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Markets buoyed by central banks and US/Mexico deal

We're trading back in the green at the start of the week as central banks continue to provide comfort for investors and a border deal between the US and Mexico eases trade concerns.

While market expectations for interest rate cuts still seem a little overdone – probability of three Fed cuts this year has exceeded 50% – the perceived willingness of officials to engage in loosening after years of hikes has settled otherwise shaky markets. Markets have been on a good run for the last week and that looks set to continue at the start of this, which could further comfort investors who's nerves may have been tested over the last nine months.

The deal between the US and Mexico to avoid tariffs will naturally be helping to boost investor sentiment. While this wasn't a tariff spat that had yet got underway, the risk was very real and could have escalated very quickly. Coming at a time when relations with China are already strained and massive tariffs have already been imposed, investors were understandably uneasy.

If the Trump team can make headway with China at the G20 later this month, investors will be far happier. Until then and in the event that the meeting this month is unsuccessful, the onus will be on the central banks to fill the void which would make cuts all the more likely.

Perhaps that's why investors aren't convinced about a rate cut this month – less than 20% priced in – as they believe it's going to be highly influenced by the outcome of the Trump/Xi meeting.

The cross extends bull-run to new nearly five-month high at 0.8913 on Monday, as pound was hurt by significantly weaker than expected UK data that added to negative sentiment over Brexit concerns and run for the successor of Theresa May in PM position.

Last week's break and close above important Fibo barrier at 0.8868 (61.8% of 0.9113/0.8471) was bullish signal, reinforced by formation of 20/200SMA golden-cross.

Rising 10SMA continues to track the advance since 8 May and underpins the action (currently at 0.8856).

Bulls eye targets at 0.8962 (Fibo 76.4%) and 0.9000 (psychological), but overbought stochastic and RSI warn of price adjustment (so far without firmer signals).

Dips should be ideally contained by rising 10SMA, but extensions towards pivotal 20 SMA (0.8814) cannot be ruled out and expected to provide better opportunities for re-entering bullish market.

Res: 0.8913, 0.8962, 0.9000, 0.9061
Sup: 0.8880, 0.8868, 0.8856, 0.8814

Markets buoyed by central banks and US/Mexico deal

We're trading back in the green at the start of the week as central banks continue to provide comfort for investors and a border deal between the US and Mexico eases trade concerns.

While market expectations for interest rate cuts still seem a little overdone – probability of three Fed cuts this year has exceeded 50% - the perceived willingness of officials to engage in loosening after years of hikes has settled otherwise shaky markets. Markets have been on a good run for the last week and that looks set to continue at the start of this, which could further comfort investors who's nerves may have been tested over the last nine months.

The deal between the US and Mexico to avoid tariffs will naturally be helping to boost investor sentiment. While this wasn't a tariff spat that had yet got underway, the risk was very real and could have escalated very quickly. Coming at a time when relations with China are already strained and massive tariffs have already been imposed, investors were understandably uneasy.

If the Trump team can make headway with China at the G20 later this month, investors will be far happier. Until then and in the event that the meeting this month is unsuccessful, the onus will be on the central banks to fill the void which would make cuts all the more likely. Perhaps that's why investors aren't convinced about a rate cut this month – less than 20% priced in - as they believe it's going to be highly influenced by the outcome of the Trump/Xi meeting.

Oil traders encouraged by Saudi output cut confidence

Oil prices have been given a lift in recent days, with various factors feeding into the gains. Whether that's the improved overall risk appetite in the markets, US/Mexico developments or an acknowledgement from the Saudi oil minister that an extension to the output cut is almost guaranteed, the news is bullish for oil prices. It also comes at a time when oil prices needed some good news, having fallen more than 15% over the course of a couple of weeks.

