Financial market research and analysis

Wall street extended gains overnight on rate cut hopes and optimism that the US and Mexico are moving closer to a resolution over immigration issues. This could see the US hold back on imposing new tariffs on goods.

The prospect of some good news over trade turned US financial markets around. Asia followed suit and European bourses are pointing to a stronger start on the open. There is a good chance that the markets are getting ahead of themselves here. History tells us that there have only been a limited number of occasions where Trump hasn’t stuck to his word over a trade tariff threat. Mexico is pushing for more time but we are less convinced than the markets that Trump will grant it.

Oil traded 1% higher in early trade on Friday, moving away from a five-month low hit earlier in the week. Optimism that Trump could delay the Mexico tariffs, in addition to the prospect of OPEC continuing output cuts helped pick oil prices up from the oversold territory of earlier this week. That said, the outlook for oil remain dim given the ongoing trade dispute with China and fears of a global downturn.

NFP & Fed Rate Cut?

All eyes are now on the US nonfarm payroll report. 175,000 jobs are expected to have been created in May, below the 263,000 created in April. Unemployment is expected to remain steady at 3.6%, whilst average hourly earnings are forecast to tick higher to 0.3% m/m, up from 0.2% in April.

On the one hand the ADP private payrolls report was very weak; the weakest in a decade. On the other hand, the employment component of the ISM non-manufacturing report was notably good, an encouraging sign for the US Labour Departments numbers. A stronger than forecast headline reading will serve to remind the market that it has got carried away with the idea of the Fed cutting rates. In this scenario we could see the dollar move higher, whilst stocks give back some recent gains.

In some ways this NFP figure will be a gateway for the heightened expectations of a US rate cut. The near term direction for the markets depend on whether the gate is open or shut. Should the NFP disappoint, expectations of a Fed cut potentially as soon as June or July could rise. The CME FedWatch shows the markets are seeing a 22% probability of a hike in June and a 55% probability of a hike in July. Increases in these probabilities could see the dollar fall further, stocks could surge as low interest rates are beneficial for businesses and gold could shine brighter than it has been over the last few days, targeting resistance at $1344.