It’s almost June
Citi’s month-end rebalancing model flags a strong USD sell signal against EUR and GBP at this month-end
“Our Asset Rebalancing Model notes a rotation from equities into bonds at May month end. The signal is moderately strong coming in at -1.4/+1.3 historical standard deviations (hist. std. dev.) for equities and bonds respectively.
The FX impact notes selling of USD against EUR and GBP at month end,” Citi notes.
Typically, month-end FX re-balancing flows is felt most going into the 4pm London fix on the last trading day of the month.
Highlights of the Beige Book released May 27, 2020:
- The next Fed decision is June 10
- Wage pressure mixed
- Pricing pressures varied but were steady to down modestly on balance
- Date collected on or before May 18
- In New York there were scattered signs of a pickup in early May
- Full text
This doesn’t tell us anything we didn’t know.
The overall summary is about what you would expect:
Economic activity declined in all Districts – falling sharply in most – reflecting disruptions associated with the COVID-19 pandemic. Consumer spending fell further as mandated closures of retail establishments remained largely in place during most of the survey period. Declines were especially severe in the leisure and hospitality sector, with very little activity at travel and tourism businesses. Auto sales were substantially lower than a year ago, although several Districts noted recent improvement. A majority of Districts reported sharp drops in manufacturing activity, and production was notably weak in auto, aerospace, and energy-related plants. Residential home sales plunged due in part to fewer new listings and to restrictions on home showings in many areas. Construction activity also fell as new projects failed to materialize in many Districts. Commercial real estate contacts mentioned that a large number of retail tenants had deferred or missed rent payments. Bankers reported strong demand for PPP loans. Agricultural conditions worsened, with several Districts reporting reduced production capacity at meat-processing plants due to closures and social distancing measures. Energy activity plummeted as firms announced oil well closures, which led to historically low levels of active drilling rigs. Although many contacts expressed hope that overall activity would pick-up as businesses reopened, the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery.
Report from Reuters
The White House is considering suspending Hong Kong’s preferential US tariff rate for Exports to the US in response to China’s planned security law.
If that’s the crux of the US response, then it’s not anything for markets to worry about. There’s talk of sanctioning Chinese individuals and companies but unless there’s something broader for the Chinese economy then it’s not going to tip the apple cart.
Keep the free money rolling
- German DAX +1.3%
- French CAC +1.5%
- Italy MIB flat
- UK FTSE 100 +1.1%
- Spain IBEX +2.3%
The DAX rose above the 61.8% retracement of the March drop today but closed back down below it.
Sharp drop in North American trade
The Australia dollar completed the coronavirus comeback yesterday as it completely recouped the March-April decline to trade back to where it was in mid-February.
Today the mood is AUD/USD isn’t so rosy, the pair has fallen 80 pips in the past couple hours after making a margin new high but failing to extend. Part of that is broad US dollar strength but the weakness is accelerating and that’s a negative signal for the risk trade.
There’s still some rope left in yesterday’s rally but we have crossed the 61.8% retracement of that move.
Gold falls to the low of the day
Gold sank through $1700 and continued down to a session low of $1694 in a $16 decline. It’s the third day of selling this week and is being helped along by a strong dollar today.
The drop wipes out the mid-may rally and puts gold back in the middle of the April range.
The better risk tone and big moves in stocks are sparking flows out of gold and into risk assets.
Technically, this looks like a false break or at the very least a retest of the old range.
If central banks are the drivers of this rally, you have to worry about a scenario like the Bank of Israel early this week, where they upgraded growth forecasts and hinted at a time on the sidelines. I can easily see the Fed following the same playbook and that would undermine the short-term case for gold. It’s the same thing on the fiscal side where the better mood will slow the appetite for spending.
That just reaffirms the message from Lagarde earlier
The forecast he is mentioning is between the ECB’s ‘medium’ and ‘severe’ scenarios, which Lagarde already made a similar mention to earlier here.
In any case, this sets up expectations ahead of their June meeting that all of this will be factored into the staff projections and that more stimulus may accompany it – as they rule out their ‘mild’ scenario from before.
Just be reminded that PEPP should meet its target some time around September or October, so the ECB should communicate an increase in the size sooner rather than later.
Despite the additional easing in nature, the reassurance should keep market participants satisfied that they are willing to do more to ensure financial conditions stay as they are. Remember, “close the spreads”.