A dovish Fed is risk positive, however, the safe havens seem to have been the big winners. This comes as geopolitical tensions in the Persian Gulf were cranked up another notch. The downing of a US drone (supposedly by Iran) over international waters will only serve to inflame tensions between the US and Iran. There has been a spike in oil (WTI up 5.3% yesterday), with gold smashing through many years of key resistance and the Japanese yen also very strong. However, the initial knee jerk reaction of dollar weakness is beginning lose impetus as consolidation begins to set in. There are big questions left unresolved on whether the Fed will cut rates. The Fed’s concerns about inflation being slow to return to target is a key factor in its recent dovish tilt. But oil prices are spiking higher (inflationary). Also, what if Donald Trump and President Xi of China have a constructive meeting at next week’s G20? If the trade dispute recedes then, traders may be left asking what the Fed is cutting for. All those new dollar bears will be sitting rather uncomfortably to say the least. Perhaps these questions are beginning to weigh this morning as we see the dollar starting to find a basis of support. The US 10 year Treasury yield is back above 2.00% this morning. Also, interestingly, the sharp run higher on gold is beginning to unwind (already $17 off its intraday high). The run higher on equities is stalling in early moves today.
Wall Street closed strongly higher with the S&P 500 +0.9%, although US futures are slightly lower at -0.2%. Asian markets have been more cautious today, as the Nikkei fell -1.0% whilst the Shanghai Composite was around flat (+0.1%). In Europe there is a move following the US futures, with the FTSE futures and DAX futures -0.2%. In forex, the run higher on EUR and GBP is showing signs of running out of steam today as USD looks to form support although there is little real direction. In commodities, there are question marks over the run higher on gold, which although is trading mildly higher, is currently more than a percent off its earlier highs. As for the oil rally, there is a degree of consolidation this morning, with a slip back of -0.3%.
On the economic calendar, attention turns back on the prospects for Eurozone growth this morning, with the flash PMIs for June. The Eurozone Flash Manufacturing PMI is at 0900BST and is expected to show a marginal improvement to 48.0 (from a final 47.7 in May), which would be a four month high. Eurozone Flash Services PMI is expected to remain at 52.9 (52.9 in May). This means that the flash Eurozone Composite PMI is expected to remain at 51.8 (51.8 in May). The UK Public Borrowing for May is at 0930BST and is expected to be £3.3bn which would be lower than the £3.9bn in May of 2018. Into the US session, the US Flash Manufacturing PMI for June is at 1445BST and is expected to sl