This likely contributed strongly to Khalid al-Falih's confidence in a deal, with reports previously indicating that Russia was less enthused about the idea. Of course, price is a major factor in this and the rapid decline may have quickly changed that. This also comes at a time when the US is setting new records on output, which will be frustrating members of the cartel and its new allies but at the same time reinforces the need for the cuts as price would otherwise be substantially lower

EUR/USD has edged lower in the Monday session. Currently, the pair is trading at 1.1306, down 0.24% on the day. German banks are closed for Whit Day. On the release front, there are no German or eurozone events. In the U.S., the sole event is JOLTS Job Openings, which is expected to tick up 7.50 million.

The euro enjoyed an outstanding week, with gains of 1.5%. This marked the strongest weekly gain since August. The currency posted considerable gains on Friday, after a dismal nonfarm payrolls report for May. The economy created only 75 thousand jobs, down from 263 thousand a month earlier. Wage growth was unchanged at 0.2%, shy of the estimate of 0.3%. Despite these soft job numbers, the U.S. economy remains in far better shape than the eurozone, so the last week’s spike could be short-lived.

The message from last week’s ECB policy meeting was dovish, yet the euro still managed to post gains. The ECB surprised the markets by revising its forward guidance, saying that it would not raise interest rates before the middle of 2020. Previously, the bank had said that it would not hike rates prior to the spring of 2020. The delay is a response to weak economic conditions in the eurozone, as the global trade war has taken a toll on manufacturing and exports in Germany and the rest of the bloc.

As expected, ECB President Draghi said that ECB will pay banks to borrow funds from the central bank, if the funds are passed on to consumers and small businesses. This is a stimulus measure with the aim of boosting spending in the private sector. The bank upwardly revised its 2019 outlooks for growth and inflation. In March, the ECB forecast GDP at 1.1% and inflation at 1.2% – these were revised to 1.2% and 1.3%, respectively.

The dollar regained traction on positive news about US/Mexico trade conflict and opened with gap-higher on Monday, recovering all losses from last Friday, caused by disappointing US labor data.

Fresh advance probes above the top of five-day congestion , but faces strong headwinds from falling 10SMA (108.66) which so far capps upside attempts.

North-heading daily stochastic and RSI support but rising bearish momentum weighs and offsets positive signals. Sustained break above 10SMA would signal further recovery and expose Fibo barriers at 108.90 (38.2% of 110.67/107.81) and 109.24 (50% retracement, reinforced by descending 20SMA).

Conversely, failure to clear 10SMA would keep the pair within extended range and would increase risk of fresh attempts at recent lows at 107.80 zone.

Res: 108.66, 108.90, 109.24, 109.58
Sup: 108.36, 108.02, 107.81, 107.57

The euro is undergoing a bearish reversal against the greenback, with the pair slipping below the 1.1300 level during the European trading session. If the EURUSD pair continues to trade below the 1.1300 level, sellers may force price back towards the 1.1260 support level. Bulls need to move price back above the 1.1321 level to encourage fresh intraday buying interest.

The EURUSD pair is only bearish while trading below the 1.1300 level, key technical support is found at the 1.1260 and 1.1230 levels.

If the EURUSD pair trades above the 1.1300 level, buyers may test the 1.1321 and 1.1360 levels.

On Friday, the US dollar fell against a basket of major currencies due to a weak report on the US labor market for May. The number of people employed in the nonfarm sector was only 75K, while experts expected an increase by 185K. Average hourly wages increased by 0.2% instead of 0.3%. The unemployment rate remained at the same level of 3.6%. These statistics have strengthened forecasts that the Fed may reduce interest rates at upcoming meetings. The US dollar index closed in the negative zone (-0.52%).

Meanwhile, the Mexican peso rose sharply against the dollar after the US and Mexico concluded a migration agreement at the end of last week, preventing a tariff war and improving investors’ sentiment. The agreement will speed up the program known as the Migration Protection Protocols, which came into force in December. This program sends migrants who seek asylum in the United States to wait in Mexico while their cases are being considered. The agreement will mean that the United States immediately expand the implementation of the MPP across the entire 2,000-mile (3,220 km) southern border.

