The old stock investing adage of “sell in May and go away” took a distinctively British turn last night, with UK Prime Minister Theresa May’s tenure on its last legs after her latest Brexit proposal was shot down in flames by all sides of the House. Her most recent bill is unlikely even to make it into Parliament. The much-beleaguered Game of Thrones writers needed to look no further than Westminster for inspiration it seems. The British pound (GBP) continued to sink, touching a four-month low at 1.2625 before staging a minor comeback to 1.2660.
With the Conservatives facing a complete wipeout in European elections today, and a hard Brexiter the leading candidate to replace Mrs May in a drawn out and convoluted leadership process, the UK is entering uncharted Brexit waters. Markets are having to reluctantly face the much higher odds of a hard Brexit, having been in denial for most of the year. Still, things aren’t all bad, despite the Brexit doom-mongers predictions, UK unemployment is at record lows, record numbers of Europeans are still coming to work there, and inflation is tracking nicely at 2%, driven by higher wages. This central bank Nirvana would probably have the Bank of England looking to hike rates if only that pesky Brexit weren’t still around.
Elsewhere, global equity markets entered into hand-wringing mode as a lack of news on US-China trade frictions this week has led to sentiment flip-flopping on a daily basis. The FOMC minutes provided no help as they clearly show the Federal Reserve is happy to be singing “patience” at the moment rather than trying to anticipate unknown unknowns and known unknowns. The Fed will react appropriately once both become known knowns. Markets could possibly take a leaf from their book.
Wall Street retreated slightly today, in contrast to yesterday, with the S&P 500 falling 0.30%, the Nasdaq dropping 0.45% and the Dow Jones easing 0.40%. The US dollar made modest gains overnight on light haven flows and no dovish insights from the FOMC Minutes. In a very low-to-no interest rate world, the US 10-year treasury yield of around 2.40% should ensure the dollar remains strong for much of 2019.
Turning to Asia, Jakarta was rocked by rioting following the official election results announcement yesterday. The Indonesian rupiah (IDR) sank to 14,525.00 against the dollar before rallying to 14,488.00 in the overnight session. Sitting in Jakarta, I can say the riots looked terrible on television but were small in scale and very localised, and the tensions will pass quickly.
Elsewhere, the Japan May Flash PMI has just been released, coming in at a disappointing 49.60 versus a consensus of 50.50. This is a rather large miss and may send some shivers through Japanese markets, which have, until now, avoided trade friction overspill.
Singapore releases inflation data at 13:00 local time (SGT) before the closely watched German GDP at 14:00 SGT.
FX
The dollar rose gently against most currencies, the exception being the Japanese yen (JPY), which benefitted from its own safe-haven flows. The most notable loser was the GBP, falling on political and thus Brexit woes. Having broken 1.2700, the technical picture looks cloudy with the market scrambling to reprice hard Brexit odds. The 1.2600 region looms as the next important support.
Regional currencies will likely follow the overnight lead and ease gently against the greenback. The IDR recovered nicely overnight, and the political worries caused by yesterday’s overblown coverage of the riots will probably fade quickly.
Equities
Asian stock markets are likely to follow Wall Street’s lead and track lower on trade-friction nerves. The Nikkei 225 is already 0.70% lower, post a poor flash PMI, and the ASX is down 0.20%.
As ever, the sentiment is vulnerable to headline flashes on trade, and we can expect this sort of flip-flopping in sentiment daily until more clarity emerges on any progress on the US-China trade front. In the bigger picture, equities may find upward momentum difficult on a consistent basis, while the trade picture and its knock-on effects remain so cloudy.
Oil
A giant build in US Crude Inventories overnight – 4.7 million barrels versus an expected drop of 600,000 barrels – torpedoed both Brent Crude and WTI below the water lines. Brent fell 2% to USD70.75 a barrel while WTI dropped a massive 3% to USD61.25 a barrel. The unexpected build-up – the second in two weeks – vindicates OPEC’s position somewhat, meaning production cuts should remain in place and the recent rally in prices is fragile.
The US is clearly pumping enough black gold to cover any typical shortfalls absent from a substantial supply disruption in the Middle East. If the trade frictions between the US and China escalate and/or drag on, the knock-on global growth will almost certainly make this equation worse.
Traders will be eyeing the USD70.00 a barrel level on Brent, but the real technical support rests at USD69.00. Technical support on WTI rests just below at USD60.50, with major support at USD60.00 a barrel. A break of USD69.00 and/or USD60.00 respectively implies a much more significant downward correction could be on the horizon.
Gold
Gold continues to be the investment that time forgot, finishing unchanged overnight at USD1,274.00 an ounce. In the face of political and economic uncertainty, gold price action continues to be underwhelming with eager sellers on any sort of rally.
The USD1,265.00 region continues as critical support with a daily close below implying a much deeper correction for the beleaguered precious metal is ahead.
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