Rising oil prices fed into an already risk positive environment to help a number of major equity indices press to record highs across the globe. At the risk of sounding like a broken record, many markets feel extremely stretched at these levels but what won’t go down can only go up and until we see a real indication of a directional shift, the only way is up.
There were record highs in the UK’s FTSE and the German DAX. The US, S&P and the NASDAQ all both pressed highs as well, while in overnight trade the Nikkei traded to the highest levels since 2015. In currency markets the USD found itself under pressure with GBPUSD recovering back above 1.2900 area, while this morning we have already seen a .7% rally in EURUSD, back up over 1.1030 and at 6 month highs breaking above the post French election highs. Overnight the AUD was relatively neutral following the release of the RBA minutes. The bank saw policy as consistent with the current environment and sustaining growth while sounding some slight concerns with risks around house prices and credit growth which they are monitoring carefully.
EURUSD has rallied 1.7% since Friday morning and while some of this move can be attributed to a weaker greenback much of the press higher has been on the expectation of normalisation of ECB policy. EURUSD broke above the key 1.1000 figure and data from the region continues to show signs of improvement despite the ECB sounding other concerns/warnings.
Up today we have the GDP figures and data from the region has tended to surprise to the upside. Expectations are for 1.7% year on year growth through Q1 but anything higher may well spur on the Euro and see additional buying of the single currency. We also have to cast a careful eye on the German elections (not due until December) where Merkel goes from strength to strength after falling down opinion polls last year.
EURUSD is now at a very key juncture. Since March 2015, 1.0980 to 1.1070 has been a support resistance zone for EURUSD, meaning whatever side the rate sits has generally set the larger tone. A break above 1.1070/80 area will certainly see EURUSD bulls return which could lift EURUSD back towards 1.1400. EURGBP is now also pressing higher and to key resistance around .8530/40 area. A break here will favour a run higher towards .8595. Let’s not forget ECB speakers however, any indication that the June meeting will not signal normalisation chat could see quite rapid profit taking on the Euro move higher.
In the UK we will be looking at the CPI inflation figure with inflation currently at 2.3%, today’s figures are expected to show a rise to 2.6% over the last month moving ever further from the BOE’s 2% target. The BOE themselves have made no secret that they are happy to absorb higher inflation in the shorter term and last week’s BOE meeting saw no shift in BOE policy of the stance of the voting members, so one has to think the market may be getting a little carried away with this inflation play.
That being said, a strong inflation reading will certainly favour a GBP rally and with that provide opportune times for GBP selling. We have continued to recommend selling GBP into such rally’s and broadly speaking markets have seen a 120% uptick in GBP hedging at higher levels in recent months as many have taken advantage of sterling’s move. 1.3000 has yet to be tested in GBPUSD as sellers are lined up from 1.2970 and above but a break higher may well open up opportunity for a step higher. EURGBP has been overpowered by the stronger Euro and its key to hold below .8530 in order to move lower again.
Looking stateside and the USD finds itself under pressure. We’ve consistently highlighted that in order to raise rates, the Fed need to be all singing the same tune and have the data to back it up. However, despite markets pricing in a >than 70% chance of a June rate hike, the USD index finds itself sitting at 6 months lows and US yields are under pressure.
There has been plenty in the press overnight and unfortunately for the US Government this is overshadowing the economy and while there continues to be a media circus around every step Trump takes and every word he utters the concern is, he’s taking too many steps and saying too many words.
That’s certainly the opinion overnight where reports suggest he leaked confidential information to Russian diplomats last week. In the world of ‘fake news’ however, where it seems every man and his dog is trying to put Trump in bed with Russia, it’s difficult to find the truth here so I’d prefer to focus on the facts. Trump needs to replace the FBI Director, he needs to have Republicans on side to do this, he is losing that battle and thus the process will drag out. He needs that to be done before he can proceed with the great tax plan we’ve all heard so little about.
All these delays and sideshows only take away from the real issues that need to be addressed by the administration, and that is a risk to Fed policy and growth projections.