Financial market research and analysis

Protests against the extradition bill in Hong Kong escalated and painted the equity markets in red. Investors are increasingly worried, because Hong Kong’s privileged status is now at stake; the extradition bill, if passed, will increase risks for businesses and employees, encouraging some of them to quit HK eventually. Hong Kong’s lawmakers canceled the debate today, but dozens of protesters are still in the streets.

In the US, the softer inflation read revived the bets of a Federal Reserve (Fed) rate cut in July. The 10-year treasury yield softened below 2.10%. But, even the prospects of cheaper liquidity couldn’t cheer up the investors on Wednesday’s session. The US dollar index remained capped by the 100-day moving average (97.00) and the US stocks closed in the red.

Donald Trump’s threats on Merkel regarding Germany’s support for a gas pipeline from Russia further eroded the market mood, as Russian spokesman Dmitry Peskov accused the US for ‘blackmailing’ and ‘unfair competition’.

Hang Seng index fell up to 1.75% in the early hours of trading; Nikkei (-0.59%) and Topix (-0.92%) declined on stronger yen. Shanghai’s Composite (+0.12%) eased before reversing losses by mid-day. FTSE (-0.20%), Dax (-0.26%) and Dow (-0.21%) futures remained offered, hinting at a softer open in London and New York for the second day.

FTSE is seen 20 points lower at 7347p at the open. A cheaper pound may not be enough to increase the appetite in UK stocks this morning; energy stocks will likely feel the pinch of falling oil prices. Brent crude trades at the lowest levels since the beginning of this year, just below the $60 per barrel, after the Energy Information Administration (EIA) data showed on Wednesday that the US crude inventories unexpectedly rose 6.8 million barrels last week, reaching a 20-month high due to weak demand. Traders are waiting for OPEC to announce an extension of the production cuts, some hope for deeper cuts, as the current deal will expire end of June.

Tories are preparing to vote today, on ten candidates who are brave enough to become the UK’s next Prime Minister and to escort the country outside the European Union ideally by the October 31st deadline. The candidate with the weakest vote count, and those with sixteen votes or below will leave the race. The pound is expected to remain under pressure, as Cable failed to consolidate above the 1.27 level although Boris Johnson, a convinced Brexiteer candidate, said that he is not ‘aiming for a no-deal outcome’.

The euro slipped below the 1.13 mark against the US dollar. The European industrial production data, due today, could confirm the expectations of a faster contraction in April (-0.5% m-o-m versus -0.3% printed a month earlier). Meanwhile, the EU and Italy will resume discussions over the country’s budget defiance. The growing risk for disciplinary action against Italy could encourage a deeper downside move in the euro complex. The EURUSD is expected to see support at 1.1250/1.1258 (100-day moving average / major 38.2% retracement on May – June rebound), if broken, should indicate the reversal of the two-week bullish trend and pave the way toward the 1.12 mark, the major 61.8% retracement.

Provided the unpromising headlines across the globe, investors believe that it may be wiser to move toward the safe haven assets. The yen (+0.27%) has been the biggest winner against the US dollar in Tokyo for the second consecutive day, the Swiss franc (+0.13%) gained after three-straight-day of decline and gold (+0.30%) is preparing to test the $1’340 resistance.


SNB Jordan’s low-rate headache

The Swiss National Bank (SNB) will give its police verdict today and is expected to maintain its three-month libor target at -1.25% to -0.25%. Although the SNB says that the bank is ready to pull the rates lower, with a deeply negative sight deposit rate at -0.75%, Thomas Jordan’s team has its hands tied in face of an increasingly dovish policy environment across the board. Moving the rates lower has serious consequences for the market, such as an increased pressure on banks, pension funds and the housing prices. Therefore, any additional move on the dovish side should be thought thoroughly. An undesired appreciation in the Swiss franc would pretty much be the only trigger for an eventual rate cut for the SNB. The franc trades at its highest levels against the euro in two years and the strong franc is detrimental for Swiss businesses beyond borders, making the Swiss exports more expensive than they already are.

But investors are not ringing the alarm bell just yet, in that, the actual dovishness also increases the risk appetite bringing investors to sail away from the franc and to adventure among riskier investments. Anything that could turn investors’ attention away from the franc should take the pressure off the SNB’s shoulders and save at least some time for the SNB.

A policy normalisation, on the other hand, has perhaps become a faraway dream for the SNB. The bank will certainly not raise its rates before its European neighbours raise theirs. The latter would not happen any time before mid-2020 according to the European Central Bank (ECB) President Mario Draghi. Hence, the SNB will likely remain seated on the current negative rates at least until 2021.