It’s quiet out there. Well, except for that whole UK officially leaving the EU thing.
As outlined earlier this morning, Theresa May will make the UK’s split with the EU official on Wednesday, sealing the economic fate (literally, as they’ll be a hand delivered letter involved) of the British people and very possibly relegating the pound to also-ran status. Thanks, populism.
Overnight, the dollar and 10Y yields held onto Tuesday’s momentum which, all else equal, should probably support risk. Here’s SocGen’s morning take:
The British Government’s decision to trigger Article 50 and start the process of leaving the EU is making all the headlines, of course. But the wider market story is that yet again, volatility has collapsed. Both the Vix, and Deutsche Bank’s CVIC FX volatility index, are back below their 50, 100 and 200-day moving averages. The excitement that was caused by the failure of President Trump’s healthcare bill has been washed away as bond yields stabilise. A 2.42% 10- year Note yield is neither too hot nor too cold, consistent with a couple more rate hikes this year but not with the Fed’s famous dots that take rates to 3% in due course. Rates stay below the nominal growth rate of the economy and asset prices take comfort. Both the dampening effect on volatility and the over-correlation of financial markets are back as the dominant force behind markets. In FX, that’s a recipe for yieldhungry, risk-tolerant investors to take the lead.
As a reminder, Fed Vice Chair Stanley Fischer told CNBC yesterday that the median estimate for two more rate hikes this year “seems about right.” “That’s my forecast as well,” he added.
Sure, that sounds dovish, but markets hear what they want to hear and I suppose that’s led some folks to posit just the kind of Goldilocks scenario described by SocGen above. That is, yields just high enough to support the reflation narrative but a repricing higher that’s not dramatic enough to trigger a tantrum.
Speaking to reporters later Tuesday from West Virginia, Fed Governor Jerome Powell struck a similarly vague tone: “I’m not going to say we’ve achieved maximum employment, but we’re getting close to it. Inflation is still a little bit short, but not terribly short.” Whatever.
Treasuries were little changed in the overnight session and the dollar held its ground as markets clung to the reflation meme even as the prospects for Trump’s pro-growth policies look dimmer virtually by the hour.
Regional equities were mixed as traders and investors struggle for direction against a fraught geopolitical backdrop. Here’s a quick snapshot:
- Topix down 0.2% to 1,542.07
- Hang Seng Index up 0.2% to 24,392.05
- Shanghai Composite down 0.4% to 3,241.31
- Sensex up 0.4% to 29,519.45
- Australia S&P/ASX 200 up 0.9% to 5,873.52
- Kospi up 0.2% to 2,166.98
- FTSE 7329.43 -13.99 -0.19%
- DAX 12188.97 39.55 0.33%
- CAC 5049.49 3.29 0.07%
- IBEX 35 10343.40 -45.60 -0.44%
They’ll be more Fedspeak on Wednesday for you to parse for clues about the likely trajectory of rate hikes.
- 9:20am: Fed’s Evans Speaks on Economy and Policy in Frankfurt
- 11:30am: Fed’s Rosengren Speaks at Economic Club of Boston
- 1:15pm: Fed’s Williams Speaks to Forecaster’s Club of New York
Crude will be watching EIA data at 10:30 EST to see if the “official” numbers back up yesterday’s API 1.91 million bbl build.