BoJ easing talk sends bond yields up

Signs that the Bank of Japan (BoJ) might scale back its monetary stimulus faster than expected sent tremors through bond markets on Monday, while European stocks slipped as threats of further U.S. tariffs on China drained risk appetite.

Europe’s bond yields climbed after a Reuters report that the BoJ was discussing modifying its huge easing programme sent Japan’s 10-year bond yield to a six-month high.

The report rekindled anxieties about monetary stimulus easing around the world and piled further pressure on investors already struggling to navigate rising protectionism.

The yield on Europe’s benchmark bond, the German 10-year Bund, hit a one-month high of 0.39 percent and U.S. 10-year Treasury yields also hit their highest in a month at 2.90 percent.

The yen climbed to two-week highs against the dollar and was last up 0.2 percent at 111.14 per dollar.

“It’s all that concern investors have about the move from global quantitative easing to global quantitative tightening. That fear gets stoked when you have reports such as this,” Psigma Investment Management’s head of investment strategy, Rory McPherson.

“The ECB meeting this week will be more in focus now that we’ve had this concern about Japan.”

The dollar index meanwhile bounced back, up 0.1 percent from two-week lows hit after U.S. President Trump criticised the Federal Reserve’s tightening policy and accused the European Union and China of manipulating their currencies.

“We see the latest news on trade policy as pointing to continued high risk of escalation between the U.S. and China, and a renewed focus of the Trump Administration on currency matters,” Goldman Sachs analysts said.

Beijing said it has no intention of devaluing the yuan to help exports.

Trump’s comments about rates also helped the Treasury yield curve reach its steepest in three weeks. The yield curve’s flattening has been seen by some as a sign of an impending recession.

The U.S. president’s new threats to slap duties on all $500 billion of U.S. imports from China triggered sell-offs across stock markets, though good earnings kept a lid on losses.

The MSCI all-country world index declined just 0.1 percent while MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.2 percent.

Reuters

Canada: Wholesale trade, May 2018

Wholesale sales rose 1.2% to a record $63.7 billion in May. Sales were up in four of seven subsectors, representing approximately 50% of total wholesale sales.

The miscellaneous, building material and supplies, and farm product subsectors contributed the most to the gains in May, while the motor vehicle and parts subsector posted the largest decline.

In volume terms, wholesale sales increased 1.3%.

Sales increase in four of seven subsectors, led by the miscellaneous and the building material and supplies subsectors

In dollar terms, the miscellaneous subsector reported the largest increase in May, as sales rose 7.8% to $8.3 billion. Sales were up in four of five industries, led by the agricultural supplies industry (+25.6%) following a 5.4% decline in April. In volume terms, the agricultural supplies industry increased 27.4%.

Sales in the building material and supplies subsector rose 5.0% to $9.7 billion as all industries posted gains in May. Much of May’s increase was attributable to higher sales in the lumber, millwork, hardware and other building supplies industry, up 7.3% to $4.9 billion. This was the third consecutive increase for the industry and the highest sales level since July 2017. In volume terms, the industry increased 6.8%, indicating that the gain in the current dollar series was partly price driven. In May, international merchandise trade reported gains in both imports and exports of building and packaging materials.

Following a 17.5% decline in April, the farm product subsector rebounded in May, up 25.5% to $859 million. This was the third increase in four months and the highest level since November 2017. A 28.5% increase in volume terms signifies that price changes had no impact on the growth seen in the current dollar series. Exports of farm and fishing products increased in May.

The motor vehicle and supplies subsector recorded the largest decline in dollar terms in May, down 2.5% to $11.1 billion. This was the second consecutive monthly decline and the fifth drop in six months, bringing the subsector to its lowest level since December 2016. The sole contributor to the decrease was the motor vehicle industry, down 3.7% to $8.9 billion. Imports and exports of passenger cars and light trucks as well as manufacturing sales of motor vehicles declined in May.

Sales increase in eight provinces

Sales were up in eight provinces in May, accounting for 49% of total wholesale sales in Canada. Higher sales in the western provinces led the gains. In dollar terms, Alberta contributed the most to the increase, more than offsetting the decline reported in Ontario.

Alberta reported its fifth increase in six months, with sales rising 6.7% to $7.3 billion, their highest level on record. Sales were up in six subsectors, led by the miscellaneous subsector (+26.7%). The agricultural supplies industry within the miscellaneous subsector contributed the most to the gains.

Sales in Saskatchewan increased for the third consecutive month, up 9.8% to $2.3 billion—the highest level since December 2016. The miscellaneous subsector (+17.2%) led the gains, with the agricultural supplies industry contributing the most to the increase.

