Fed spreads calm

Summary

A calming influence from Federal Reserve minutes that revealed no hawkish surprises, prevails.

Market looks past the backtrack

Backtracking in U.S.-China trade discussions continued to disorient global shares and the dollar on Thursday after the White House opened a new front, floating possible tariffs on car and truck imports. FOMC meeting minutes that dampened prospects of a ‘bonus’ fourth hike in 2018 though, took the edge off risk aversion. The adjustment prevailed at time of writing. U.S. futures were tentative, though off early lows. Germany’s DAX was down a tenth of a percentage point, somewhat dragged by news of Deutsche Bank’s latest attempt to restructure. Britain’s FTSE crept around but not far beneath the flat line too; France, Spain and Italy were up 0.2%-0.5%. The seemingly ad-libbed administrative style of Trump’s White House applied to international trade remains an effective ‘risk-off’ trigger, edging gold, yen and Swiss franc higher, and JGBs and Treasurys off recent lows. But the market is still prioritising the rates outlook.

Yen bid softens

The apprehensive yen safety bid that ensued on Trade developments was intact at the time of writing, though had softened. The first rise in four months of a Japanese manufacturing gauge supported the yen. South Korea’s finance ministry noting its economy was on track for 3% annual growth as the Bank of Korea saw fit to hold rates for a sixth straight month, despite downside inflation pressure, added to positive Asia sentiment. Overall, the impression of shallower dollar longs bailing was more plausible than the beginnings of a more far-reaching correction for the greenback. After a dollar high of ¥110.10 in Asia, attention is now on ¥109, given almost exact daily tagging by the rate there late last month, ahead of new cycle highs.

Sterling looks robust

The snapshot of sterling against the dollar gave a more robust impression than the trend since mid-April. The rate was already firmer before stronger-than-forecast UK retail sales data,  to which the market tends to apply a discount. With the $1.33 range low intact, the upswing now targets short-term moving averages, for instance the 10-day MA, around $1.34. A close above $1.3467 would open room to $1.3482, previously busted support which should now pose resistance. The second reading of UK GDP on Friday is the nearest fundamental watch point for sterling. Forecasters do not foresee changes from the initial growth estimate of 0.1% compared to the fourth quarter and 1.2% year-on-year in Q1.

Mattarella’s warning

The euro’s bounce was among the least convincing, short of Wednesday’s $1.1789 high. The backdrop is that whilst Italy’s benchmark yield has trimmed some of its ascent since early in the month it held on to around 70 basis points of the move. The country’s administrative president offered the coalition’s prime ministerial choice a mandate on Wednesday evening. The focus now shifts to 5-Star/League’s choice for economy minister. The president’s office pointedly noted a veto could be deployed in the event of a Eurosceptic appointee. The suggestion is that the coalition may have to compromise, whilst Giuseppe Conte—PM designate with no political or management experience—is shaping up to be a figurehead. Still, ample room for further flare-ups in Italian asset markets remains, for the foreseeable future.

U.S. existing home sales were the only remaining data release of note on the calendar.