Daily News Flash 070617 - 15 minutes to take you around the globe.

Global Markets

Gold and sovereign debt are set to build on solid overnight gains while Asian stocks are likely to slip on Wednesday as investors reduce risk before several major political and economic events later this week. With U.K. elections, an European Central Bank policy meeting where policymakers may take a less dovish stance, and former FBI director James Comey's Senate testimony on all set for Thursday, market participants will be wary of taking big positions. MSCI's broadest index of Asia-Pacific shares outside Japan edged 0.2 percent lower, retreating further from a two-year high hit on Monday. Early Asian markets such as Australia and Japan are pointed lower. British Prime Minister Theresa May looks on course to increase her parliamentary majority in Thursday's election, an opinion poll showed on Tuesday, shortly after another survey suggested the race with the opposition Labour Party was neck and neck. Major U.S. stock indexes fell between 0.23 percent and 033 percent on Tuesday. The risk-off undertone pushed government bond prices up and yields lower, while propping up gold and the Japanese yen. Yields on ten-year U.S. Treasury yields briefly fell to seven-month lows of 2.129 percent, the lowest since Nov. 10, before settling at 2.15 percent.

 

In currency markets, the dollar's weakness against major rivals reverberated across markets as shrinking U.S. bond yields further impeded a greenback already struggling in a climate of heightened political uncertainty. Reports suggest former FBI director Comey plans to disclose on Thursday conversations in which U.S. President Donald Trump allegedly pressured him to drop his investigation into former National Security Adviser Mike Flynn, who was fired for failing to disclose conversations with Russian officials. At its Thursday meeting the ECB may even discuss dropping some of its pledges to ramp up stimulus if needed, four people with direct knowledge of the discussions told Reuters last week. The common currency held firm at $1.127 against the greenback. Gold remained a firm investor favorite with the precious metal holding strong around the $1,294 per ounce line. It has gained nearly 7 percent in the past month.

 

Treasury 

U.S. long-dated Treasury yields fell to seven-month lows on Tuesday, as nervous investors favored the safety of bonds ahead of Thursday's general election in Britain, the European Central Bank's policy meeting, and former FBI Director James Comey's testimony before a Senate panel. Ten-year Treasury yields, which move inversely to prices, currently sit at 2.141 percent. A close at or below that yield could test the psychological 2.0 percent level, said Lou Brien, market strategist at DRW Trading in Chicago. "We have a situation here where technicals are informing the direction of Treasuries, with the various risk events adding to the momentum," said Brien. In the British election, a tightening race between the ruling Conservative Party over the opposition Labor Party, based on recent polls, raised uncertainty about Britain's path in its exit from the European Union. Traders have also speculated on whether ECB policymakers might signal a possible end to the central bank's bond purchase program at its upcoming meeting amid an improving European economy.

 

Comey's first public appearance since he was fired by U.S. President Donald Trump, meanwhile, might shed more light on a probe by the Federal Bureau of Investigation into alleged Russian meddling in last year's U.S. presidential election. DRW's Brien also said U.S. Treasuries were boosted by a Bloomberg report saying China is prepared to increase its holdings of U.S. government debt under the right circumstances, as the yuan has stabilized against the dollar. Safe-haven bids pushed U.S. 10-year Treasury yields to 2.129 percent, the lowest since Nov. 10, two days after Trump's surprise election victory. Yields were last at 2.143 percent . John Hermann, rates strategist at MUFG in New York, believes the risk of the 10-year yield topping 3.00 percent is quite limited given that the U.S. economy and Trump's fiscal package may disappoint market expectations. "Importantly, should the Democrats fight Trump to the death, and should the Republican party fail to lead, then the Trump fiscal stimulus may fail to arrive from the start – and the yield on the 10-year Treasury note may grind lower back toward 1.30 - even sooner than our models forecast," he added. U.S. 30-year bonds rose 22/32 in price, yielding 2.807 percent, compared with Monday's 2.84 percent. U.S. two-year yields, meanwhile, were at 1.294 percent, from 1.306 percent late on Monday.

 

Currency 

The dollar wallowed near a six-week low against the safe-haven yen on Wednesday, with traders cautious ahead of Britain's general election, a European Central Bank policy decision and testimony by former FBI Director James Comey. The greenback was little changed at 109.420 yen, not far from 109.225, its lowest since April 21 plumbed overnight. The dollar has lost 0.9 percent against the yen this week, also pressured by a sharp drop in U.S. Treasury yields to seven-month lows as investors sought the safety of government debt. The U.S. currency was seen coming under more pressure as previously bullish equities also began declining. Wall Street shares pulled away from recent record highs and fell overnight as demand for risky assets waned ahead of Thursday's events. "The dollar has felt the tug of lower U.S. yields for a while now, but buoyant stocks had helped neutralize some of that pressure," said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo. "But it lost even that support, and the dollar's fall gathered momentum."

