The last trading day of the second quarter was anti-climactic, with equities waffling around unchanged for the majority of the session while the downward trend in the DXY continued. Although pending home sales came in better than expected with a 6.1% increase over the month of April, the S&P shrugged off the news to close the session essentially unchanged, with the DXY also unable to catch a bid as selling pressure pushed the USD-linked index to register its second-worst month on the year. Treasury yields were also little changed on the session after a knee-jerk spike in the 10-year on the back of the pending home sales number, cruising into the close at 2.53%. The Loonie eased into the holiday unscathed by a softer than forecast GDP number for April, though the 2.1% y/o/y print on expectations of a 2.3% increase did stall the momentum of the tumbling USDCAD.
The overnight session was more eventful, with a dearth of economic data that kept Asian markets busy as traders deciphered the news. The Japanese Tankan survey over the Q2 measurement period saw confidence among big manufacturing companies drop by a greater amount than expected, with the survey printing at 12 versus expectations of 15 and a drop from the 17 registered in Q1. While sentiment took a bigger hit than expected, capex forecasts among similar companies was a bright spot, as survey results showed an increase to 7.0% from the 0.1% in the previous quarter. The better capex numbers have helped blunt some of the Yen weakness, but USDJPY has managed to lift itself back into the mid-101s as the Tankan sentiment weighs on the Yen. Consequently, the weaker JPY has helped the equity performance of Japanese exporters, which have pushed the Nikkei to a gain of 1.08% on the session.
The Aussie is showing some life this morning, rallying into the mid-0.94s against the USD after strong Chinese Manufacturing PMI and the decision of the Reserve Bank of Australia to keep rates and their language around the economy and monetary policy unchanged. The official PMI Manufacturing report out of China showed that activity increased to its best level of the year, raising the probability that a rebound in the manufacturing sector will help China achieve its more balanced growth target this year. Better prospects for an economy that is a heavy importer of commodities has helped buoy sentiment with currencies such as the AUD and CAD, both of which are putting in modest gains ahead of the opening bell in North America.
Following with the theme of robust PMI reports, the UK manufacturing sector also reported strong increases in the headline reading, with the survey hitting 57.5, up from May’s 57.0 and better than the median forecast of 56.8. The solid manufacturing number has helped Cable build on its gains from yesterday, driving GBPUSD to highs not seen since late 2008. The pair has managed to rip into the mid-1.71s, where traders will be looking to confirm the breakout after the release of Construction PMI on Wednesday, followed by the Services PMI on Thursday.
As we head into the North American open, US equities look set to begin the second half of the year at record highs. Hydrocarbons are mixed after the Ukrainian government formally ended the cease-fire and resumed their campaign against the pro-Russian rebels; Brent has eased slightly and is trading hands in the low $112/barrel region, while WTI has found some bids and is edging into the high 105/barrel area.
The Loonie has been supported by strength in the commodity-currency bloc after the decent Chinese PMI print, but with a lack of economic data on the docket during the North American session, further direction will come from the US ISM Manufacturing PMI later today; likely to show continued expansion in activity for purchasing managers in the manufacturing sector. Should the reading see a print around the 56 mark, this would be the six consecutive increase from the previous month, and give those skeptical of a rebound in American GDP growth for Q2 something to ponder. It will also be a good idea to keep an eye on the employment sub-index within the report for clues as to how the hiring activity within the manufacturing industry may flow-through to the Non-Farm Payrolls to be released later the week. A strong print will likely help to soften some of the blow the Q1 contraction has exhibited on the big dollar, though it will likely be Thursdaywith the ECB meeting and NFP before we see the potential for any change in direction.
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