Markets Quiet Ahead of Triple Witching
• The US dollar remains firm but the sharp advance has stretched some technical readings and the long-end of the curve unwound the Fed-induced gains.
• The Bank of Japan extended its emergency lending facilities through March 2022, while maintaining its current policy framework. Separately, the rise in core inflation, which excludes fresh food, reflect the rise in energy prices.
• The UK unexpectedly reported a sharp drop in May retail sales after a surge in April. Covid cases hit new multi-month highs.
• A big drop in agriculture prices was seen yesterday as corn and canola were limit down in the futures market yesterday and soy’s decline leaves it flat for the year. A combination of anticipation of better weather, uncertainty about the Biden administration’s biofuel polices, and reports suggesting that China’s swineherd has been rebuilt, weighing on lean hog prices (largest fall in seven months).
• Iran votes today and France holds regional elections this weekend.
After some dramatic moves over in the immediate post-Fed period, the markets have quieted. The kind of volatility that is sometimes associated with triple witching expirations in the US may have already taken place. Asia Pacific equities were mixed, but the MSCI benchmark finished with its second consecutive weekly decline. Europe’s Dow Jones 600 ended its nine-day run with a small loss yesterday and additional slippage so far today. Still, near midday, it is holding on to about a 0.25% gain for the week. US futures are steady to slightly firmer.
The US 10-year yield unwound the gains registered in the immediate aftermath of the Fed’s less dovish signals, and near 1.48%, it is practically flat on the week. Most European yields have edged up today and are 3-5 bp higher on the week. An unexpected decline in UK retail sales and the most Covid cases in a few months appears to have dragged Gilt yields lower.
The dollar is mostly firmer against the major currencies, but the euro and yen stable but fragile. The greenback is having its best week here in Q2. The Scandis are the weakest with 2.5%-2.8% losses for the week, while the yen is the strongest, off a little less than 0.5% this week. Emerging market currencies are mostly firmer today, though a handful of Asian currencies are slightly softer. The JP Morgan Emerging Markets Currency Index is posting its first gain in six sessions. Brazil, which hiked its key Selic rate by 75 bp and signaled another hike in August, has the only emerging market currency posting gains for the week (~2.2% coming into today).
Gold is also seeing its first gains in six sessions, though it remains below $1800 and is off around 4.5% this week. Oil is nursing its second consecutive loss. The July WTI contract finished last week a touch below $71, and with today’s slippage is near $70.50. Iron ore and steel rebar futures prices are higher, and copper is slightly firmer after dropping 4.7% yesterday. Grains and livestock prices tumbled yesterday, and the CRB Index fell 2.8%. It had not risen so far this week and is off around 3.8% coming into today, which, if sustained, would be the largest weekly loss since before the Covid vaccine was announced.
Bannockburn Global Forex