 

Comey, who will testify on Thursday, was investigating whether Donald Trump's presidential campaign and Russia colluded to sway the 2016 U.S. election when he was fired by Trump in May. Investors are worried his testimony could dampen already flagging momentum for Trump's agenda of rolling back regulations and overhauling the tax code. The dollar index against a basket of major currencies was a shade lower at 96.598 following a slip to 96.515, its lowest since Nov. 9. The euro was little changed at $1.1268 after climbing about 0.2 percent overnight. The common currency was still shy of the seven-month high of $1.1285 touched on Friday as a wait-and-see mood prevailed ahead of the European Central Bank's policy meeting on Thursday, another of this week's major events that the markets are bracing for. While the ECB is not expected to shift rates or make changes to its quantitative easing scheme this week, market participants will sift through President Mario Draghi's statements for his view on the euro zone economy. The pound was unchanged at $1.2908 after swerving between $1.2951 and $1.2873 the previous day. Sterling has seen choppy trading on polls suggesting outcomes ranging from a majority for Prime Minister Theresa May's party to a 'hung' parliament in which no party has an overall majority. The Australian and New Zealand dollars were steady at $0.7507 and $0.7176, respectively.

 

GOLD

Gold rose to the highest in seven months on Tuesday on a slump in the dollar to a seven-month low and safe-haven demand driven by a rift in the Middle East, an upcoming European Central Bank meeting and the British election. Investors were also drawn to gold, seen as a safe place to park assets, by uncertainty around the testimony to a Senate committee by former FBI Director James Comey. A weaker dollar makes gold cheaper for holders of other currencies, while lower yields reduce the opportunity cost of holding non-yielding bullion. Weak economic data from the United States has reduced expectations of rapid U.S. interest rate rises this year, but the Federal Reserve is expected to hike rates at its June policy meeting next week. Interest rate rises push bond yields higher and tend to strengthen the dollar. Spot gold was up 1.1 percent at $1,294.34 an ounce by 2:25 p.m. EDT (1825 GMT), having earlier touched its highest since Nov. 9 at $1,295.97. U.S. gold futures rose 1.2 percent to settle at $1,297.50. The dollar index, which tracks the greenback against six major rivals, was down 0.18 percent at 96.624 Gold has risen more than 6 percent since a low of $1,213.81 in early May as political turmoil in the United States created doubts that President Donald Trump could enact economic stimulus, pushing down the dollar and bond yields. "Gold surged to highs since Election Day as geopolitical concerns with the UK election and Comey testimony both due Thursday as well as fresh tensions on the Arabian peninsula triggered strong buying in spot as well as options," said Tai Wong, director of base and precious metals trading for BMO Capital Markets in New York. 

 

European Central Bank policymakers will take a more benign view of the economy on Thursday and will even discuss dropping some of their pledges to ramp up stimulus if needed, sources told Reuters. A decision by major gold consumer India to levy a sales tax on gold at 3 percent rather than the expected 5 percent was supporting bullion prices by spurring demand for physical metal, analysts said. From a technical standpoint, gold may be poised for further gains, analysts said. "The long-term bearish trend line that had been in place since the year 2011 has broken down and this could pave the way for significant long-term gains," said Fawad Razaqzada, market analyst at Forex.com. "A decisive break above the last swing high at $1,295 is what the bulls want to see now." In other precious metals, silver rose 0.9 percent to $17.67 an ounce, its highest level since April 25. Palladium climbed 1.5 percent to $854.30 an ounce after rising to $858.70, its highest since September 2014 while platinum gained 0.9 percent to $958.8 an ounce after touching $967.50, the strongest since April 24. Platinum and palladium, mainly used to make auto catalysts that clean exhaust fumes, have rallied despite data showing weaker global auto sales in May, Julius Baer analyst Carsten Menke said in a note. "We see technical rather than fundamental factors behind this (palladium) rally, supporting bullish sentiment in the futures market. We stick to our negative view and short position, expecting prices to realign with the weaker demand backdrop over the coming months."

 

BASE METALS

Aluminium prices hit a three-week trough on Tuesday as traders brushed aside news that Qatar's exports of the metal had been blocked and focused instead on weak Chinese demand and rising geopolitical tensions. Norway's Norsk Hydro said it was seeking other routes for its aluminium exports from Qatar, which have been blocked as a result of a diplomatic rift between the Gulf country and several Arab states. Norsk Hydro and state-owned Qatar Petroleum each own 50 percent of the Qatalum joint venture, which produces more than 600,000 tonnes of primary aluminium per year. "On a global scale Qatar plays a minor role in the aluminium market, direction is more dictated by China. There are sufficient (aluminium) supplies in China, inflows into Shanghai (warehouses) have increased and demand is relatively weak in summer," said Casper Burgering, analyst at ABN Amro.

 

OIL

Oil prices dipped on Wednesday, with Brent crude futures failing to find support at $50 per barrel, as global fuel markets remained oversupplied, although rising tension in the Middle East and falling U.S. inventories lent some support. Brent crude futures were trading at $49.94 per barrel at 0041 GMT, down 18 cents, or 0.4 percent, from their last close. Brent is almost 8 percent below it levels on May 25, when an OPEC-led policy to cut oil output was extended to cover the first quarter of 2018. U.S. West Texas Intermediate (WTI) crude futures were at $47.98 per barrel, down 21 cents, or 0.4 percent, from their previous close, and down over 6 percent from May 25.

