Started by PocketOption, Jun 13, 2023, 04:24 am
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Overview: Today may be the calm ahead of atomorrow's US CPI and rate decisions by the Fed, ECB, BOJ, and PBOC over thenext few days. Most large bourses in the Asia Pacific region rose and Europe'sStoxx 600 is snapping a three-day decline. US index futures are trading higher.US 10-year yield is slightly firmer as are core European benchmark yields. Thedollar is under broad pressure and is weaker against the G10 currencies. Againstemerging market currencies, it is also mostly softer, but there are a fewnotable exceptions. They include Turkey, China, and Mexico. Gold is a range ofa little more than $5 on either side of $1960.
July WTI is soft and itsinability to recover after what appeared to be supportive developments adds tothe bearish tone. Itwas denied by both sides that a US-Iranian deal was near, which wouldostensibly make Iranian oil available (supply). The US has begun refilling itsstrategic reserves (demand) could have supported prices. The US announced itbought 3 mln barrels of oil for the SPR at an average price of $73 and theDepartment of Energy announced plans to purchases another 3 mln barrels. Thecontracts will be awarded by the end of the month for September delivery. SeptemberWTI is trading near $70. The low for the year was set in early May near $64.20.The US sold the crude at an average price of about $95 a barrel. July WTI isoff nearly 2.8% near $68.25. It fell by around 3.2% in the last two sessions.It has been down to almost $67.65 today and the low set in late May was closerto $67.00.
While US press report haveplayed up China becoming the world's largest exporter of autos (with the helpof foreign brands), another achievement has not yet gotten the attention itwill. China's Comachas flown its first domestically built commercial airplane. It is asingle-aisle jet, whose dimensions are unsurprisingly like an Airbus model, butwith 2/3 of the range. The C919 flew 174 passengers from Shanghai to Beijing,and reports claim it has orders for 670 planes. In a broader context, thisimport-substitution effort is also about what is fashionable to call de-riskingin the US and Europe. Yet, with the C919, it is still far from complete. Anestimated 40% of the parts, including the engine, are imported from France'sSafran and the America's General Electric.
Separately, we note that theUS has added two more Chinese companies (and their subsidiaries) to its"entity" list, for work in Xinjiang helping to facility forced laboridentified by the UN. Theyare the first additions under American legislation passed last year. Meanwhile,Italy is expected to formally withdraw from the Belt Road Initiative later thismonth. Also, Pirelli is expected to limit the ownership rights of Sinochem,which is the largest owner with 37% of the shares. Sinochem will be barred fromkey decisions, appointments, and access to strategic technology. Reportssuggest the Dutch government is preparing legislation that will effectively barChinese students from higher education programs on technologies likesemiconductors and defense. Lastly, after seemingly denying that the existenceof a Chinese listening post in Cuba last week, the White House has acknowledgedthat it exists, and that the presence began during the previous administrationand that Beijing is expanding them. Apparently, the Biden administration issaying that its initial push back was over the idea that it was a newdevelopment.
Despite the slightly firmerUS rates, the dollar is trading with a heavier bias against the Japanese yen. It is inside the pre-weekend range(~JPY138.75-JPY139.75) and pressing on the 20-day moving average (~JPY139.15)in the European morning. It has not closed below this moving averaging innearly a month. Still, we look for dollar to hold above JPY139.00 and work itsway back toward JPY139.50-60. The Australian dollar is extending itsrecovery. At the end of May, the Aussie had fallen slightly through$0.6460 to record the low for the year. It has traded higher every day but onethis month so far and approached the $0.6775 area. It recorded a three-monthhigh on May 10 near $0.6815. The intraday momentum indicators are stretched,and the Australian dollar is pushing beyond the upper Bollinger Band(~$0.6770). Caution about chasing it higher seems prudent. Despite thebroader weakness, the dollar gapped higher against the Chinese yuan and reachednearly CNY7.1360. The high from the end of last week was about CNY7.1320. Today'slow was slightly below CNY7.1360. There seems to be greater recognition of therisks that the PBOC cuts the one-year medium-term lending facility rate thisThursday, which would allow lower prime rate next week. The PBOC set thedollar's reference rate tightly to expectations (CNY7.1212 vs CNY7.1219).
