fter stabilizing in the US yesterday afternoon and Asia Pacific trading overnight, stocks in Europe have roared back to life today with the FTSE up 0.8%, the Dax
up 1.0% and the CAC up 1.4%. US markets which did not decline as much yesterday, are up more moderately today with Dow and S&P index futures up 0.2%.
Action across regions indicates that this week’s declines were not all about Brexit and that a number of factors are in play at the moment including seasonality and speculation ahead of todays’ FOMC and Bank of Japan meetings.
News flow out of the UK continues to show The Leave camp gaining momentum. A ComRes poll for the Sun showed Remain’s lead evaporating to 46%-45% from 52%-41% a month ago. Meanwhile, a strong UK employment report showing job growth increasing, the unemployment rate falling and wages rising indicates the UK economy isn't weakening as Leave gains momentum, it’s strengthening. This leads me to wonder it the Chorus of Brexit Doom has been so dead wrong about the impact of the Brexit debate on the economy so far, can we trust any of their predictions about the future?
GBP is also bouncing back having held channel support in the $1.4000 to $1.4100 area relative to USD. This indicates that Brexit fears come in waves but they fade as well. While some traders seem fearful about the future, others see declines as an opportunity to go bargain hunting meaning that overall markets appear to be more ready for a Brexit than traders have been given credit for.
While writing this note, an IPSOS Mori poll has come out showing Remain leading 59%-33% among likely voters running contrary to the recent trend of polls. This news has not sparked another wave of relief rally in the GBP indicating that traders may see this result as an outlier relative to the recent trend or a sign of a very close race which has already been priced in to Sterling.
US traders continue to prepare for this afternoon’s long awaited big Fed decision. Ahead of the meeting there is a final round of morning data the most important of which is industrial production and also includes producer prices and Empire Manufacturing. Yesterday’s retail sales report was better than expected, indicating robust consumer spending. Of late, the one disappointing hard economic number (no surveys or sentiment indicators), was the nonfarm payrolls report, but that appears to be enough to keep the Fed on hold for now.
That being said, any signals the Fed gives may attract significant attention. After the payroll report, Fed Chair Yellen talked up the economy saying not to read too much into one data point and hinting upcoming member projections could be significant. The USD Dollar Index USD has been climbing toward 95.00 indicating traders still pricing in 2 rate hikes this year.
Fed members could use the statement (wording or number of dissenters), the projections (any change to GDP or inflation forecasts) or Chair Yellen’s press conference to signal whether they are still thinking about a July rate hike or not. Because of the upcoming Presidential election campaign, the Fed is unlikely to act in September or especially October. Because of this, if the Fed delays now, the window for a hike may not reopen until December which would mean one increase at most this year. Any interest rate signalling could have a significant impact on trading in US stocks, bonds, USD, gold and other currencies. An overly dovish Fed or overly pessimistic outlook for the economy could raise the ire of Donald Trump the presumptive Republican nominee (who has already threatened to sack Dr. Yellen at the end of her term). Because of this I expect to see an upbeat economic outlook from Fed members and comments geared toward keeping their options open on interest rates.
We also could see Japanese markets active through the day ahead of tonight’s Bank of Japan meeting where Governor Kuroda faces a dilemma. Recent gains by JPY due to its role as a defensive haven run counterproductive to the central bank’s goals of stimulating the economy and boosting inflation. Back in the winter when the bank brought in negative interest rates, traders saw it as a sign of weakness and sent JPY soaring as a defensive haven, the opposite of what one would usually expect. Traders may look to today’s meeting for indications of whether negative rates are working or not and if the Bank of Japan is planning to bring in more stimulus this summer.
Crude oil may also be active today. WTI fell 0.8% overnight after a surprise 1.6 mmbbl increase in API inventories but continues to attract support near $48.00. DOE inventories are due mid-morning with the street expecting a 2.3 mmbbl decline.
There have been no major corporate announcements in North America so far today.
Significant announcements released overnight include:
Overnight Brexit Polls:
ComRes for the Sun Remain 46% Leave 45% narrows dramatically from Remain 52% Leave 41% last month
IPSOS Mori Remain 58% Leave 33% among likely voters
UK jobless claims (0.4K) vs street 0K vs previous (2.4K)
UK 3M employment change 55K vs street 60K vs previous 44K
UK average weekly earnings 2.0% unchanged vs street 1.7%
UK unemployment rate 5.0% vs street 5.1%
NZ REINZ house sales 13.6% vs previous 18.4%
Australia consumer conf 102.2 vs previous 103.2
Singapore retail sales 1.1% vs street 6.1%
Singapore retail ex auto (3.0%) vs street (2.3%)
Upcoming significant economic announcements include:
(Note: 11:30 am in Sydney/Melbourne is currently 1:30 pm in Auckland, 4:30 pm in Vancouver, 7:30 pm in Toronto/Montréal, 12:30 am in London and 8:30 am in Singapore)
There are no major announcements scheduled for North America today
8:30 am EDT Canada manufacturing sales street 0.6% vs previous (0.9%)
9:00 am EDT Canada existing home sales previous 3.1%
8:30 am EDT US producer prices street (0.1%)
8:30 am EDT US core PPI street 1 0%
8:30 am EDT US Empire Manufacturing street (4.5) vs previous (9.0)
9:15 am EDT US industrial production street (0.2%) vs previous 0.7%
9:15 am EDT US manufacturing production street (0.1%) vs previous 0.3%
10:30 am EDT US DOE crude oil inventories street (2.3 mmbbls)
10:30 am EDT US DOE gasoline inventories street (0.175 mmbbls)
2:00 pm EDT US FOMC decision 0.50% no change expected
2:00 pm EDT US FOMC statement and member projections
2:30 pm EDT US FOMC Yellen press conference
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