The "black gold" prices have been growing. At the moment, futures for the WTI crude oil are testing the mark of $54.20 per barrel.

Market Indicators

• On Friday, aggressive purchases were observed in the US stock market: #SPY (+1.00%), #DIA (+0.98%), #QQQ (+1.93%).
• The 10-year US government bonds yield rose slightly. At the moment, the indicator is at the level of 2.12-2.13%.

The news feed on 2019.06.10:

• Data on UK GDP at 11:30 (GMT+3:00);
• Manufacturing production in the UK at 11:30 (GMT+3:00);
• JOLTS job openings in the US at 17:00 (GMT+3:00).

Notes/Observations

• US announced a deal with Mexico to ensure that tariffs did not get imposed today (Monday) as planned; risk appetite finds some leg room
• UK Conservative leadership race formally begins ahead of Thursday's 1st round of balloting
• EU session quiet session with German, Swiss, Austrian, Danish and Norwegian markets closed for Whit Monday

Asia:

• G20 Finance Ministers and Central Bank joint communique: Pledge to use all the policies they can to protect global growth from disruptions due to trade and other tensions; risks from trade and geopolitical tensions are "intensifying"
• China May Trade Balance registers a larger surplus as components diverge ($41.7B v $23.2Be); Exports Y/Y: +1.1% v -3.8%e; Imports Y/Y: -8.5% v -3.3%e
• China May Foreign Reserves: $3.100T v $3.090Te as gold holdings rise for a 7th straight month
• Japan Q1 Final GDP unrevised (YoY: 2.2%)
• BOJ stated that there was no debate on its policy at G20 Finance Minister meeting; G20 reaffirmed commitment to us all policy options if risks materialized. No talks about specific measures for each country
• Vietnam to impose higher penalties for smugglers transferring Chinese goods through Vietnam to US to circumvent US tariffs

Europe/Mideast:

• ECB policymakers said to be open to cutting rate if growth weakens in the remainder of 2019, cites sources; Notes the case for more quantitative easing (QE) is less clear
• Some ECB staff members said to see risk that inflation expectations were de-anchored and had fallen to a record low. Concerned that situation could force the ECB to dig deeper into its stimulus toolkit
• ECB Weidmann (Germany): Germany economy could decline 'slightly' in Q2, stimulus package not needed despite economic dip. US/China trade dispute could reduce global trade by 1% in the mid-term.
• ECB Visco (Italy): Rise in the Euro currency had to do with interactions with US rates, market had understood ECB correctly. If trade tensions had effect on demand it would be more difficult to deliver on mandate.
• BOE's Haldane: acting early with a rate rise would insure against the need for bigger rate hikes in the future; time is nearing when a small rise in interest rates would be prudent
• IMF Chief Lagarde: The principal threat stems from continuing trade tensions. IMF estimates the tariffs could reduce the level of global GDP by 0.5% in 2020, or ~$455B.

Americas:

• President Trump: US had reached an agreement with Mexico; tariffs were "indefinitely suspended"; Mexico had agreed to "take strong measures to stem the tide of migration"
• US/Mexico joint statement on immigration agreement: Mexico agreed to take unprecedented steps to increase enforcement to curb irregular migration; talks on additional measures to be completed in 90 days. Mexico would deploy National Guard throughout Mexico with a priority on its southern border, deployment to begin on Monday, Jun 10th
• President Trump tweet noted that Mexico agreed to immediately begin buying large quantities of agricultural products
• US Treasury Sec Mnuchin stated that he expected that any major progress in resolving trade issues would likely come at a meeting of Presidents Trump and Xi during the G20 summit in late June in Osaka