In British Columbia, sales grew 1.9% to $6.7 billion, its third consecutive gain. The gains were led by the machinery, equipment and supplies subsector (+11.4%), more than offsetting the 10.2% decline in April.

Sales in Nova Scotia rose 9.0% to $962.3 million, driven by gains in the food, beverage and tobacco subsector (+38.8%).

Ontario posted its second consecutive monthly decline in May, down 0.9% to $32.1 billion. The motor vehicle and parts (-4.6%) and the food, beverage and tobacco (-6.5%) subsectors led the decrease. The motor vehicle and parts subsector was down for the second consecutive month, while the food, beverage and tobacco subsector declined for the second time in four months.

Wholesale inventories increase for the second consecutive month

Wholesale inventories rose for the second consecutive month, up 1.4% to a record $84.0 billion in May. Five of seven subsectors posted increases, representing 90% of total wholesale inventories.

In dollar terms, the machinery, equipment and supplies subsector (+1.6%) posted the largest gain, following a 0.3% decline in April. Three of four industries increased, with the other machinery, equipment and supplies industry contributing the most to the upturn.

Inventories grew 2.7% in the miscellaneous subsector, a third consecutive monthly gain. Increases were reported by all five industries and were led by increased stock in the other miscellaneous industry (+4.0%).

The building material and supplies subsector (+2.0%) rose for the third consecutive month, on the strength of higher inventories in the metal service centres (+3.8%) and the lumber, millwork, hardware and other building supplies (+1.6%) industries.

Higher inventories in the motor vehicle and parts subsector (+2.0%) were led by increased stock in the motor vehicle industry (+2.9%).

The inventory-to-sales ratio increased from 1.31 in April to 1.32 in May. This ratio is a measure of the time in months required to exhaust inventories if sales were to remain at their current level.

StatsCanada

Trade and currency wars a market threat

Monday July 23: Five things the markets are talking about

A new week starts with equities under pressure as capital markets digest warnings from G20 finance ministers about the impact of protectionism on growth – “risks to the world economy have increased.”

Also raising concerns is the Sino-U.S trade war is now spilling over into currency markets with President Trump rhetoric supporting the U.S administration preference for lower U.S dollar interest rates and a weaker currency.

Elsewhere, the yen (¥111.00) has found support while JGB’s slid on speculation about Bank of Japan’s (BoJ) stimulus. Crude prices trade a tad softer amid concern the escalating trade rows will destabilize energy demand.

On tap: an E.U Trade Commission is due to arrive stateside this week for trade talks. Expect some tough questions, demands and their own list of retaliatory measures in response to proposed U.S tariffs. The highlight of the week should be Thursday’s European Central Bank (ECB) monetary policy meeting.

1. Stocks start the week under pressure

Japan’s Nikkei fell to a ten-day low overnight, with exporters under pressure by the yen’s (¥111.00) rally and by market speculation that the Bank of Japan (BoJ) could wind back its exchange-traded fund purchases. The Nikkei ended the day down -1.33%.

Note: The market is speculating that the BoJ could debate changes in its monetary policy at its upcoming meeting, with potential tweaks to its interest rate targets and stock-buying techniques on the table.

Down-under, Aussie shares fell on President Trump’s threat to impose tariffs on all Chinese imports. The S&P/ASX 200 index declined -0.9% at the close of trade. The benchmark gained +0.4% on Friday. In S. Korea, it was a similar story. The Kospi fell about -1% overnight following Trump’s comments about tariff’s and the currency last week.

In China, stocks rallied on Monday, aided by strength in financials and industrial stocks, but a slump in healthcare shares capped the broader gains. The blue-chip CSI300 index rose +0.9% while the Shanghai Composite Index ended up +1.1%.

In Hong Kong, it was a similar story. Stocks rose slightly overnight, as declines in tech and consumer shares were offset by strength in financials. The Hang Seng index rose +0.1%, while the China Enterprises Index gained +0.5%.

In Europe, regional bourses are trading mostly lower across the board, following a mixed session in Asia. The Italian FTSE MIB is in focus following weakness in shares of Fiat and Ferrari after the stepping down of its CEO Sergio Marchionne due to health.

U.S stocks are set to open in the ‘red’ (-0.1%).

Indices: Stoxx600 -0.1% at 385.1, FTSE -0.4% at 7651, DAX -0.1% at 12549, CAC-40 -0.3% at 5382, IBEX-35 +0.2% at 9743, FTSE MIB -0.1% at 21,775, SMI -0.5% at 8947, S&P 500 Futures -0.1%

2. Oil steady after G20 warns of risks to growth, gold higher

Oil prices have stabilized as worries over production losses were outweighed by concerns that trade disputes would reduce economic growth and hit global energy demand.

