- Risk appetite was reduced in the Asian session despite no clear catalyst suggesting short-term mean-reverting behavior as the prospect of a President Trump makes everyone, including battled hardened financial professionals very nervous
- Stockpile news added to the concern caused by weakness in China PMI and manufacturing confidence which has forced commodity traders to rethink the Asia based recovery story
- We remain bearish on the USD and view recovery bounced as an opportunity to sell although USD was broadly stronger following recent heavy selling
- We retain our expectations of one 25bp hike in 2016, most likely in December as cyclical aspects of US data are likely to shift downwards and volatility generating events will make hike timing difficult
- Without the monetary policy divergent story and rising yield support we do not see a fundamental rationale to buy USD
- Focus of GBP traders will be Prime Minister David Cameron’s questions from the House of Commons Liaison Committee over the June EU referendum
Risk appetite was reduced in the Asian session despite no clear catalyst suggesting short-term mean reverting behavior. Potentially, the sell-off in risky assets could have been triggered by news that Donald Trump is the presumptive Republican presidential nominee following a conclusive victory in the Indiana primary and Ted Cruz’s confirmation of the end of his campaign. The prospect of a USA President Trump makes everyone, including battled hardened financial professionals, very concerned. Asian regional equity indices were broadly in the red and the Hang Seng fell -0.79%, Shanghai composite -0.03% and ASX down -1.47% reversing yesterday's RBA driven gains. Oil was weak, below $44brl as US inventories indicated expanded stockpiles. Stockpile news added to concerns caused by weakness in China PMI and manufacturing confidence forcing commodity traders to rethink the Asia based recovery story. USD was broadly stronger following recent heavy selling, yet demand volume remains light. EURUSD pulled back from yesterday’s 1.1616 highs to 1.1494. A similar pattern was seen in USDJPY as the pair further corrected off the lows at 105.55, rising to 107.46.
US Fed Lockhart provided some headlines but little real insight. Overall, Lockhart was ambivalent on whether to increase interest rates in June as he indicated concerns that Q1 growth softness could linger. Lockhart stated that the consumer was healthy and that the economy is expanding at a moderate pace, while also indicating his disappointment in domestic demand. Finally, he also made reference to Brexit as a source of increased global anxiety. We retain our expectations of one 25bp hike in 2016, most likely in December as the cyclical aspect of US data is likely to shift downwards and volatility generating events will make the hike timing difficult. Without the monetary policy divergent story and rising yield support we do not see a fundamental rationale to buy USD.
Data overnight was light with the New Zealand commodity price index printing -0.8% in April and the Q1 unemployment rate jumping to 5.7% from 5.3% versus an expected 5.5%. NZDUSD fell sharply from 0.6937 to 0.6880 on the disappointing results.
On the docket today the final release of the April Euro area composite & services PMI is due with consensus suggesting a flat 53 & 53.2 read. This will follow a string of PMI reads across Europe and Euro area retail sales giving investors some insight into the economic state of Europe. Yet, following the upward revision to the Euro area April manufacturing PMI there is some upside to today’s reads. In the UK construction PMI is expected at 54.0 from 54.2 prior read. This follows a significantly disappointing UK manufacturing PMI read where weak external demand and uncertainty around the Brexit question has dragged down manufacturing activity in the near term. Deterioration in UK fundamentals and uncertainty over the EU referendum outcome will erase the recent shine on the GBP providing short term selling opportunities. However, the focus of GBP traders will be Prime Minister David Cameron’s questions from the House of Commons Liaison Committee over the June EU referendum. The US will provide plenty of volatility driven data including ADP, trade balance, ISM non-manufacturing, services & composite PMI, factory orders, and durable goods orders. We anticipate further evidence that weaker USD has not helped the US considering the soft international activity. We remain bearish on the USD and view recovery bounced as an opportunity to sell.
Yann Quelenn, market analyst: “US ADP payroll data ahead of NFP: Financial markets are still looking for evidence that the Fed will raise rates this year and are unconcerned about their dovish stance especially as a loose monetary policy benefits the stock markets. However, in the long run, the resulting bubble could burst very strongly. The labour market is perhaps one of the best performing US fundamentals (if not the only one) with unemployment at almost 5%. However, inflation is clearly not picking up and the March release stood below 0.9% y/y. Retail sales growth is also lower however the March print was at a decent 1.7% y/y.
The results of massive easing have not yet managed to put the US economy back on the road to sustainable recovery. Today marks the starting day of US jobs data with the ADP release ahead of Friday’s NFP data. The April ADP Employment change is expected this afternoon at 195k new jobs vs 200k in March. We do not believe that US soft data will not be reflected in some way in the job market and expect a weaker number. Currency-wise the EURUSD should continue to move higher and as we have already mentioned, our mid-term target for the pair is 1.2000.” ---