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 +0.20% at 378.24, FTSE +0.52% at 7,369.50, DAX +0.77% at 12,045.38, CAC-40 +0.29% at 5,379.38, IBEX-35 +0.28% at 9,262.11, FTSE MIB +0.15% at 20,391.50, SMI +0.72% at 9,751.80, S&P 500 Futures +0.28%]
• Market Focal Points/Key Themes: European Indices trade higher across the board in a quiet session as many of the major markets including Germany and Switzerland are closed in observance of White Monday. Overall theme has been positive following gains in Asia and higher US futures after President Trump reached an agreement with Mexico to halt the threatened tariff rises. On the corporate front M&A activity has been rife with United Technologies and Raytheon announcing a mega merger over the weekend in an all stock transaction; Ramirent trades sharply higher following a takeover offer from Loxam; Thomas Cook gains on confirmation of discussion with Fosun following receipt of preliminary approach. In other M&A news Metso is to acquire McCloskey for C$420M, Mediaset and Mediaset Espana announced a combination through the formation of a new parent company, while Air Liquide to divest its industrial gas unit in China for undisclosed terms. Elsewhere Ferguson declines 6% after Q3 Revenue fell short of expectations, Avesoro Resources more than halves after a cut in production guidance following significant ore dilution at the Youga Gold Mine. Looking ahead notable earners include Thor Industries, Ferrelgas Partners and Lovesac company.

Equities

• Consumer discretionary: Ramirent [RMR1F.FI] +64.5% (to be acquired), Metso [METSO.FI] +2% (acquisition in Canada), Ferguson [FERG.UK] -4.5% (earnings; buyback program), Thomas Cook [TCG.UK] +15% (acquisition talks)
• Financials: Helical [HLCL.UK] +11% (responds to press speculation), Woodford Patient Capital [WPCT.UK] -3.5% (company's update), Allied Minds [ALM.UK] -2% (CEO steps down; trading update)
• Healthcare: MDxHealth [MDXH.BE] +17% (study result)
• Industrials: Airbus [AIR.FR] +0.5%, BAE Systems [BA.UK] +1.5% (Ratheon and United Technologies confirm merger), Fiat Chrysler [FCA.IT] +2.5% (discusses revival merger plan with Renault), M.J. Gleeson [GLE.UK] -9.5% (CEO steps down), Scapa Group [SCPA.UK] +10% (board update)
• Materials: Nyrstar [NYR.BE] +1.5% (unplanned planned production outage)

Speakers

• Italy PM Conte stated that he wanted to lead talks with EU over fiscal policy together with Econ Min Tria
• Japan PM Abe reiterated trust BoJ and was up to the central bank to decide monetary policy. Would introduce flexible macro-economic policies if risks materialized
• BOJ Gov Kuroda stated that it could deliver more big monetary stimulus if necessary; To ease further if momentum towards its 2% inflation targets was lost
• BOJ, PBoC and BOK governors said to have held a meeting to exchange views on economic and financial situation
• Saudi Energy Min Al-Falih: Russia was the only remaining country still undecided on OPEC+ extension deal. Could further discuss positions with Russia's Novak on global output deal at G20 in Japan later in June

Currencies/Fixed Income

• USD recovered some of its luster after Friday's soft US non-farm payroll data. President Trump's announcement of a deal with Mexico on immigration to avoid the implementation of a 5% tariff from today helped to put risk appetite back on the table.
• The G20 Finance Minister meeting over the weekend kept a cautious tone on the global growth front du to geo-political issues. Analysts noted that further monetary-policy easing was possible.
• EUR/USD back below the 1.13 level as weekend press noted that ECB might have to dig deeper into its stimulus efforts to combat low inflation.
• GBP was softer as the Conservative party began its leadership challenger. Weak April UK data was a headwind for the GBP currency.

