Risk head-fakeBy Peter Rosenstreich
On the surface, risk is building, yet underneath, volatility continues to compress. The VIX volatility index at 12.33 is at levels not seen since January. Financial markets are less concerned about geopolitical hype and more focused on fundamentals. Economic slowdown in Asia and Europe is not alarming, while central banks’ normalisations remains gradual. Equity valuations outside the US are at manageable levels. While protectionism remains a risk, Asia’s internal trade keep the region supported. Growth in the developing East Asia and Pacific regional is expected to reach 6.4% in 2018; China is outpacing estimates, tracking toward 6.9%.
We are bearish USD (bullish INR, THB and IDR), yet uncertain how the massive debt sale will affect emerging markets’ capital outflows. This week a US rate hike of 0.25% is universally expected. There is risk of four rate hikes in 2018, up from currently expected three. Four hikes would give the USD a minor, short-lived boost.
Trump-Kim USD boost fades alreadyBy Arnaud Masset
The dollar started off strongly, as investors cheered the successful Trump-Kim summit. During the Asian session, the dollar index bounced to 93.89 as the single currency fell as low as 1.1741, USD/JPY rose to 110.49 and USD/CHF hit 0.9884. The two leaders signed an agreement that Donald Trump qualified as “comprehensive” and “important”, which suggests it could be a game changer. Still, the agreement is so “comprehensive” that it neither tells what North Korea will actually do regarding denuclearization, nor what would be the reward from the US. The statement is too vague to draw any solid conclusion. Yes, it shows good will, but unfortunately, both leaders have spotty records in promise keeping. This won’t be an easy ride.
Investors soon figured that out. During the European morning, the buck reversed early gains. EUR/USD bounced back above 1.18, USD/CHF eased to 0.9840 and USD/JPY retuned to 110.30. Markets will soon put geopolitics on the backburner, as both the US Federal Reserve and the European Central Bank have meeting this week. The main event today will be publication of the US inflation report for May. The headline gauge is expected to rise 2.8% annually, compared to 2.5% in April, while the core measure should print at 2.2% annually (2.1% in the previous month). Bulls at the Fed might push for a fourth rate hike this year.