The optimism from the enthusiastic employment report last Thursday quickly faded as the new trading week began, with equities ceding the majority of Thursday’s gains as the S&P slipped 0.39%. Whether it was nervousness around escalating tensions between Palestine and Israel on the the Gaza strip, or skepticism surrounding the underlying strength between full and part time jobs with the June employment report, risk assets traded with an offer tone throughout the day as the VIX popped above the 11% handle and US treasury yields dove lower.
Currency markets were fairly quiet, though the Loonie had a volatile day after it was unable to move higher on the back of a stronger than expected building permit report, and had it’s wings clipped after purchasing manager activity contracted for the second consecutive month. Not helping the Loonie regain its footing was the fact that the BoC’s quarterly loan officer survey showed that export-intensive businesses had yet to experience a strong and sustained pick-up in demand from the relative weakness in the Loonie earlier in the year, highlighting skepticism that Poloz’s weak Loonie strategy can be a panacea for Canada’s export sector.
The overnight Asian session experienced some follow-through from the sell off on Wall Street, with Yen strength weighing down the Nikkei as it dropped by 0.42%. Japan’s larger than expected current account surplus for May that was released overnight helped the Yen grind higher against the big dollar throughout overnight trade, with USDJPY slipping through the 200-day moving average, though the pair has managed to find support in the high-101s. Although Japan’s trade balance is still in a much larger cumulative deficit than last year due to the deterioration in the Yen making imported goods more expensive, the better current account surplus aided by a smaller than expected trade deficit for May continues to add to the concern the Bank of Japan will shy away from any further stimulus measures this year, thus making it a tough slog for the JPY bears.
European equities have not fared any better than their Asian counterparts this morning, with the major bourses under pressure as it has been reported that Germany’s second largest bank has agreed to a settlement of at least USD $500mln for breaking US sanctions and transferring money through its American operations on behalf of countries that are blacklisted by the United States. The significance of this settlement is the crackdown on money laundering has now shifted from France and BNP to Germany and Commerzbank, as the German government actually owns 17% of the lender, causing concern more probes and indictments could inflame diplomatic tensions between Washington and Berlin.
Heading further West from mainland Europe, the Pound is struggling to regain its ground after a sharp drop this morning as a result of much worse than expected manufacturing and industrial production numbers. Instead of modest increases for the month of May as expected, manufacturing and industrial output dropped by 1.3% and 0.7% respectively, causing GBPUSD to break to the downside through 1.71. Cable has since managed to recover a good portion of its early losses and is now only modestly weaker on the day, as traders saw the partial wash-out as a good opportunity to establish long positions. One bad month of output activity is not enough to leave investors questioning how this will affect the BoE’s methodology around slack in the economy, as another monthly rise would have been the largest string of unbroken growth since 1997. We would argue that price action will be fairly subdued for Sterling over the rest of the week as it is unlikely we see any change in policy at the BoE meeting on Thursday, thus leaving investors waiting until the minutes are published to receive more colour.
Heading into the North American open, equity futures are echoing the softness witnessed around the globe, with the S&P poised to extend its losses for a second consecutive session. Hydrocarbons are also trading with some weight to their tapes, as Brent slips below $110/barrel despite Israel targeting strategic Hamas targets on the Gaza Strip along with mobilizing troops for a potential ground invasion. USDCAD is essentially flat from yesterday’s close after a failed attempt at re-taking the 1.07 handle, which is a crucial level that will need to be ceded in order for the pair to make another break higher. A weak employment report for the Canadian labour market on Friday could provide the tinder to snap USDCAD above the key resistance level, but the greater pivot for direction will be the Bank of Canada policy meeting next week.
The remainder of the session is light from an economic data perspective, though at10:00EST we will get further information on the American labour market with the May JOLTS report. Confirmation the labour market is on the road to recovery has been well documented by strong Non-Farm Payroll readings over the second quarter, and further confirmation is likely to be received with the amount of job openings continuing to increase as firms look to expand their work forces in anticipation of increased demand. A fourth consecutive month with over 4M job openings will be something not experienced since early 2008, and likely to provide further confidence the second quarter is on track to witness a strong rebound from the contraction registered in the first three months of the year.
Further reading:
First Fed hike likely around Q2 2015, ECB QE seems more likely
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