Following several days of torrid newsflow, which markets digested without a glitch and continued their recent grind higher, the overnight session has been relatively quiet, and while trading was subdued post the European open, a burst of buying was observed in generally illiquid conditions as US traders walked in, sending S&P futures sharply to session highs as volatility continues to dip with the VIX now erasing its elevated level seen in 1Q.
Global equities are generally in the green this morning, with some exceptions across Europe.
There was no immediate catalyst for the move, although an acceleration in the slide of the dollar may have been the catalyst: after hitting a 2018 high on Wednesday, the BBDXY has been sliding since, dropping the most since March on Thursday, and then once again accelerating on the downside during the overnight session.
Aside from the recent burst in US buying, it was a lackluster European session as most markets drift with little momentum; earlier Asian stocks jumped after a disappointing US CPI print eased some pressure from the Fed to step up the pace of monetary tightening.
Europe's Stoxx 600 Index erased an early advance, as a result of the sharp jump in the EURUSD this morning pressuring European exporters, although the index is still headed for its seventh week of increases, the longest streak in more than three years. In addition to exporter weakness, declines in the healthcare sector weighed on by a string of negative drug-trial results offset gains for basic resources as commodities, and oil in particular, continued to rise. After yesterday's drubbing, Italian banks were supported by good earnings from Monte Dei Paschi (+13.5%),
As Bloomberg notes, investors have been weighing most recent economic data releases to judge the most likely path for global interest rates: in this regard Thursday's U.S. CPI miss, which came as U.K. money markets priced out a hike this year after the Bank of England forecast slower price rises, suggests fears about accelerating tightening may have been premature, which in turn reincarnates the goldilocks “buy everything” thesis. Comments from European Central Bank Governor Mario Draghi at a conference in Italy will be the focus later.
Easing geopolitical fears also helped, and aided gains in Asian stocks after Trump and Kim set for their landmark meeting in Singapore on June 12. Meanwhile, Malaysian assets trading offshore began to stabilize after the shock election win for the opposition. Emerging-market stocks headed for the best week since February and most developing-nation currencies extended a rebound from the past month's selloff, thanks to the sharp move lower in the dollar in the past 2 days.
While 10-Year TSY yields remained below 3%, the continued flattening in the curve after yesterday's unexpectedly strong 30Y auction has put some traders on edge: this morning the 5s30s curve has flattened to the lowest level since August 2007, breaking 30bps to trade at 27bps now, a level technicians have predicted would lead to an acceleration in the move, especially if some of the record short overhang decides to finally cover. Meanwhile, 10s30s swaps are on the verge of inversion with the move continuing in Europe trading.
Some believe it's only a matter of time before yields and the dollar resume their rise: the “mismatch between higher U.S rate differentials and a weaker USD is starting to reverse,” as the Fed looks likely to match its “dots,” while other central banks across G-10 face challenges to begin or extend their tightening process, David Bloom and Paul Mackel, strategists at HSBC Holdings. Needless to say, unless US yields resume their move higher, dollar gains may be capped for the time being.
And with the dollar sliding, WTI found new bids this morning, now on the verge of $72, and heading for a second week of gains after the U.S. pulled out of the Iran nuclear deal.
In metals, gold is currently trading flat on the day, with aluminum witnessing a slide for the second session in a row. Copper also slipping on the day, after peaks on Thursday due to shortened inventories, but still set to close positively for the week. Steel in the green for the day on growing Chinese demand.
In geopolitical developments, the 5 Star Movement and League government may be formed next week, and the parties will pass a flat tax and citizens income in 2019. Meanwhile, a top 5 Star member said the next Italian PM could be an independent figure who is not part of either 5 Star or League. Elsewhere, Iran Foreign Minister Zarif is to meet with Chinese Foreign Minister Wang on Sunday, Russian Foreign Minister Lavrov on Monday and EU officials on Tuesday to discuss preserving nuclear agreement.
Ten companies are on the earnings list on Friday, while macro investors can look forward to Michigan sentiment and data on import and export price indexes.
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