by Pinchas Cohen
Key Events
- Dollar weaker; S&P flat on Trump
- Asian markets affected by currency and business
- European markets rise
- Risk-off and Risk-on operate in tandem
- Oil jumps on falling inventories—a correction within a decline
- Bank of Canada expected to raise rates
The dollar extended yesterday’s declines versus its G-10 peers on news revealing that the President's son, Donald Trump Jr. had received an email prior to the election offering Russian government assistance to help his father’s presidential campaign.
The yen rose for a second day, despite concerns of BoJ intervention—in a clear sign of rising investor risk aversion because of Trump Jr.’s possible collusion. From a technical perspective, it is only a correction in a return-move to the "reversal line” of a H&S reversal pattern.
Global Affairs
With risk-off now being embraced by investors, US 10-year Treasury yields declined 1.27 percent within the first two hours after the release of the latest developments in the Trump Jr.-Russia affair. They've continued to fall to a total to1.60 percent as of 2:00 EDT. Similarly, the price of gold jumped 0.64 percent within the first hour, and rose as much as 0.97% as of 1:00 EDT.
After the the release of the news, the S&P 500 sharply declined by 0.63 percent, but bounced right back, ending the day down just a negligible 0.1 percent lower. This is a case of everyone fearing what others will do. So, they're the first to sell off, but upon realizing the news isn't that big a deal, they rush back in.
This morning, European equities advanced; the Euro Stoxx 50 was up 0.55 percent at time of writing, the DAX was up 0.44 percent and the CAC 40 advanced 0.7 percent on energy shares. The French benchmark index bounced off its April low, following oil's corrective rally.
While safe haven assets rise—a clear risk-off indicator, equities investors continue to embrace risk-on sentiment. This aberration began with the November US elections, when both risk and safe haven assets started rising in tandem, de-calibrating market components and leaving investors with disparate economic outlooks on how markets will play out.
Yesterday, Bloomberg reported that “Stocks had been inured to Washington tensions since Comey [when they] drop[ped].” In fact, since the Brexit vote, equity investors have become more daring in their disregard for political risk, while currency and commodity traders seem to have kept their political savvy. It took equity markets three days to digest the shock of the June 24, 2016 Brexit vote, three hours to come to terms with the shock of the November 8 US presidential vote and three minutes to skip back the significance of the December 4 Italian referendum. Does this suggest that equity investors are wrong? Try telling that to investors who’ve seen their equity portfolios rise 15 percent in eight months since the US elections, and 19 percent since the Brexit vote.
The Tokyo Price Index opened 0.28 percent lower, declined as much as 0.64 percent and settled at 0.47 percent. However, let’s remember that the yen, had strengthened as much as 0.35 percent at the same time, which is proportionate to the decline in Japanese stocks, while investors are nervous ahead of Yellen’s testimony before Congress.
In Hong Kong, traders were not fazed by political risks, as the Hang Seng was up 0.8 percent, crossing over the 26,000 round psychological price level and resuming a rally of 2.8 percent this week. The index seems to be heading for its best weekly performance since mid-March, as investors focus on the rise of mainland Chinese blue-chips, up 1.5 percent. The index is on course for its best performance in nine weeks.
Oil recovered 3.13 percent yesterday, and reversed 4.6 percent from the low of the day on reports of a decline in stockpiles. Inventories declined by 8.13 million barrels last week, according to an API report—the biggest drop since September when compared with the US Energy Information Administration data. The API report followed the EIA cut in its 2018 oil output forecast to 9.9 million barrels a day, down from its 10.01 million estimated in June.
Today, oil extended yesterday’s gains by 1.7 percent, as of 3:34 EDT. However, oil is still within a bear market and from a technical perspective, this rally is a correction within a decline, providing a better opportunity for short traders.
The pound declined after it was reported that the Bank of England Deputy Governor Ben Broadbent isn’t ready to vote for a rate hike. The decline opens up the potential for a double-top reversal pattern.
Yesterday, Federal Reserve Governor Lael Brainard handed investors bittersweet news, as she supported shrinking the balance sheet “soon,” while holding off on rate hikes until it's warranted by inflation.
The Bank of Canada is widely expected to hike interest rates. See our trading strategies for the Canadian dollar here.
In the aftermath of yesterday’s latest development in the ongoing Trump political drama, investors are awaiting Yellen’s testimony before Congress today, and a refresh via more familiar territory—the start of corporate earnings season.
Up Ahead
- Yellen testifies before Congress today and tomorrow.
- JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) will release earnings reports on Friday before the market opens.
- The UK will publish its Repeat Bill on EU membership this week.
Market Moves
Currencies
- The pound was down 0.2 percent at 8:06 a.m. in London following the news that BOE’s Deputy Governor Broadbent isn’t ready to support a hike.
- The yen was up 0.4 percent at 113.53 per dollar.
- The dollar barely regained losses against its G-10 peers.
- The Dollar Spot Index is fluctuating, having been down 0.14 percent, up 0.15 percent and settling up 0.9 percent at 95.71, as of 4:38 EDT.
- The Canadian dollar rose 0.1 percent ahead of a widely expected rate hike.
- The euro was down 0.1 percent.
Stocks
- The S&P 500 closed 0.1 lower.
- The Euro Stoxx 50 gained 0.4 percent.
- The FTSE 100 rose 0.6 percent.
- S&P 500 futures are flat.
- Japan’s TOPIX lost 0.5 percent.
- Australia’s S&P/ASX 200 Index declined 1 percent.
- Hong Kong’s Hang Seng climbed 0.7 percent, crossing over the key 26,000 mark, led by banks.
- Pakistan’s Karachi 100 dropped 1 percent, after it fell its most in eight years on Tuesday, when investigators recommended that Prime Minister Sharif and his two sons be brought to trial on corruption charges.
Bonds
- The US 10-year Treasury yield dropped one basis point to 2.36 percent.
- Australian 10-year bonds fell three basis points to 2.72 percent, halting five days of gains.
- The Bank of Japan raised outright purchases of 3- to 5-year government notes to contain a recent increase in medium-term yields.
Commodities
- WTI crude climbed 0.35 percent, crossing the dollar-mark to $46.01. The commodity was unable to hold on to those levels and retreated below the whole number to $45.95 a barrel, as of 4:43 EDT.
- Gold was little changed at $1,217.97 an ounce.
- Silver rose 0.4 percent to $15.80.