Trader thoughts - the long and short of it

The euro has dropped to a six-month low against the US dollar Friday amid growing concerns about the eurosceptic disposition of a populist coalition government taking shape in Italy, the Eurozone’s third-largest member state. 

Euro Dollar Notes
Source: Bloomberg

Euro at risk of deeper losses as political instability fears spread to Spain: The euro has dropped to a six-month low against the US dollar Friday amid growing concerns about the eurosceptic disposition of a populist coalition government taking shape in Italy, the Eurozone’s third-largest member state. Spain may now emerge as another headache after Pedro Sanchez – leader of the mainstream left Socialist party – called for a vote of no confidence in the minority government of Mariano Rajoy. The long-serving prime minister and his Popular party continue to be hounded by corruption allegations. The spread between Spanish and benchmark German 10-year government bond yields – a measure of the excess risk in lending to Madrid versus Berlin – jumped by the most in 9 months to end the week at a five-month high. That seems to bode ill for the single currency going forward even as it finds a bit of a respite after Italian President Sergio Mattarella vetoed the choice of anti-euro economist Paolo Savona as the new government’s nominee for Economy Minister. Prime Minister designate Giuseppe Conte swiftly abandoned administration-building efforts, opening the door for a technocrat team to take the reins until a new election is held in autumn. Mr Mattarella summoned senior IMF official Carlo Cottarelli for a meeting Monday, hinting he might lead such a transitional government.

Crude oil on the verge of ceding monthly gain after suffering first weekly loss in May: Two days of commentary from the sidelines of the St Petersburg International Economic Forum weighed heavy on crude oil prices as OPEC officials and their allies hinted at increasingly production. Russia’s energy minister Novak said a discussion about relaxing supply curbs may come as soon as June and Deputy Finance Minister Kolychev said there is “no sense” in further price gains. Saudi officials echoed these sentiments. Meanwhile, US inventories swelled by the most since February. Looking forward, easing pressure in the physical market reinforces the case for weakness. The latest move higher was tracked by widening calendar spreads – the difference between futures prices for difference delivery months. That spread is now narrowing, which might increase the likelihood of near-term crude oil topping.

Wall Street weighs Italian politics and Trump’s North Korea stance, falls alongside oil prices: US stocks closed mildly lower Friday, but still managed to squeeze out a weekly gain. Europe and North Korea were in focus. Rising Italian yields in relation to German bund equivalents reflect the acute risk seen in European politics, with the spread between the two now exceeding 200 basis points. Meanwhile, US President Trump appeared to offer an olive branch to North Korea, voicing respect for its leader Kim Jong-un and saying that the now cancelled bilateral meeting previously set for June 12 could still take place. A drop in crude oil prices tipped the scales in favor of the downside however, with energy names losing nearly 3 percent as Saudi oil minister Khalid Al-Falih joined his Russian counterpart in calling for the relaxing of self-imposed output curbs.

US Dollar rally may continue as market sentiment deteriorates: The US dollar demonstrated its continued appeal as a haven asset during times of risk aversion, roaring higher as shares tumbled into the close on Friday. This seems to open the door for something of a rotation in catalysts powering the greenback’s advance. Fed rate hike speculation may take a bit of back seat from here as the recent upshift in the priced-in tightening path consolidates. Minutes from the May 2 FOMC meeting were pointedly too timid to inspire USD gains. Incoming PCE inflation and payrolls data is expected to print broadly steady, leaving the Fed on course but doing little to inspire bets on a more aggressive posture. Deteriorating sentiment might see the benchmark US currency continue to build higher all the same however, with plenty of flashpoints to preoccupy investors. Seesawing US policy on North Korea, President Trump’s thinly veiled threat of a tariff on auto imports that punishes allies like Germany and Japan while complicating NAFTA renegotiation, and growing worries about instability in the Eurozone have all emerged as headwinds.

Global asset benchmarks seen splitting along risk on/off divide: Rising correlations between haven-seeking assets across financial markets are hinting that binary risk on/off trading patterns are becoming entrenched once again. 20-day percent change studies show increasing parallels between the moves in the Japanese Yen, the Swiss Franc and the US dollar against the three currencies’ G10 FX alternatives. A firming positive relationship between the former two currencies with benchmark 10-year US Treasury bonds and an increasingly weak inverse one with the latter reinforce the point. This hints that sentiment trends may overshadow economic fundamentals as the top consideration for investors in the days and weeks ahead.

AUD/USD down trend may be about to resume: The Australian Dollar has recovered nearly 3 percent of its value since hitting an 11-month low in early May, but the dominant price trend continues to point firmly downward. A well-defined series of lower highs and lows established from late January has taken prices through two-year support, painting current gains as corrective. Downtrend resumption may be just around the corner as AUD/USD tests counter-trend support defining the bounds of the upswing. A daily close below this barrier – now at 0.7530 – would signal that sellers have regained the upper hand, opening the door for a test of the 0.75 figure. A breach above 0.7660 is needed to invalidate the near-term bearish bias.

ASX 200 falls despite rise in telecoms: Friday’s narrow loss of 0.07% contributed to a 0.9% weekly loss. Telecoms made a comeback this week, although they are still down 18.5% so far in 2018. On the side of the performance spectrum, energy names fell nearly 4.5% to mark the worst outing of all the ASX sub-groups. Beach Energy Ltd led the move lower as oil prices fell for the fourth day. Premiums may remain however, with the earnings outlook for key miners BHP Billiton and Rio Tinto supported in the long term by Chinese demand for the two firms’ higher-quality ore. Still, implied data anticipates short-term volatility, with BHP and Rio Tinto ADRs lower by 3.5% and 1.5% respectively into the weekly close on Wall Street. Similarly, ASX 200 futures are set to open Monday 28 points lower toward the 6,000 mark.

Market Data:

SPI futures moved -4.26 or -0.07% to 6032.82.

AUD/USD moved -0.0019 or -0.25% to 0.7557.

On Wall Street: Dow Jones -0.15%, S&P 500 -0.05%, Nasdaq 0.2%.

In New York: BHP -3.54%, Rio -1.49%.

In Europe: Stoxx 50 -0.51%, FTSE 100 -0.12%, CAC 40 -0.28%, DAX 30 0.29%.

Spot Gold moved -0.13% to US$1302.9 an ounce.

Brent Crude moved -2.61% to US$76.73 a barrel.

US Crude Oil moved -3.32% to US$68.36 a barrel.

Iron Ore moved -1.31% to CNY452 a tonne.

LME Aluminum moved 0.48% to US$2281 a tonne.

LME Copper moved 0.19% to US$6880 a tonne.

10-Year Bond Yield: US 2.93%, Germany 0.4%, Australia 2.79%.

 

Written by: Ilya Spivak, Currency Strategist and Tyler Yell, CMT, Currency Strategist with DailyFX

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