Originally published by Rivkin Securities
The euro retreated -0.48% on Tuesday despite positive economic data as a stronger US dollar weighed on the common currency as treasury yields rose. The increase in US treasury yields came following the auction of $26 billion in two-year notes with a yield of +1.316%, with two-year debt trading in the secondary market rising +2.8 basis points to 1.3073%. The US Dollar Index gained +0.39% and helping financials outperform with the sector gaining +0.68% pushing the S&P 500 index up by +0.18%.
A flash composite PMI report for the US (MoM May) edged up slightly from April to 53.9 from 53.2. The report highlighted US business continued to gain momentum, pointing to a pickup in second quarter GDP as hiring remained robust maintaining expectations that the Fed will hike rates in June.
The European economic recovery continues to gain momentum with the flash Markit PMI composite (MoM May) showing business activity expanding at the fastest pace in six years. The measure which accounts for around 85% of responses remained unchanged at 56.8 topping estimates for a slight dip to 56.7. Job creation remained strong as rising backlogs of work signal increasing demand, however there is some initial signs of a reduction in selling prices that may translate into slightly weaker inflation.
German 2-year bund yields gained +3.2 basis points to -0.645% as a final reading for German GDP in the first quarter remained unchanged, expanding at +0.6% for the quarter and +1.7% year-on-year. Business optimism in the EU’s largest economy also rose following the prospect of further EU integration after Emmanuel Macron won the French presidential election decisively with the German IFO business climate index (MoM May) rising to 114.6 from 113 previously.
Oil prices gained with WTI crude oil up +1.46% overnight as the market looks towards a nine-month extension of the 1.2 million barrels per day production cuts by OPEC producers and a further 600,000 barrels by non-OPEC producers. The first chart below shows the price having risen over 11% from the May low and the question is now how much has the market priced in a nine month extension? Given rhetoric by OPEC officials, particularly Saudi Arabia over the past fortnight the overwhelming majority of this has largely been priced in.
The saying is “buy the rumour, sell the fact” and given the rally in oil over the past fortnight I would say this applies, implying we may see a near-term high in prices following an announcement on Thursday. That is unless we get a surprise decision from producers to deepen production cuts.
Locally the S&P/ASX 200 edged lower on Tuesday, down -11.01 points or -0.19% and this morning we look set to take a positive lead from Wall Street with ASX SPI200 futures up +11 points or +0.19% in overnight trading.
Data releases:
· BOJ Governor Kuroda Speaks 10:00am AEDT
· Australian Westpac Leading Index (MoM Apr) 10:30am AEDT
· ECB President Mario Draghi Speaks 10:45pm AEDT
· Bank of Canada Rate Decision 12:00am AEDT
· US Existing Home Sales (MoM Apr) 12:00am AEDT
· US Crude Oil Inventories (May 19th) 12:30am AEDT
· FOMC minutes (May 3rd) 4:00am AEDT
Chart 1 – WTI Crude Oil