Benchmark Brent crude oil is up +15c at +$73.22 a barrel, while U.S light crude is unchanged at +$68.26.

G20 Finance ministers over the weekend called for more dialogue to prevent trade and geopolitical tensions from hurting growth as “downside risks over the short and medium term have increased.”

Note: Baker Hughes data on Friday showed that U.S energy companies last week cut the number of oil rigs by the most since March following recent declines in oil prices. Drillers cut five oilrigs in the week to July 20, bringing the count down to 858.

Ahead of the U.S open, gold prices are steady atop of a one-week high as the dollar eased to a two week low after President Trump criticised the Fed’s interest rate tightening policy. Spot gold holds steady at +$1,231 an ounce. U.S gold futures for August delivery are nearly unchanged at +$1,231 an ounce.

3. Japan yields in focus

JGB’s have sold-off along the curve on reports late Friday that the BoJ might consider changes to interest rate targets. The market is speculating that the BoJ might be willing to let 10-year JGB yields (+0%) rise to some degree including a possible hike of the target level. Overnight, JGB 2-, 10- and 30-year yields were higher (+1.8, +4.5, and +8.0 bps respectively).

BoJ officials said to be looking for ways to keep stimulus program sustainable while reducing the harm it causes to markets and bank profits.

Note: The BoJ stepped in to buy unlimited bonds at a fixed rate of +0.11%, to cap the move.

On tap for this week: The ECB monetary policy meeting is on Thursday, no policy stance expected, but the market is looking for clarification on their first potential rate hike.

Elsewhere, the yield on 10-year Treasuries gained less +1 bps to +2.90%, the highest in more than a month, while in the U.K; the 10-year Gilt yield advanced +1 bps to +1.232%.

4. Dollar under pressure from Trump rhetoric

The ‘mighty’ USD maintains its softer tone after President Trump criticized the Fed for raising interest rates and suggested the USD was too strong.

Aside from currency Twitter rants, the markets focus this week will be on the ECB rate decision and press conference on Thursday. Consensus is ‘not’ anticipating any policy change in the short to medium term, however, the markets will be on the lookout for any clarification on the first potential rate hike. The EUR/USD is still flipping alternately between moves towards €1.16 and over €1.17 in response to news on the trade row, given the lack of clear direction.

GBP (£1.3124) continues to remain vulnerable to “headline risk,” but consensus believes a lot of negativity seems to be already priced. With parliament in recess, sterling has the potential to stage a modest retracement from its current area.

5. G20 communiqué

In their final communiqué yesterday from their meeting in Argentina, finance ministers and central bankers from the G20 economies said, “Heightened trade and geopolitical tensions pose an increased risk to global growth” and called for greater dialogue.

“Global growth remains robust and unemployment is at a decade low. However, growth has become less synchronised recently, and downside risks over the sort and medium term have increased,” said the communiqué.

Forex heatmap

Dollar Rally Ends With Trump Monetary Policy and Currency War Comments

The USD fell against major pairs on Friday after US President Donald Trump tweeted that China and the EU manipulate their currency. Trade war escalation has reached a second phase at a time when American politics are having an identity crisis with the ongoing Russian interference during the 2016 elections. Steven Mnuchin will head to Buenos Aires to take part in the finance ministers G20 meeting with trade and monetary policies sure to be a topic of discussion. The European Central Bank (ECB) will announce its main refinancing rate on Thursday, July 26 at 7:45 am EDT with little expectations of a change. ECB President Mario Draghi will host a press conference at 8:30 am EDT with the market focused on his comments for insights into the monetary policy of the central bank.

  • US President worried about Fed’s monetary policy triggers currency war
  • European Central Bank meeting anticipated to be a quiet affair
  • Canadian inflation and retail sales beat expectations

EUR Rises Ahead of ECB as Currency War Concerns Rise

The EUR/USD gained 0.28 percent in the last week. The single currency is trading at 1.1717 after a volatile week is over. The EUR rose 0.73 percent on Friday as Trump’s comments on currency manipulation hit the newswires. The US dollar had fallen on Thursday after President Trump criticized the U.S. Federal Reserve for raising rates and eroding the competitiveness of American products.



In an interview with CNBC the US President said he was not thrilled with the path of interest rates, although he did mention that he would let them do what they feel is best. Earlier in the week Fed Chair Powell testified before the Senate Banking Committee and the House Financial Services Committee side-stepping any comments on trade spats.

