Opening Bell: Stocks, Yields Jump On Averted Mexican Tariffs; Gold Slips

Key Events

Global stocks and futures on the S&P 500, Dow and NASDAQ 100 extended last week's climb this morning—the strongest since November—on speculation the Fed will move to shore up the economy after Friday's jobs report showed paltry new hiring and weak wage gains. Threats of escalating U.S. tariff measures against Mexico also eased, allowing investors to shrug off heightened trade headwinds.

Europe's STOXX 600 edged higher for the fifth day out of six, though some exchanges, including Germany's, were closed for a holiday.

In the earlier Asian session, regional shares advanced after China’s trade data beat expectations for the first time since the onset of the country's trade dispute with the U.S. China’s trade surplus leaped 78% to $417 billion last month. On an annual basis, the country’s exports grew 1.1%. On the other side of the equation, imports dropped 8.5%—much less than the market had feared.

Global Financial Affairs

On Friday, U.S. equities advanced for the fourth straight day despite fresh data showing both nonfarm payrolls and average hourly wages dropped in May as the protracted effect of the U.S.-China trade war took a toll on the U.S. economy. The country added 75,000 new jobs last month, after a 224,000 advance in April. The figures exacerbated a broader pessimistic economic outlook after retail sales, factory output and home purchases readings all weakened this quarter, suggesting the U.S.'s record economic expansion had come to an end.

However, the expected shift to more pronounced monetary accommodation from the Fed overshadowed the inherent economic weakness. Traders increased bets on the Fed funds futures, with a quarter-point cut practically priced in for July and a 70 basis point easing expected by the end of the year.

Technically, Friday’s session on the S&P 500 closed off its highs, after nearing May’s highs, which formed the right shoulder of a H&S top. If prices climb above 2,900, we can expect investors to take on the May 1 record at the 2,950 level. If prices fail to post higher, we might see them retesting the H&S neckline at the lower 2,800’s.

The forgone conclusion that the Fed will cut rates has stopped the 10-year Treasury yield from spiraling further. However, from a technical perspective, its range after it fell below the bottom of the descending channel suggests there is more pain to come. Overall, while the market didn’t expect yields to plunge, we have been warning about it since they double-topped in early December and fell below their medium-term uptrend line since mid 2016 later in the month.

The dollar bounced back after hitting the uptrend line since September last year. However, it completed a double-top. Unless the price climbs back above 97.00, we can expect the uptrend line to break and the greenback to keep sliding along with the falling rates outlook.

Meanwhile, the USD has been weakening versus the Mexican peso for two reasons: Trump backing off from his threatened tariffs on Mexican goods and traders increasing bets on a Fed cut, which in turn lowers the dollar’s return rate.

Conversely, the buck strengthened against the yen after Bank of Japan Governor Haruhiko Kuroda said the central bank can deliver more stimulus if necessary.

In commodities markets, gold has been falling along with the dollar’s reawakening—after a growing consensus of coming rate cuts had pushed the USD lower last week. The cheaper dollar attracted dip buyers, weighing down on the price of the yellow metal.

From a technical standpoint, gold reached below the $1,350 levels—the Feb. 20 highs—forming a resistance and opening the potential of a double-top reversal, with a penetration of the April lows at $1,266.

WTI pared gains that had been spurred by reports OPEC planned to continue curbing production as well as Trump's U-turn on Mexican tariffs. U.S. drilling activity slowed, also contributing to oil's initial climb.

Up Ahead

• ECB President Mario Draghi speaks at a conference in Frankfurt on Wednesday.
• Monthly consumer price index figures, a key measure of U.S. inflation, are due on Wednesday.
• The race to pick a successor to British Prime Minister Theresa May heats up on Thursday, with the first Conservative Party leadership ballot.
• Also on Thursday, euro-area finance ministers meet in Luxembourg. On the agenda: financial penalties for Italy over its debt load and the euro-area budget.
• U.S. Industrial production and retail sales data on comes out on Friday
• China also releases factory output and retail sales on Friday.

Market Moves

Stocks

• The U.K.’s FTSE 100 increased 0.4% to the highest in more than five weeks.
• The MSCI Asia Pacific Index gained 0.9% to the highest in four weeks.
• The MSCI Emerging Market Index advanced 1% to the highest in a month on the biggest gain in a week.

Currencies

• The Dollar Index opened 0.18% higher and extended the climb to 0.32%.
• The euro fell 0.2% to $1.1307.
• The British pound declined 0.2% to $1.2711, the largest decrease in more than a week.
• The Japanese yen slid 0.4% to 108.63 per dollar, the weakest in more than a week on the biggest dip in two months.

Bonds

• The yield on 10-year Treasurys gained four basis points to 2.13%.
• Germany’s 10-year yield increased two basis points to -0.24%, the first advance in a week and the biggest increase in almost three weeks.
• Britain’s 10-year yield fell one basis point to 0.836%, the lowest in almost three years.

Commodities

• West Texas Intermediate crude increased 0.4% to $54.22 a barrel, the highest in more than a week.
• Gold dropped 1% to $1,327.74 an ounce, the first retreat in almost two weeks and the largest decrease in two months.