CONSOLIDATION IN RANGES AS MARKET BRACES ITSELF FOR NEXT WEEK, OIL ENDS A 3-DAY RALLY

  • Market sentiment may continue to remain weak and ranges will consolidate as the reality of the magnitude of the UK referendum on EU membership and FOMC meeting begins to hit investors
  • Developed markets interest rates may continue to dominate conversation as rates position lower on event fears
  • USD may strengthen against most G10 and EM currencies
  • USDJPY held near the top of 106.85 to 107.30 range on short covering, yet with Fed next week and Brexit fears high, traders are vigilant for a quick reversal
  • USDSEK exhibited a strongly bullish, engulfing pattern on the daily charts suggesting further upside
  • Emerging markets weakness, led by oil and metals despite solid demand and supply disruption worries suggests a $52.86 peak
  • We do not expect the BoJ to meaningfully adjust monetary policy next week as data continues to disappoint policy makers we are inching towards a fiscal version of “helicopter money”
  • Due to impending desperate action by Japanese policymakers we like a long gold, short JPY
  • Oil: We feel that selling pressures are growing as oversupply continues and an agreement from OPEC members to stop it is not yet on the table
  • $50 mark is a key price for OPEC as it would keep its market share intact and we should not see it going higher within the next few weeks. We would instead target a retracement towards $45

Asian equity markets declined for a second straight day as commodities fell on the back of lingering growth and fed policy. The reality of the magnitude of the UK referendum on EU membership and FOMC meeting is beginning to hit investors. We anticipate sentiment to remain weak and ranges to consolidate. Developed markets’ interest rates continue to dominate conversation as rates positioned lower on event fears. UK, German and Japanese 10-year bond yields fell to a historical low. 10yr JGB yields fell to -0.155% and investors now have to go out 20 years on Swiss government bonds to secure a positive return. The Nikkei and Hang Seng declined -0.60% while the Shanghai composite remained closed for the Dragon Boat festival. Notably, MSCI will decide on whether to include China’s A shares in the index on 15th June. The USD strengthened against most G10 and EM currencies, as the DXY rose to 94.21. The AUDUSD reversed yesterday’s gains from 0.7505 to 0.7407 as commodities sold off (despite reports that Chinese demand for crude is on the rise). USDJPY held near the top of the 106.85 to 107.30 range on short covering, yet with Fed next week and Brexit fears high, traders are vigilant for a quick reversal.  Finally, USDSEK exhibited a strongly bullish, engulfing pattern on the daily charts, suggesting further upside. In emerging Asian markets, KRW and MYR led the decliners against the USD. Weakness in commodities was led by oil and metals as Brent declined to $51.61, despite solid demand and supply disruption worries, potentially suggesting a $52.86 peak.

Japan reports indicate that producer prices increased 0.2% m/m in May, above an expected read of 0.0% (-0.4% prior read). Export prices came in flat on a monthly basis, but -4.5% y/y, import prices rose 0.3% m/m, putting the yearly read at a massive -13.1%. Clearly this significant deflation will not make for a happy BoJ. However, we do not expect the BoJ to now meaningfully adjust monetary policy next week (higher probability of a July easing and fiscal measures). As data continues to disappoint (highlighted by the collapse of machine tool orders) policy makers, we are inching towards a fiscal version of “helicopter money”. Due to impending desperate action by Japanese policymakers we favour a long gold, short JPY to harness this opportunity.

Yann Quelenn, market analyst: Oil ends a 3-day rally: WTI oil’s low 2016 prices now seem like a distant memory. On February 11 one barrel of WTI Crude oil was worth $26.05. Since then, the rise has been continuous despite some bearish retracement such as at the end of March when it dropped from $41.90 to $35.24 two weeks later. As long as crude prices increased, volatility also declined and while it was common to see 10% change in a single day, this is no longer the case as selling pressures grow.

Although the price of a barrel is now above $50 we believe that fundamentals at this level are quite fragile. Oversupply continues and an agreement from OPEC members to stop is not yet on the table. At the OPEC meeting on June 2, production levels were maintained as members claimed that the market is in a “rebalancing process”. Yet at $50 a barrel, shale gas production is profitable again. For the time being the wildfires in Alberta, Canada as well as the attack on American producer Chevron in Nigeria are reducing the supply. The loss from these two independents is assessed to be between 800’000 barrels and one million barrels per day. From our vantage point, the $50 mark is a key price for OPEP as it would keep its market share intact and we should not see it going higher within the next few weeks. We would instead target a retracement towards $45.”—

Today traders are expected to see UK construction output, France manufacturing production, the Canadian employment report and US Michigan Sentiment index. With the Fed policy decision, BoJ monetary policy meeting and China real activity data looming next week, we anticipate liquidity conditions to thin and ranges to contract.