The U.S. Federal Reserve has hiked two times already in 2018 leaving the benchmark rate at 175 to 200 basis points. The CME FedWatch tool shows a 86.9 percent chance of a September rate hike and 53.9 percent of a follow up in December. Both sets of probabilities where higher on Wednesday before Trump’s comments were released.

The economic calendar will not feature a large number of North American indicators with the main standout being the release of the first estimate of the US GDP data on Friday, July 27. Analysts forecast a rise of 4.1 percent and could serve as an antidote to Trump’s tweets. The European Central Bank (ECB) will feature on Thursday, but there is little expectation that new guidance will be provided after the June monetary policy meeting.

Loonie Higher on Strong Retail Sales and Inflation Data

The Canadian dollar rose on Friday after the release of retail sales and inflation data. The USD/CAD DROPPED 0.05 percent on a weekly basis. The currency pair is trading at 1.3146 after Canadian retail sales surprised with a 2 percent rise to a seven month high boosted by auto and gasoline sales on Friday. Inflation rose 2.5 on an annual basis in June also impacted by higher gasoline prices. The economic indicators validate the decision of the Bank of Canada (BoC) earlier this month to hike rates by 25 basis points and could further pressure the central bank to lift rates higher despite growing geopolitical headwinds.


Canadian dollar weekly graph July 16, 2018

The US dollar has been on a downward trend since President Trump issued some sharp criticism on the U.S. Federal Reserve monetary policy. The comments took the market by surprise as talking about the currency is not usually the job of the President, but rather the Treasury Secretary. The statements will most likely be discussed as the G20 meeting in Buenos Aires kicks off.

The US President continued to tweet about the unfair strength of the greenback which responded by falling more than 1 percent against the Canadian dollar.

Oil prices recovered from losses earlier in the week but West Texas Intermediate will finish below $70 after concerns about the increase in supply outstripping rising demand.

The GBP/USD dropped 0.76 percent in the last five days. The currency pari is trading at 1.3133 with political headwinds keeping the pound under pressure. The confusing Brexit strategy from the UK government could end up costing Prime Minister May her job as she scrambles to call an early summer recess to avoid challenge to her leadership.



The Bank of England (BoE) held rates unchanged in June, but there were three dissenters. The economic data could support an August rate hike by the central bank, but the question now is will MPC vote for higher rates holding to its mandate, but with a high possibility that Brexit negotiations once again threaten the growth of the UK economy and the reverse action is needed. The market still believes in an August rate hike, but the GBP will continue under pressure from political uncertainty at home and abroad.

Market events to watch this week:

Tuesday, July 24
9:30pm AUD CPI q/q
Wednesday, July 25
10:30am USD Crude Oil Inventories
Thursday, July 26
7:45am EUR Main Refinancing Rate
8:30am EUR ECB Press Conference
8:30am USD Core Durable Goods Orders m/m
Friday, July 27
8:30am USD Advance GDP q/q

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Canada: Inflation Hit Six-Year-Plus High

The Consumer Price Index (CPI) rose 2.5% on a year-over-year basis in June, following a 2.2% increase in May. This is the largest year-over-year increase in the CPI since February 2012.

This month’s year-over-year CPI increase follows a year of gradual acceleration in consumer price inflation, from a recent low of 1.0% year over year in June 2017. This trend reflects increases in prices for gasoline and food purchased from restaurants, as well as offsetting factors such as lower price inflation for electricity and telephone services. These movements coincide with recent improvements in the economy and the labour market, as well as an increase in oil prices.

Component highlights

Seven of eight major components rose year over year. The transportation index (+6.6%) was the largest contributor to the year-over-year increase, while the household operations, furnishings and equipment index (-0.1%) was the lone major component to decline.

Energy costs were 12.4% higher compared with June 2017, after increasing 11.6% year over year in May. Year-over-year gains in prices for gasoline (+24.6%) and fuel oil and other fuels (+25.9%) were larger in June than in May, as sustained increases in crude oil prices and exchange rate pressures continued to impact consumer prices. Prices for durable goods rose 0.6% year over year, led by growth in the purchase of passenger vehicles index (+1.8%). This gain is attributable to lower rebates on 2019 model-year vehicles.

Year-over-year gains in the price of services were lower in June (+2.2%) than in May (+2.3%), moderating the growth in the CPI. Prices for telephone services (-8.8%) continued to decline year over year, amid a series of industry-wide price promotions. Consumers paid 8.4% less for travel tours compared with June 2017. The homeowners’ replacement cost index increased less on a year-over-year basis in June (+1.4%) than in May (+2.0%).