UK Prime Minister Sunak,with a new Atlantic Declaration in hand, well shy of a promise of a free trade,faced an immediate party crisis on his return. Former Prime Minister Johnson resigned asa member of parliament, claiming he was being chased out by a "kangaroocourt." Johnson is charged with lying to parliament about parities in2020-2021, for which he (and Sunak) has already paid fines. There is athree-part process. An investigation was conducted by the Privileges Committee(Tory majority). It can only recommend a penalty, which was that Johnson shouldbe suspended for more than 10 days. The second step is a vote in the House ofCommons (Tory majority). Johnson quit before a vote could be held. Even if theMPs supported his suspension, Johnson would not have been driven from office.That requires his constituents to demand a byelection. There will be abyelection of his seat now, and he had carried it in 2019 with a slim majority(~7k votes). Two other Tory MPs resigned for different reasons, andbyelections are necessary there too.
A standard definition of ESGhas yet to emerge, and the idiosyncratic approach can generate unexpectedresults. Germany'sonly state led by the Green Party, Baden Wurttemberg, adopted law similar tothe German state of Schleswig-Holstein that puts ESG considerations on par withthe traditional criteria of liquidity and profitability. The fact that the UShas not ratified international treaties in areas such as human rights andcontroversial weapons, classifies it for these purposes as an ESG laggard. Thismeans that US Treasuries are not approved investments. Brandenburg Hesse andNorth Rhine-Westphalia use indices that also exclude ESG laggards. Significantsums are not involved, and other countries judged to be ESG laggards includeGreece, Latvia, and Finland.
The euro's high from lastweek was slightly shy of $1.0790. It traded there in Europe today after slipping through thepre-weekend low (~$1.0745) to almost $1.0730 in Asia Pacific turnover. Theintraday momentum indicators are stretched. That said, a close above the$1.0790 area today would constitute a bullish outside up day and sets the statefor a possible crossing of the five-day moving average above the 20-day. It hadcrossed below on May 10, where the euro was a little below $1.10. Sterlingrecorded a low last week near $1.2370 and it has approached $1.2600 in Europetoday. The high for the year was set on May 10 near $1.2680. We noted last weekthat the five-day moving average crossed above the 20-day moving average. It isprobing the upper Bollinger Band (~$1.2590) and the intrasession momentumindicators are stretched. Initial support is seen around $1.2560.
There is widespreadrecognition that once the debt ceiling drama was resolved, the US Treasurywould sell a large amount of T-bills. It began last week and intensified this week with newregular six-week cash management bill joins the mix. Then there are nearly $100bln in coupons that will be sold this week and the corporate tax date. The neteffect is some tightening of financial conditions. On the other hand, what themedia has covered less is the return of deposits. Deposits have flowed backinto banks for the last three weeks of May for a cumulative $160 bln. That isnearly a quarter of what left out this year.
The weaker than expectedCanadian May jobs report, which should a loss of full-time positions for thesecond consecutive month and a 0.2% rise in the unemployment rate to 5.2%helped the US dollar hold above CAD1.3300 level ahead of the weekend. The greenback has not traded below theresince mid-February. The swaps market turned a bit less aggressive after thecentral bank surprised with a quarter-point hike last week. It continues toprice in a strong chance (~90%) of a hike in Q3. However, the market is lessenthusiastic about a hike in Q4. Initially, after the Bank of Canada's move,the swaps market discounted more than a 55% chance of a second hike late in theyear. After the disappointing jobs report, the odds were scaled back to lessthan 33%.
After the CAD1.3300 held(the low was slightly below CAD1.3315), the US dollar traded up to aroundCAD1.3355 in the North American afternoon ahead of the weekend. The knee-jerk high on the jobs report wascloser to CAD1.3370, which is to say that the greenback's low, the Canadiandollar high, was set a couple of hours after the employment data. The CAD1.3400area, which had provided support now offers resistance. A move above therecould see a return to the CAD1.3440-80 area. On the downside, the USD low forthe year was set in early February near CAD1.3260. Note that are options foraround $485 mln that expire today at CAD1.3300. The seeminglyirrepressible Mexican peso reached a new high since 2016 ahead of the weekend,with the dollar falling near MXN17.26. There seems to be little in theway of a push toward MXN17.00. While the plump interest rate premium attractsinterest, Mexico is the vortex of favorable macroeconomic forces(friend-shoring), a strong external position, where worker remittances morethan cover the trade deficit. Mexico's Bolsa is among the best performers inthe region this year (~12.5%) and has easily outperformed the MSCI EmergingMarket equity index (~4.8%). Once again, after the dollar fell to new lows,there was what appears to be a short-covering profit-taking bounce that issold. The pre-weekend dollar high was near MXN17.39. A break, perhaps onposition squaring ahead of the FOMC, could see a squeeze into theMXN17.50-MXN17.57 area.
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