 

Traders said an ongoing fuel supply overhang was keeping prices under pressure despite a pledge led by the Organization of the Petroleum Exporting Countries (OPEC) to hold back almost 1.8 million barrels per day (bpd) of production until the first quarter of 2018. World fuel production and consumption is roughly in supply and demand balance, at almost 98 million bpd, although inventories remain somewhat bloated, according to the U.S. Energy Information Administration (EIA). Traders said the market was supported by heightened political tensions in the Middle East and by signs of a gradual drawdown of bloated fuel inventories in the United States. Commodities brokerage Marex Spectron said it expects "lower supply of crude oil on the physical market" in the coming weeks, adding that "this is likely to provide support to the price" of oil. A campaign by leading Arab powers, including Saudi Arabia, Egypt and the United Arab Emirates, to isolate Qatar is disrupting trade in commodities from oil, natural gas, metals, and food. In the United States, U.S. crude inventories fell by 8.7 million barrels in the week to May 26, data from the American Petroleum Institute showed late on Tuesday. Official data by the EIA will be published later on Wednesday. Marex Spectron said that the demand outlook for coming weeks from refineries was strong, also supporting prices. However, the brokerage said that price gains could be capped by what it called a "deeply bearish" macro-economic environment.

 

Source : Reuters

News Update

World Bank: Global economy to keep growing this year

The economy worldwide is on track to expand 2.7% this year and 2.9% over the next two years, despite growing support for protectionism, mostly from the US, the World Bank said. It notes that the principal drivers will be the seven biggest emerging-market economies: Brazil, China, India, Indonesia, Mexico, Russia and Turkey.

Deutsche Welle (Germany)/Agence France-Presse/Reuters (05 Jun.),  Financial Times (tiered subscription model) (04 Jun.)

 

Australia leaves main rate at record low

The Reserve Bank of Australia has left its benchmark interest rate at a record-low 1.5%. The job market is strengthening, but house prices are softening, and economists expect a report to show GDP expanded only 0.3% in the first quarter.

Bloomberg (06 Jun.),  Reuters (06 Jun.) 

 

Supreme Court rolls back SEC's disgorgement authority

The Supreme Court ruled that the Securities and Exchange Commission's power to require the return of illegal profits can be applied only to funds obtained up to five years before the SEC files its claim. Lower courts have disagreed on whether the five-year statute of limitations on fines, penalties and forfeitures also applies to disgorgement.

Bloomberg (05 Jun.),  The National Law Journal (free content) (05 Jun.)

 

China thought unlikely to abate regulatory crackdown

Market participants say China's crackdown on shadow banking and excessive credit growth, resulting in a fusillade of regulations in recent months, will likely continue unabated as the People's Bank of China takes on an increasingly influential role in uniting the efforts of disparate regulatory agencies. Although the crackdown is widely expected to ultimately benefit the economy, some analysts say it is also contributing to moments of market volatility.

Central Banking Publications (subscription required) (05 Jun.) 

 

Geopolitical tension pushes down US dollar

Tension in the Middle East and political uncertainty in the UK, the EU and the US have driven down the US dollar. The US Dollar Index, which measures the dollar against a basket of trade-weighted currencies, has reached the lowest level since the US presidential election in November.

Reuters (06 Jun.) 

 

Eurozone growth maintains strong pace

IHS Markit's composite purchasing managers' index remained unchanged in May from April, and shows that eurozone growth in manufacturing and services kept expanding at its fastest clip in six years, powered mainly by stronger performances from France and Germany, as well as Italy and Spain. However, European Central Bank President Mario Draghi is expected to maintain his generally cautious approach at this week's ECB meeting, while acknowledging that progress is being made.

Bloomberg (05 Jun.)  

 

Japan's Abe backs China's huge infrastructure project

Japanese Prime Minister Shinzo Abe has publicly applauded China's mammoth Belt and Road infrastructure plan and said Japan is ready to cooperate with its implementation. Japan has been working to improve relations with China since President Donald Trump withdrew the US from the Trans-Pacific Partnership trade deal.

Nikkei Asian Review (Japan) (tiered subscription model) (06 Jun.)  

 

Scotland likely to leave UK no later than 2025, Sturgeon says

Nicola Sturgeon, the first minister of Scotland and head of the Scottish National Party, said in an interview with ITV that she expects her country to be independent of the UK by 2025. Polls indicate her party will make a strong showing in this week's parliamentary election.

Reuters (05 Jun.)  

 

Lagarde proposes compromise over Greek debt disagreement

Christine Lagarde, managing director of the International Monetary Fund, proposed a compromise aimed at ending the stalemate in resolving Greece's debt crisis. According to her proposal, the IMF would remain an active participant in the process while creditors fully clarified their unresolved debt relief measures, which would clear the way for the next bailout payment to be issued this month.

Reuters (05 Jun.)  

 

Source : CFA Institute Financial Newsbrief

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