USD, Yields Rally; Gold Hits 2018 Low; Futures Higher

May 21, 2018

Frankfurt (May 21)  European shares are edging higher on Monday, following a volatile Asian session that nevertheless saw most regional indices close in positive territory after US Secretary of the Treasury Steven Mnuchin said the US trade war with China is on hold. The question investors must be asking themselves now is whether this particular pause will be more meaningful than previous attempts to rebalance trade tensions. The dollar is following yields, including on 10-year Treasurys, higher, but US futures are currently heading up: the S&P 500, Dow and NASDAQ 100 futures are all pointing higher.

The STOXX Europe 600 rally was led by household goods makers and retailers, both buoyed by lower trade risk, however temporary. However, the diplomatic opening signaled by Mnuchin failed to reach Italian shares, which continue to take a hit from jittery local political headlines. The FTSE MIB plunged 2.1 percent in early trade, ahead of the populist Five Star Movement and right-wing League's meeting with President Sergio Mattarella to present him with a final government agreement. However, the Italian benchmark index later inched higher to pare most losses, minus 0.19 percent at the time of writing.

While clinching a final coalition deal may bring a semblance of stability to the southern European country, it also awakens old fears of a divided Europe, as yet one more euroskeptic government becomes a tangible reality, against a continental backdrop where other right-wing anti-EU parties have strengthened considerably since the Brexit vote of June 2016. Technically, the FTSE MIB is forming an intraday hammer, above the neckline of a February-March H&S bottom, demonstrating that there is demand at these levels.

The FTSE 100 hit a fresh record high on trade optimism, compounded by weakness in sterling—which stood about half percentage point lower in Europe's morning session.

Global Financial Affairs

Japan’s TOPIX slid 0.1 percent lower, after gaining almost 0.25 percent and fluctuating intraday. Prices are displaying signs of weakness, with today’s Shooting Star confirming Friday’s Hanging Man.

China’s Shanghai Composite added 0.65 percent to Friday’s rally on a rising gap, to bag a combined 1.9 percent gain. Shares listed on Hong Kong’s Hang Seng climbed 0.6 percent, retracing from an initial 1.45 percent jump.

South Korea’s KOSPI gained 0.2 percent, rebounding from a 0.5 percent loss and posting a two-day advance of 0.7 percent.

Australia’s S&P/ASX 200 ticked 0.1 percent higher, then dropped 0.25 percent to settle at minus 0.05 percent—posting a three-day decline of 0.40 percent.

The global equity rally seen this morning highlights investor willingness to bid prices up on the cease fire of the US-China trade tiff, after it weighed on shares this past Friday amid mixed signals on the ongoing trade issue. Safe haven assets performed unevenly on Friday; investors bought into Treasurys (thereby pushing yields back below 3.1 percent) but sold off the yen and gold.

Other geopolitical factors weighing on investors: South Korean president Moon Jae-in’s visit to Washington to discuss North Korea, and ongoing Brexit negotiations. However, since the Brexit referendum in June 2016, investors have preferred to focus on what they consider more relevant, or perhaps understand better—the economy. Market focus will therefore shift to minutes of the Fed's May monetary policy meeting on Wednesday, along with preliminary eurozone PMIs.

The dollar extended gains to its highest price since mid-December 2017 after Mnuchin’s statements, further helped by a tumbling euro, which hit its the lowest level year-to-date after Italy’s two populist parties unveiled their proposals for the country's next prime minister.

Technically, the EUR/USD is testing the December 12, 1.1718 support. Should It break that level, it would find no support until the November 7, 1.1553 level.

With the dollar strengthening again, emerging market currencies continue to be under pressure. The Turkish lira tumbled 1.1 percent and Indonesia's rupiah weakened, as the country's central bank vowed to continue to intervene in the forex and bond markets and an interest-rate hike last week failed to prevent a selloff. The Malaysian ringgit dropped for a ninth day—on course for its longest losing streak since November 2016.

Gold dropped to the lowest level this year, extending the penetration of a double-top neckline, implying a revisit to the $1,240 level.

US oil futures hit $72.00 and are headed for their highest close in more than three years, after the trade war pause boosted investor risk appetite. However, the stronger dollar is currently pushing prices back down to $71.72, extending a consolidation to its 8th day.

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