Regional highlights

Prices rose more in six provinces in June on a year-over-year basis compared with the previous month. This growth was strongest in Prince Edward Island, where prices increased 2.9%.

The CPI in Newfoundland and Labrador rose 2.3% in June. Gasoline prices were up 16.5% in the 12 months to June after increasing 5.5% the previous month.

Seasonally adjusted monthly Consumer Price Index

On a seasonally adjusted monthly basis, the CPI rose 0.1% in June, matching the increase in May. Six of eight major components increased, while the household operations, furnishings and equipment index (-0.3%) and the recreation, education and reading index (-0.6%) both declined.

StatsCanada

Canada: Retail trade, May 2018

Retail sales increased 2.0% in May to $50.8 billion, following a 0.9% decline in April. Sales rose in 8 of 11 subsectors, representing 70% of retail trade.

Higher sales at motor vehicle and parts dealers and at gasoline stations were the main contributors to the gain in May. Excluding these two subsectors, retail sales were up 0.9%.

After removing the effects of price changes, retail sales in volume terms increased 2.0%.

Sales rebound in several subsectors

Sales at motor vehicle and parts dealers (+3.7%) made almost a full rebound following a 3.8% decline in April, which had unseasonably cool temperatures and inclement weather in many parts of the country.

Receipts at gasoline stations (+4.3%) were up for the second month in a row, partially reflecting higher prices at the pump. Sales in volume terms at gasoline stations rose 2.7%.

General merchandise stores (+3.2%), building material and garden equipment and supplies dealers (+5.4%) and clothing and clothing accessories stores (+2.8%) also contributed to the gain. Increases in each of these subsectors more than offset the declines that had been reported in April.

Food and beverage stores (-2.1%) posted a sales decline for the fourth time in five months. The decrease in May was primarily due to lower sales at supermarkets and other grocery stores (-3.1%).

According to the Retail Commodity Survey, 20.6% of food sales took place at general merchandise stores in the first quarter of 2018 compared with 19.1% in 2017. During the same period, 75.1% of food sales came from the food and beverage stores subsector, down from 76.5% in 2017.

Higher sales in seven provinces, led by Ontario and Quebec

Seven provinces reported higher sales in May, with Ontario and Quebec more than offsetting their declines from April.

Sales in Ontario (+2.6%) increased for the fourth time in five months. Higher sales at motor vehicle and parts dealers accounted for the majority of the increase in May. Sales in the Toronto census metropolitan area (CMA) were up 1.4%.

In Quebec, sales increased 3.0%, following a 2.6% decline in April. Sales were up 1.4% in the Montréal CMA.

E-commerce sales by Canadian retailers

The figures in this section are based on unadjusted (that is, not seasonally adjusted) estimates.

On an unadjusted basis, retail e-commerce sales totalled $1.4 billion, representing 2.5% of total retail trade. On a year-over-year basis, retail e-commerce rose 16.9%, while total unadjusted sales increased 5.5%.

StatsCanada

South African reserve bank leaves repo rate unchanged at 6.5%

South Africa’s central bank kept its benchmark repo rate unchanged at 6.5 percent in a unanimous decision by members of the Monetary Policy Committee on Thursday, saying risks to inflation cited at previous meetings had begun to materialize.

All 25 economists surveyed by Reuters had predicted the repo rate would stay on hold.

“While headline inflation is comfortably within the inflation target band, indications are that we have passed the low point of the current cycle,” Governor Lesetja Kganyago told a news conference, citing the tariff war between the United States and China as well as higher global oil prices as the main dangers to inflation.

On Wednesday data showed headline consumer inflation quickened to 4.6 percent year-on-year in June, further away from March’s 7-year low but well within the central bank’s target of between 3 and 6 percent.

All 25 economists surveyed by Reuters had predicted the repo rate would stay on hold.

The bank said the weakening currency as global financial conditions tightened, as the Federal Reserve raised lending rates and lowered it’s global bond buying program.

The bank also cut its growth forecast for 2018 to 1.2 percent from 1.7 percent, saying conditions were challenging and would be constrained in the near term by weak consumer spending linked to the recent increase to value added tax and unemployment which is near record levels.

“The domestic economic growth outlook for this year is weaker than we expected in May, Kganyago said.

The continent’s most industrialised economy suffered its worst quarterly contraction in nine years in the first quarter, and consequent data has been mixed, cooling investors enthusiasm over President Cyril Ramaphosa’s ability to deliver long term growth.

