Markets are gearing up for what is set to be a crucial Fed meeting this week. Any signal that hints at what might push the Fed one way or another is being amplified. A terrible reading from the New York Fed manufacturing has once more elevated expectation of a dovish FOMC decision (although this is a survey taken in the midst of the US/Mexico tariff threats that subsequently have come to nought). Treasury yields are ticking lower again, which is a drag on the dollar, whilst yield differentials are again pulling in favour of yen outperformance. As the dollar goes down, this is once more helping to build support for gold. Crucially though it does seem as though this is all noise around the edges whilst traders brace themselves for the FOMC meeting. How the Fed sets its stall out for a new potential rate cutting cycle, could be decisive for medium term market outlook. Given that equities have gone almost nowhere for the past week, this is another area likely to be conclusively drive by the Fed. It is worth keeping an eye on sterling today, coming under pressure amidst the elevated prospects of a no deal Brexit. The second round of the Conservative Party leadership election sees Brexiteer Boris Johnson seemingly set to sail through to the final run off. Yesterday saw sterling breaking down to five month lows against both the dollar and euro. Newsflow on UK politics remains a drive of sterling underperformance.
Wall Street closed marginally higher yesterday (S&P 500 +0.1% at 2890) whilst US futures are giving back these gains this morning at -0.1%. There was a mixed to slightly negative outlook across Asian markets with the Nikkei -0.8% and Shanghai Composite all but flat. In Europe there is another mixed look in early moves, with the FTSE futures +0.1% whilst DAX futures underperforming with -0.1% hints at mild risk aversion today. In forex, the risk averse move are also being reflected in JPY and CHF outperformance, whilst AUD is under pressure. In commodities, gold has found its feet once more this morning trading +$6 (or +0.5%) higher. Oil has taken yesterday’s slip back and again trades marginally low today.
Traders looking at the economic calendar will be on the lookout for the German ZEW Economic Sentiment this morning at 1000BST. Consensus expects a deterioration to renew with a drop back to -5.9 (-2.1 in May) whilst the ZEW current conditions component is also expected to deteriorate to +6.0 (from +8.2). Eurozone final HICP is also at 1000BST with no change expected to the flash readings of +1.2% on core HCIP and +0.8% on core HICP. For the US data later in the session, the US Housing Starts for May are at 1330BST and are expected to improve to 1.30m (from 1.29m in April), whilst Building Permits are expected to improve marginally to 1.24m (from 1.23m in April). Aside from the data, will also be worth watching out for the comments of ECB President Mario Draghi who is speaking at 0900BST.
Chart of the Day – USD/CHF
An interesting crossroads has been reached on Dollar/Swiss. The recovery from 0.9850 has progressed well in the past week. However, the rebound has now unwound to a confluence of resistance. The six week downtrend and former support of the old May low at 1.0005 join today, just around the psychological parity level. Can the dollar bulls sustain this recovery? Momentum indicators ar