more hawkish shift in the FOMC is seen, markets are not expecting too many fireworks with the euro anchored around 1.1750
JPY: Continuation of higher yields, higher equities, leaving well supported. We break 200-day MA overnight and clear recent highs of 110.27. It seems like there's good USD demand but FOMC Wednesday will make for volatile possibilities. Hard to bet against the positive tone from the start to the week.
MYR: The ringgit continues to suffer from outflows, political risk overhang and the stronger USD. Local investors and traders are focused on the FOMC and will remain very defence throughout today session.