Canada: ADP National Employment Falls

Employment in Canada decreased by 10,500 jobs from May to June according to the June ADP® Canada National Employment Report. Broadly distributed to the public each month, free of charge, the ADP Canada National Employment Report is produced by the ADP Research Institute®. The report, which is derived from actual ADP payroll data, measures the change in total nonfarm payroll employment each month on a seasonally-adjusted basis.

Industry Snapshot:

– Goods Producing:

Manufacturing 1,800
Construction -5,600
Natural Resources and Mining 1,300

– Service Providing:

Trade/Transportation and Utilities -7,900
Information -2,400
Finance/Real Estate -4,300
Professional/Business Services 3,200
– Professional/Technical 2,400
– Management of Companies -800
– Administrative and Support 1,600
Education & Health Care 1,600
– Educational Services 3,900
– Health Care -2,300
Leisure and Hospitality 2,300
Other Services2 -500

“We saw a significant dip in job growth in Canada for the month of June,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “This decline likely reflects the impact of regulations on mortgage financing and a slowdown in consumer spending.”

The May total of jobs added was revised up from 2,900 to 27,800.

The July 2018 ADP Canada National Employment Report will be released at 8:30a.m.ET on August 16, 2018.

Newswire

‘Footy’ dented U.K retail sales and pounds sterling

Thursday July 19: Five things the markets are talking about

Yesterday, the dollar retreated from a three-week high as the market cashed in on gains the currency made after two days of testimony by U.S Fed Chair Powell reinforced a strong economic outlook.

In congressional testimony on Tuesday and Wednesday Powell said he believed the U.S was on course for years more of “steady growth,” and played down the risks to the U.S economy of an escalating trade conflict. He also noted that the U.S economy “may not yet have reached full employment,” while also noting that risks to domestic inflation forecasts were “roughly balanced.”

Ten-year U.S Treasury yields touched a three-week high after his comments, while this morning, the dollar is extending this week’s gains, further weighing on EM assets, while China’s yuan deepens its losses.

Elsewhere, stocks are edging higher in Europe after a mixed Asia session, while oil retraces some of yesterday’s gain as the market assesses global conflicting supply-and-demand signals. Gold prices are again under pressure for a fifth straight session.

On tap: Initial U.S. jobless claims for the week ended July 14, the Philadelphia Fed Business Outlook Survey and the Conference Board’s U.S. Leading Index (08:30 am EDT).

1. Stocks mixed sessions

In Japan, the Nikkei snapped a four-day winning streak overnight as investors booked profits. The weakness in tourism related equities offset gains in oil names and machinery makers. The Nikkei closed trade -0.1% lower, in line with the broader Topix.

Down-under, Aussie stocks edged higher overnight, helped by buying in financials and material firms. The S&P/ASX 200 index closed +0.3% higher, after having climbed +0.7% yesterday. In S. Korea, the Kospi index and the won both weakened overnight over lingering concerns raised by trade tensions. The index was down -0.34%.

In Hong Kong and China, equities fell on a weaker yuan. The currency (¥6.7066) has dropped to a 12-month low outright after news that Beijing plans to step up monetary easing measures. In Hong Kong, the Hang Seng index fell -0.2%, while the China Enterprises Index lost -0.1%. In Shanghai, the blue-chip CSI300 index fell -0.1%, while the Shanghai Composite Index lost -0.5%.

In Europe, regional bourses trade mostly lower across the board led by the French CAC and German DAX. The FTSE is outperforming on the continued weakness in the pound (£1.3004).

U.S stocks are set to open in the ‘red’ (-0.2%).

Indices: Stoxx600 -0.1% at 386.5, FTSE +0.2% at 7689, DAX -0.4% at 12716, CAC-40 -0.4% at 5425, IBEX-35 -0.1% at 9743, FTSE MIB -0.2% at 21,929, SMI +0.2% at 8951, S&P 500 Futures -0.2%

2. Oil prices fall on record output and stock build, gold lower

Oil prices remain under pressure after official U.S data yesterday showed an unexpected rise in crude stockpiles – U.S output hit a record high and major oil exporters increased production.

International crude oil benchmark Brent is down -40c at -$72.50 a barrel, while U.S light crude is -20c lower at +$68.56.

Brent has fallen almost -9% from last week’s high above +$79 on emerging evidence of higher production from Saudi Arabia and other members of the OPEC as well as Russia and the U.S.

Note: The EIA indicated yesterday that U.S crude production had reached +11M bpd for the first time – the U.S has added nearly +1M bpd in production since November, thanks to rapid increases in shale drilling.

