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Edward Bell - Commodity Analyst
Published Date: 05 June 2018
Turkish CPI inflation rose to a six-month high at 12.2% y/y in May, compared to 10.9% the previous month. Higher oil prices and a sharp sell-off in the currency, alongside a failure by the central bank to anchor expectations through tightening monetary policy more markedly, are among the key drivers. Lira weakness forced the CBRT to implement an emergency rate hike on May 23, followed by a further adjustment of its monetary policy on May 28. With a regular MPC meeting scheduled for June 7 there remains scope for further action by the CBRT given the latest inflation print and a still-weak lira. However, a moderate fall in m/m inflation, from 1.9% to 1.6%, alongside domestic political considerations, makes the outcome far from certain.
UK construction activity held steady in May according to the latest market surveys. The construction sector PMI data for May held at 52.5, unchanged from April and an improvement from weak levels earlier in the year related to poor weather conditions. The positive data for the UK economy may be relatively brief, however, as the new order component of the index was negative while input costs were elevated. A broader measure of the health of the UK’s economy, the services sector PMI, is out later today and expected to show a marginal improvement month on month. Services data also came out of China showing steady expansion in the sector. The Caixin services PMI recorded a level of 52.9 in May, the same level as a month earlier and generally in line with government data tracking the same industries. Services account for around half of China’s economy and will take an increasing share as the government pushes the economy away from export-driven, heavy industry toward more sustainable consumption-based growth.
Total factory orders in the US fell by 0.8% month on month in April as weak orders for large capital goods such as aircraft lagged. However, the underlying details of industrial demand in the US don’t appear too worrying as core capital goods shipments which is used in the calculation of GDP expanded by 0.9%, an acceleration from the previous month. Industry in the US may face higher input costs in the months ahead following the Trump administration’s imposition of steel and aluminium tariffs on trade partners.
Source: Bloomberg, Emirates NBD Research
The positive momentum from the end of last week continued to the start of the new week. Treasuries dropped across the curve as US stocks rose to their highest levels since mid-March. Yields on the 2y UST, 5y UST and 10y UST closed at 2.51% (+4 bps), 2.79% (+5 bps) and 2.94% (+4 bps) respectively.
Regional bonds drifted lower with the YTW on the Bloomberg Barclays GCC Credit and High Yield index rising +1 bp to 4.61% and credit spreads tightening 4 bps to 188 bps.
The AUD is trading lower against the other major currencies in the aftermath of the RBA holding interest rates at a record low of 1.50%. The AUD was troubled to find suitors despite a mild hawkish change in communication from the central bank which stated that “wage growth is appearing to trough”.
As we go to print, AUDUSD is currently trading 0.27% lower at 0.7627, not far above the 50 day moving average of 0.7607. We expect this level to be tested today with daily close below this level opening up the possibility of further declines towards the 0.7580, the 23.6% one year Fibonacci retracement.
This morning’s outperformer is the USD which has pared Monday’s decline to climb against the other major currencies in the build up to the G-7 summit. Currently, the Dollar Index is trading at 94.08 and looks poised to test 94.20, the 61.8% one year Fibonacci retracement, a level which has acted as a daily cap for the previous three trading days.
Developed market equities closed higher as optimism over economic growth in the US trumped fears over trade tantrum. The S&P 500 index added +0.5% and the Euro Stoxx 600 index gained +0.3%.
Regional markets closed higher with the DFM index and the Qatar Exchange adding +1.6% and +2.1% respectively. Gains in Qatari stocks were no account of continued interest from foreign investors following rebalancing of various EM indices. The DFM was led higher by gains in Emaar Properties (+2.6%) and Emaar Development (+4.5%).
Oil prices dropped sharply to start the week with Brent falling by nearly 2% to close at USD 75.29/b and WTI falling 1.6% to close below USD 65/b. The market appeared to be reacting to statements out over the weekend that Arab oil ministers pledged for more cooperation between OPEC and its partners in the production cut agreement, although they gave little indication what form that cooperation would take.
The deterioration in Venezuela’s ability to supply crude markets is continuing as PDVSA, the state oil company, warned customers it would only be able to supply 694k b/d in June compared with contracted obligations of nearly 1.5m b/d.
FX Week: JPY gains amid equity rout