Financial market research and analysis

The trading week started with a mixed risk appetite in Asia. The Hang Seng index gained up to 1.25% after Hong Kong’s chief executive Carrie Lam delayed the fiercely disputed extradition law on Saturday. Still, millions gathered in Hong Kong on Sunday asking for the complete withdrawal of the bill and Lam’s resignation. Lam could well succumb to pressure and step down.

But the Asian equities failed to gain traction and reversed gains by the mid-day. Chinese mainland stocks turned negative, as Nikkei turned flat into the lunch break.

Still, the Swiss franc and the Japanese yen were the only losers against the US dollar in Tokyo. Gold eased to $1336, after hitting $1358 on Friday.


US futures hint at recovery ahead of Fed decision

The Dow (+0.26%) and the Nasdaq (+0.44%) futures hint at a positive start in New York; the US stocks should recover a part of Friday’s losses, recorded after the US retail sales data showed a solid activity in May getting investors to doubt about their expectations for a Federal Reserve (Fed) rate cut in July. A single data point could momentarily ease, but not reverse the expectations of two, or even three Fed rate cuts over the next twelve months. Due today, the US Empire Manufacturing read may bring the Fed doves back in charge before Wednesday’s policy decision, if the June data confirms a decline to 11.0 from 17.8 printed a month earlier.

The Fed is expected to announce no policy change at this week’s FOMC meeting, yet investors are willing to hear more about what’s cooking in the coming months after the Fed Governor Jerome Powell hinted at an eventual policy easing at the beginning of June. But what if the markets misinterpreted Powell’s words? It is well possible that Powell meant a softer policy action than what is being priced in by the markets. Hence, a less dovish policy stance could give way to a sharp correction in US treasury markets and the US dollar later this week.

The US 10-year yield returned above the 2.10% mark following Friday’s positive data; the US dollar gave back a part of the sudden and sharp gains recorded on Friday.


Softer UK inflation to ease hawks into the BoE meeting

Elsewhere, the Bank of Japan (BoJ) and the Bank of England (BoE) will also announce their policy verdicts on Thursday. BoJ’s Kuroda has already warned that the softer Fed expectations, hence a stronger Japanese yen, could lead to more stimulus in Japan.

In the UK however, the situation is not as clear. While the rising inflation since the beginning of the year calls for a more hawkish BoE, Theresa May’s premature replacement brings along renewed uncertainties regarding the Brexit negotiations. Therefore, the BoE should continue giving support to the UK financial markets in an effort to improve the mood among investors and to temper the price volatilities as much as possible.

Due on Wednesday, the data should confirm that the inflation in the UK may have eased to 2.0% y-o-y in May, as the retail sales including auto fuel may have contracted 0.5% over the same month. A softer inflation read should allow the BoE to keep its interest rates at the current levels for an extended period. The BoE is expected to maintain the policy rate unchanged at 0.75% and its asset purchases target steady at 435 billion pounds at least until mid-2020.

In theory, even with a less hawkish BoE, the prospects of softer US and European yields should lead to a stronger pound. But apparently, the UK’s political uncertainties and the Brexit related fears keep currency traders away from the pound sterling.

Cable dived to 1.2580 on Friday, the lowest levels since the beginning of the year; the euro-pound consolidates near 0.89, a five-month high.

The second round for the Conservative party leadership will be held on June 18 and the following days. One candidate will leave the race until only two remain. Boris Johnson, who has a strong will to leave the European Union with or without a deal, is still the favorite candidate to become the UK’s next Prime Minister.

The cheap pound remains appetizing for UK stock investors, however. The FTSE futures (+0.30%) hint at a positive open in London, as the better global risk appetite and the recovery in oil prices will likely encourage investors to purchase cheapened pound-denominated UK stocks.

The FTSE 100 is expected to open 20 points higher at 7366p.