Ahead of the U.S open, gold has extended its fall to a one-year low overnight as the ‘big’ dollar firmed after the Fed asserted the need for further interest rate hikes amid a strong economy. Spot gold is down -0.2% at +$1,223.56 an ounce. The yellow metal slipped to its lowest since July 2017 at +$1,220.41 an ounce earlier in the session. U.S gold futures for August delivery are -0.4% lower at +$1,223.20 an ounce.

3. U.S bill yields back up

This week has seen U.S three-month T-bill yields back up above the +2% mark for the first time since June 2008, just before the global financial crisis erupted in earnest.

Higher yields reflect anticipated further Fed hikes. Currently, there is a +90% probability of another +25 bps increase, to +2%-2.25%, at the Sept. 25-26 meeting of the FOMC. A further hike, to +2.25%-2.50%, has about a +65% chance.

Elsewhere, the yield on 10-year Treasuries has increased +2 bps to +2.89%, the highest in almost four weeks. In Germany, the 10-year Bund yield has advanced +1 bps to +0.35%. In the U.K, the 10-year Gilt yield has climbed +2 bps to +1.226%, the largest increase in more than a week.

4. Chinese yuan hits a 12-month low

Overnight, the Chinese yuan (¥6.7066) has managed to print new lows not seen since last July, and the gap between onshore and offshore rates continues to widen, suggesting greater pessimism in the market.

To date, the yuan has been hurt by a worsening trade conflict between the U.S. and China, and on expectations that the People’s Bank of China (PBoC) will ease monetary policy further, while the Fed is likely to keep raising borrowing costs.

Elsewhere, sterling has dropped below the psychological £1.30 outright after U.K retail sales data disappointed (see below) and EUR/GBP has rallied to a four-month high of €0.8941.

The Bank of England (BoE) is expected to raise interest rates on Aug. 2, but weaker economic data may make it harder for them to do so.

Note: There is a +£2B option with a strike price of £1.3000 expiring later today.

5. ‘Footy’ dented retail U.K sales

Data this morning from the ONS showed that U.K. retail sales declined in June, as Britons chose to watch the soccer World Cup rather than shop.

Sales in June declined -0.5% compared with May, dragged lower by fall in sales of clothing and footwear – retailers are blaming the tournament. However, food stores had a better month, with sales rising +0.1% compared with May, reflecting purchases of barbecue goods during a heat wave.

Despite the decline, sales over the three-months through June grew +2.1%, the strongest three-month period in three-years. The data suggest the economy accelerated in Q2 after a slow start to the year.

Note: The BoE is expected to lift its benchmark interest rate as soon as next month to bring annual inflation back to its +2% goal.

Forex heatmap

Fed Powell advances the dollar

Wednesday July 18: Five things the markets are talking about

U.S assets get another leg up from rookie Fed Chair Jerome Powell who again expressed optimism over the U.S’s economic growth and stable inflation, telling Congress yesterday that domestic data should keep the central bank on track to raise “gradually” short-term interest rates. However, as per usual, there was a disclaimer – it was too soon to say if trade disputes might interfere with his plans.

To date, the Fed has refrained from commenting on trade policy, saying it is outside of their remit, yet Powell did caution that “open economies have fared better than closed ones.”

Elsewhere, commodity prices continue their decent, dragged down mostly by crude prices, which are off another -1% on a surprise U.S. crude stockpile report, while the ‘big’ dollar is outperforming its G10 currency pairs, with many EM currency pairs trading atop their multi-year lows outright.

In fixed income, Treasury yields have backed up along with most European bonds. Global equities have had a mixed overnight session.

On tap: Fed Chair Powell will testify for a second day on the hill today (10:00 am EDT).

1. Stocks mixed results

In Japan, the Nikkei share average advanced to a one-month high overnight as exporters – in particular, the auto sector – found support after the dollar hit a six-month high against the yen (¥113.04). The Nikkei gained +0.4%, as too did the broader Topix.

Down-under, Aussie stocks rallied after four consecutive session losses in the past six sessions, supported by one of the country’s biggest companies by market cap. The S&P/ASX 200 rallied +0.7% as BHP Billiton jumped +3.3% following an upbeat production update. In S. Korea, stocks slid to session lows in some heavy trading. After jumping as much as +0.9% on the open, the Kospi finished down -0.3%, recording its third-straight drop.

In Hong Kong and China, stocks came under renewed pressure from a weaker yuan, which has reduced appetite. In Hong Kong, the Hang Seng index fell -0.2%, while the China Enterprises Index lost -0.1%, while in China, the blue-chip CSI300 index fell -0.5%, while the Shanghai Composite Index lost -0.4%.

