Is Turnaround Tuesday Nearly Over Already?

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  • Corrective forces that took hold in the foreign exchange market yesterday extended their hold today
  • The news stream is light and it won’t pick up much in the North American session
  • Italian President Mattarella is being embraced as a check on the populist-nationalist government that is being formed
  • The market has taken little from BOE Governor Carney and other officials speaking before Parliament
  • Brazil COPOM releases its minutes; National Bank of Hungary is expected to keep rates steady at 0.9%

The dollar is broadly weaker against the majors as the rise in US rates stalls. Stockie and sterling are outperforming, while the yen and Kiwi are underperforming. EM currencies are broadly stronger. ZAR and THB are outperforming, while INR and TRY are underperforming. MSCI Asia Pacific was up 0.2%, with the Nikkei falling 0.2%. MSCI EM is up 0.6% so far today, with the Shanghai Composite flat. Euro Stoxx 600 is flat near midday, while S&P futures are pointing to a higher open. The 10-year US yield is up 1 bp at 3.07%. Commodity prices are mostly higher, with oil up 0.4%, copper up 0.5%, and gold up 0.2%.

Corrective forces that took hold in the foreign exchange market yesterday extended their hold today. However, a cent bounce from yesterday’s lows has seen new sellers of euro and sterling emerge, and the greenback found bids below JPY111.00. There is a $600 mln option struck there that will be cut in NY today. There is a 1.1 bln euro option at $1.1850 that also expires today.

Corrective forces are also seen in other markets. Uncertainty spurred by Italian political developments triggered a dramatic sell-off of Italian assets over the past few sessions. They have been given a reprieve today. Italy’s 10-year bond yield is off nearly nine basis points, and the premium over Spain has narrowed five basis points, and the spread against Germany is narrowing by 13 bp. Italian shares are also recovering. The 0.5% gain near midday in Milan is among the region’s best performers today. The Dow Jones Stoxx 600 is up 0.1%.   The CAC and DAX are struggling to sustain meaningful momentum. Both markets have rallied for eight consecutive weeks.

Most emerging market currencies are higher today, led by the South African rand’s 1.1% rise and a 0.6% rise in the Russian ruble. The Turkish lira is moving a bit off its record low (~+0.25%), and the Malaysian ringgit moved higher for the first time since May 3 (~0.3%).

The news stream is light and it won’t pick up much in the North American session. The only US report is the Richmond Fed’s Manufacturing Index. It is an early reading of May activity, and is expected to improve sharply after falling dramatically into negative territory (-3) for the first time in 2 1/2 years. Still, it does not move markets in the best of times. No Fed officials are slated to speak. Canada reports wholesale trade, also typically with limited market impact.

South Korea President Moon is in Washington. Given how quick North Korea was to threaten to cancel next month’s summit with the US, some suspect that Moon may have over-promised. However, the angle that may be more relevant for investors runs through China. Reports suggest that the US Administration sees China’s hand behind North Korea’s threats. Some link the US volte-face on trade with the desire to reach an agreement with North Korea.

The suspension of US sanctions on China and China dropping its investigation into US sorghum imports have signaled a de-escalation of tensions. After the mid-June summit, the US trade stance could harden again. In the meantime, a workaround for ZTE looks to be near. Some trade measures that China is taking, like reducing the import duty on autos to 6% from 25%, will help non-US producers as well as Americans, one would think. The other point to note is how the de-escalation of trade tensions with China has spurred criticism from Trump’s right (like Bannon), but also notably the left (like Schumer).

In Italy, the President Mattarella is being embraced as a check on the populist-nationalist government that is being formed. Reports indicate that he “expressed concerns” about the fiscal plans. Investors appear concerned over motivations as much as plans. A modification of the fiscal plans may appease Mattarella, but it may require more to ease investor concerns, where a Greek-like crisis is feared, and worse given the size of Italy’s economy and market. Despite the recovery in Italian bonds, indicative prices for the five-year credit-default swap are trading firmer.

The market has taken little from Bank of England Governor Carney and other BOE officials today, speaking before Parliament. The December short-sterling futures contract implies a single basis point higher yield following official confirmation that interest rates “could rise in coming months.” Sterling is trading firmer, consistent with the US dollar’s broad even if shallow pullback. It ran into offers like it did yesterday in front of $1.35.

Among the majors, the Australian and the New Zealand dollars have turned first, though sterling (~0.25%) and the Swedish krona (~0.3%) are leading today’s move. Over the past five sessions, the Australian dollar is up 1.7%, and the New Zealand dollar has gained nearly 1.4%. Today, Aussie has poked through $0.7600 for the first time since April 25. The five-day moving average is crossing above the 20-day average for the first time since April 23. Still, we view this move as corrective in nature and see nearby resistance around $0.7615 and then $0.7660. Kiwi has underperformed, but its bounce may have already faltered near the 20-day moving average (~$0.6980), which it has not traded above since April 19.

Brazil COPOM releases its minutes. At last week’s meeting, COPOM unexpectedly left rates steady at 6.5%. Brazil reports mid-May IPCA inflation Wednesday, which is expected to rise 2.82% y/y vs. 2.80% in mid-April. While this would be near the bottom of the 2.5-6.5% target range, the weak BRL is likely to make the next move a hike though nothing is expected at the next meeting June 20.

National Bank of Hungary is expected to keep rates steady at 0.9%. Like Poland, Hungary’s central bank has retained a very dovish stance. CPI rose 2.3% y/y, which is near the bottom of the 2-4% target range. We see steady rates well into 2019. Also like Poland, we believe Hungarian policymakers are fine with a weaker currency even as both HUF and PLN made multi-year lows against EUR this week.