Economic Data

• (FI) Finland Apr Industrial Production M/M: 2.2% v 0.2% prior; Y/Y: +6.5% v -1.0% prior
• (SE) Sweden Jun SEB Swedish Housing-Price Indicator: 32 v 27 prior
• (CZ) Czech May Unemployment Rate: 2.6% v 2.6%e
• (SE) Sweden Apr Household Consumption M/M: +0.2% v -0.1% prior; Y/Y: 0.0% v 0.4% prior
• (SE) Sweden May Budget Balance (SEK): +64.2 v -2.6B prior
• (IT) Italy Apr Industrial Production M/M: -0.7% v 0.0%e; Y/Y: -1.5% v -0.5%e; Industrial Production NSA Y/Y: +0.1 v -3.2% prior
• (TW) Taiwan May Trade Balance: $4.5B v $3.5Be; Exports Y/Y: -4.8% v -3.5%e; Imports Y/Y: -5.9% v -0.9%e
• (UK) Apr GDP M/M: -0.4% v -0.1%e; 3M/3M: 0.3% v 0.4%e
• (UK) Apr Industrial Production M/M: -2.7% v -1.0%e; Y/Y: -1.0% v +0.9%e
• (UK) Apr Manufacturing Production M/M: -3.9% v -1.4%e; Y/Y: -0.8% v 2.0%e
• (UK) Apr Construction Output M/M: -0.4% v +0.5%e; Y/Y: 2.4% v 3.3%e
• (UK) Apr Visible Trade Balance: -£12.1B v -£13.0Be; Trade Balance: -£2.7B v -£4.2Be; Trade Balance Non EU: -£4.6B v -£4.5Be
• (UK) Apr Index of Services M/M: % v 0.0%e ; 3M/3M: % v 0.2%e
• (GR) Greece May CPI Y/Y: 0.2% v 1.0% prior; CPI EU Harmonized Y/Y: 0.6% v 1.1% prior
• (GR) Greece Apr Industrial Production Y/Y: -0.8% v -2.8% prior

Fixed Income Issuance

• None seen

Looking Ahead

• (MX) Mexico May Nominal Wages: No est v 4.9% prior
• (IT) Italy Debt Agency (Tesoro) announcement on BTP auction for Thursday, Jun 13th
• (BE) Belgium Debt Agency (BDA) announcement for OLO auction for Monday, Jun 17th
• 05:30 (ZA) South Africa announces details of upcoming I/L bond sale (held on Fridays)
• 06:00 (TR) Turkey to sell 2024 I/L Bonds
• 06:45 (US) Daily Libor Fixing
• 07:00 (IN) India announces details of upcoming bond sale (held on Fridays)
• 07:25 (BR) Brazil Central Bank Weekly Economists Survey
• 07:30 (TR) Turkey May Real Effective Exchange Rate (REER): No est v 72.74 prior
• 08:00 (UK) Daily Baltic Dry Bulk Index
• 08:15 (CA) Canada May Annualized Housing Starts: 210.0Ke v 235.5K prior
• 08:30 (CA) Canada Apr Building Permits M/M: No est v 2.1% prior
• 09:00 (FR) France Debt Agency (AFT) to sell combined €3.6-4.8B in 3-month, 6-month, 9-month and 12-month Bills
• 10:00 (US) Apr JOLTS Job Openings: 7.496Me v 7.488M prior
• 11:30 (US) Treasury to sell 3-Month and 6-Month Bills

The Eurozone single currency appreciated about 0.48% in value against the Japanese Yen on Friday. The currency pair reached nearly the 123.00 marks during Friday's trading session.

The exchange rate was trading near a psychological resistance level at 123.00 during the first half of Monday's trading session.

Most likely, the EUR/JPY currency pair might make a brief retracement towards a support level set by the monthly pivot point at 122.37 today.

If the support line holds, bulls will continue their dominance in the market during the following trading session.

The Australian Dollar appreciated about 0.82% in value against the US Dollar on Friday. The currency pair tested the upper boundary of an ascending channel pattern at 0.7020 during Friday's trading session.

However, after hitting the resistance level as mentioned above, the exchange rate began to decline. By the middle of Monday's trading session, the pair has lost about 49 base points.

If the support level formed by the 200-hour SMA at 0.6957 holds, the currency exchange rate will make a pullback north.

Though, if the pair breaches the 200-hour SMA, a descending towards the bottom border of the channel pattern could be the next target for bearish traders.