Markets searching for new catalyst

5 June, 2018

U.S. equities kicked off the trading week with two indices, the Nasdaq Composite and the Russell 2000, hitting new record highs. This impressive performance is a continuation of Friday’s rally following the U.S. jobs report showing that the economy is firing on all cylinders. Easing fears from Italy’s political situation after the formation of a coalition government also revived appetite for risk. However, Europe’s problems are not over yet; although the U.S. jobs report beat forecasts it shouldn’t have been a big surprise given the improvement seen previously in the labor market. What surprises me the most is investor complacency towards President Trump’s decision on imposing steep tariffs on metals imported from the U.S.’s closest allies.

Trade wars cannot be ignored, and you don’t need a Ph.D. degree in economics to know that they will severely hurt the world’s economy. The only explanation for the lack of negative reaction from such headlines is that investors believe Trump will back away after extracting better deals from his trading partners. However, nothing is guaranteed here, and the risk of a tit-for-tat tariff spat converting to a full-blown trade war has increased significantly. Unless there are some positive announcements, I think investors will likely shift to a more cautious mode.

Currency markets were trading in tight ranges during Asian trade. The Euro fell slightly below 1.17, while the Pound and the Yen barely moved. The Aussie was the best performing currency yesterday, rising 1% against the Dollar. It was also unmoved by the RBA’s decision to keep policy unchanged.

On the data front, the Eurozone Services PMI is likely to confirm that the economy continued to slow down as it entered Q2. Meanwhile, the U.S. ISM Non-Manufacturing PMI is expected to show sustained expansion in the economy’s largest sector. This should be Dollar-positive overall, especially given that the Fed may start to consider accelerating the pace of interest rate hikes.

Oil prices recovered slightly from yesterday’s fall, but expectations of higher supplies from OPEC may continue to weigh on prices. WTI fell from a high of $72.83 recorded on 22 May to a low of $64.57 yesterday. Whether the fall in prices is just profit-taking or a change in trend will be determined on 22 and 23 June when OPEC members meet in Vienna.

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