Bank of England
The Bank of England's monetary policy announcement is the leading market event today. Forex traders' consensus is a bit muddled as long sterling positions are unattractive, although long EUR/GBP is more attractive than short GBP/USD. In other words, the market prefers to express a bearish sterling bias via EUR/GBP longs. Ultimately it makes sense to eliminate the fickle nature of the U.S. dollar these days which is moving in and out of recent correlation making it tricky to trade on an outright basis
The Street expects the MPC to announce a further GBP100 bn of asset purchases in addition to the GBP200 bn announced in March, with the weekly pace of asset purchases slowing to GBP8-10 bn from GBP14 bn currently. Although the market consensus is for the bank rate to be left unchanged at 0.10%, an active discussion of the possibility of negative rates could undermine GBP, and it is on this narrative where the bearish price action could evolve.
As well, The Street uniformly agrees that the BoE increasing the pace of asset purchases, or moving into negative rates, makes much more sense for the UK economy than yield-curve control, as only a small proportion of systematic borrowing in the UK is related to 10-year yields.
Forex
Onshore names are selling bonds aggressively, after the People's Bank of China governor said they are considering policy tools to exit the market at an appropriate time.
USD/CNH traded through the overnight low and remained offered as statements from China, and the US on the Hawaii meeting calmed the market, with stocks reversing earlier losses. I see more downside room in spot, looking at 7.04-09 today.
G10 FX vols, especially USD/JPY vols, started very bid with equity futures down 1% and USD/JPY slipping through 10. But things have settled as the market has stabilized somewhat with the S&P 500 taking a peek above 3,100.
The latest sell-off the EUR/USD continues to cascade through the FX markets, lending some support to the dollar. It never seems to fail: every time we get all bulled up on the EUR/USD within a week or so, we are seemingly closing in on, yet another make or break level (1.1180).
Arguably, we should be in the buy-zone any time we hit 1.1210-1.1225, given the list of positives, particularly around debt mutualization. Still, a slide below 1.1180 might be a painful experience for many freshly struck euro longs. Suggesting the positive USD reaction to stronger-than-expected US retail sales data shows that the currency is not merely a haven.
The reaction function echoed by the USD's positive response to the US employment report at the start of the month is also keeping a sneaky bid under the dollar. It now appears the USD can capitalize on economic upside surprises in the US, even if they provoke equity-market strength.
Stock markets
There is no doubt that economic activity is recovering from its worst levels. We can see that in numerous official and anecdotal reports. Still, financial data is thought to be unreliable these days and the positive knock-on effects seem to be losing swagger quickly as we all know the economic nasties are coming down the road.
Still, I do not think the equity markets will care, until investors are staring down the barrel of a continuous stream of weak unemployment data, if that does eventuate. In the meantime, your P&L is not going to look great if you position for the US elections now (Bolton book), as the "wall of money" argument seems to supersede virtually everything, especially with the Fed in maximum risk-on mode.
Gold Markets
Gold continues to perform for no other reason than the Fed has lost its financial morals. Indeed, it's the most market-friendly Fed of all time, with negative rates, yield-curve control, and MMT apparently all on the table.
Oil Markets
The OPEC+ technical committee that met overnight did not make any additional recommendations for further crude production cuts, focusing instead on members' compliance with the current agreement, according to OPEC+ sources.
I am not sure this is much of a factor in the overall scheme of things. After all, we are only one month into the latest extension, and compliance looks to be okay with Iraq aligning.
Oil traders have been searching for rudder in the broader market today, which has been elusive due to the constant stream of COVID-19 and geopolitical headlines in the region. But I am sure the more aggressive oil traders in London will brush these headlines aside and return focus on reopening-optimism.
In Asia, most of the focus remains on demand uncertainty starting with nascent COVID-19 economic recovery, while the counter-seasonal crude build never sits well, even at the best of times. Still, there is some positive in the inventory report to build on during the London session as gasoline and diesel inventories printed a draw.
US crude production declining to 2018 levels due to tropical storm Cristobal could lead to a substantial drop in inventories next week. This is something the market has been waiting on for weeks.
The Bolton effect
I think this is proving more of a distraction than anything else, but here it is.
The New York Times has obtained a copy of former US national security advisor John Bolton's book, which is due for release next week, but currently facing White House attempts to block it. Bolton describes how every decision Trump makes is with an eye on re-election, rather than the US good. He claims in his book that Trump has pleaded with President Xi to buy more US agricultural goods and is willing to make a deal. Much the same with Huawei, where Trump offered to wind back restrictions for the sake of a trade deal with China. Bolton writes: "He then, stunningly, turned the conversation to the coming US presidential election, alluding to China's economic capability to affect the ongoing campaigns, pleading with Xi to ensure he'd win."