Note: Overnight, China’s yuan hit a two-week low outright, breaching the key ¥6.700 level – a rising dollar raises concerns of further capital outflows.

In Europe, regional bourses have opened slightly lower and are trading sideways. The financial sector remains the best performer in muted volatility, while tech stocks are underperforming.

U.S stocks are set to open ‘flat.’

Indices: Stoxx50 -0.2% at 3,446, FTSE +0.1% at 7,608, DAX flat at 12,562, CAC-40 flat at 5,412; IBEX-35 flat at 9,714, FTSE MIB +0.4% at 21,906, SMI -0.4% at 8,812, S&P 500 Futures flat.

2. Oil prices fall on rise in U.S stocks, gold lower

Oil prices again have come under renewed pressure after yesterday’s data reveal a rise in U.S crude inventories last week, defying markets expectations for a “big drop,” while concerns about weak demand again have resurfaced.

Brent crude oil is down -60c at +$71.56 a barrel – the benchmark hit a three-month low yesterday – while U.S light crude is down -50c at +$67.58, not far off Tuesday’s one-month low of $+67.03 per barrel.

Expect today’s price action to largely depend on what the EIA release comes in at. Yesterday’s API data showed an unexpected rise of more than +600K barrels in national crude inventories. For today, the market is forecasting a decline of -3.6M barrels in U.S crude stocks for the week through July 13 (10:30 am EDT).

Also putting pressure on energy prices for the past month is Saudi Arabia and other OPEC members agreeing to increased production, while investors have also begun to worry about the impact on global economic growth and energy demand of the escalating Sino-US trade dispute.

Ahead of the U.S open, gold prices have slipped to a new 12-month low as the ‘big’ dollar firms after Fed Chairman Powell’s U.S economic outlook reinforced the markets views that the central bank is on track to “steadily” hike interest rates. Spot gold is down -0.2% at +$1,224.16 an ounce. U.S gold futures for August delivery are -0.2% lower at +$1,224.30 an ounce.

3. Sovereign yields on the move

In Europe, investor uncertainty over global growth is compressing German 10-year yields, and the hunt for yield then sees demand spill over to other debt further out the curve. The gap between German 10- and 30-year Bund yields are at its narrowest in over five-weeks at +67 bps.

In the U.S, the Fed Chair Powell indicating an “unsurprising” preference for a continued steady rise in interest rates is inevitably flattening the U.S government yield curve. The spread between the two-year and 10-year Treasury bonds is narrowing and is last at +24.7 bps.

The yield on 10-year Treasuries has climbed +1 bps to +2.87%, the highest in more than two weeks. In Germany, the 10-year Bund yield has gained less than +1 bps to +0.35%, while in the U.K; the 10-year Gilt yield has rallied less than +1 bps to +1.258%.

4. Dollar goes from strength to strength

The mighty U.S dollar is holding onto its recent gains in the aftermath of Fed chair Powell’s testimony yesterday. With the Fed chair reiterating that interest rates would continue to increase gradually again supports interest rate differentials trading strategies.

Note: Euro and U.K inflation data this morning remained underwhelming (see below).

EUR/USD is a tad softer by approx. -0.3% at €1.1622, while weaker-than-expected U.K inflation data for June sent sterling to multi-month lows against the dollar and the euro.

GBP/USD has fallen to a 10-month low of £1.3010 and EUR/GBP has rallied to a four-month high of €0.8923. Also, Brexit concerns continued to weigh upon the pound as PM May’s government again survived a recent Brexit amendment vote by a “slim” margin.

Note: U.K’s June CPI was the key focus with prospects of an August rate hike in the balance. Odds for a hike have diminished a tad, now down to +72%.

5. U.K inflation steady in June

Data this morning showed that annual inflation in the U.K. held steady last month, as summer-clothing sales offset a rise in petrol prices.

As reported from the ONS, consumer prices rose +2.4% on the year and keeps annual price-growth in excess of the Bank of England’s (BoE) +2% target.

Today’s data should keep the BoE in line to hike again next month – only politics and trade disputes could derail Governor Carney’s agenda.

Digging deeper, the data shows that prices charged by companies at the factory gate accelerated in June, gaining +3.1% on year compared with an annual rise of +3% a month earlier, in a sign that inflationary pressures are building. Raw material costs jumped +10.2% on year according to the ONS.

Note: U.K policy makers have said they expect to raise borrowing costs three or more times during the next few years to bring inflation back to their goal.

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