Article / 20 May 2016 at 7:00 GMT

Morning Markets: Fed cranks up June speculation

Former managing editor, / Saxo Bank



  • Germany April Producer Price Index (0600 GMT)
  • Euro area March Current Account (0800 GMT)
  • Federal Reserve board of governors member Daniel Tarullo speaks (1300 GMT)
  • US April Existing Home Sales (1400 GMT)

The clamour for a rate hike in June grew overnight after relative New-York Fed dove William Dudley did nothing to douse the fire. The prospects for a hike have more than doubled from earlier in the week to 32% after Dudley warned that markets were underestimating the probability of policy tightening, sending Wall Street into a spin.

Asian markets were initially cowed but then shrugged off the latest speculation to return to positive territory, partly fueled by rebounding oil prices which were both north of $49/barrel in the hur before the European session starts. US benchmark WTI's discount to Brent has been virtually wiped out in the process as oil production facilities continue to face a threat from wildfires raging through Canada's Alberta province.

Dollar strength is still underpinning forex markets but the greenback is once again boxing clever around its major peers as global finance ministers gather in Tokyo for the G7 meeting. Sterling's startling rally midweek had GBPUSD just above 1.46 at 0627 GMT while USDJPY and EURUSD are both creaking under the dollar weight. Gold is struggling for traction against the dollar muscle.

The Eurozone March current account print this morning might move the needle on EURUSD a tad, but it is far more likely that yet more talk of a rate hike when Fed member Daniel Tarullo speaks this afternoon will be decisive.

Expect the message on June to be re-emphasised again. And, while the Fed can caveat all it wants, this wave of enthusiasm for a move could see its somewhat fragile credibility once again on the line if it ultimately fails to deliver if not in June, then at least at some point in the summer.

Market signals

Asian session

  • After an early dip, Asia shrugged off concerns about the dismal performance on Wall St
  • Firmer crude oil prices were a positive factor in Asian markets
  • Japan's benchmark Nikkei 225 lifted into positive territory after an early drop
  • The NIkkei 225 was up by a 034% to 16,703.77 at 0515 GMT
  • China is upset over a hefty US tariff on steel: The Australian Financial Review
  • US/China friction over trade, FX and defence is a threat to global markets, says the AFR
  • China's Shanghai Composite was down 0.1% to 2,804.05 at 0533 GMT
  • Hong Kong's Hang Seng was up by a robust 1.03% to 19,896.66 at 0537 GMT
  • Korea's Kospi Composite was up by a slim 0.08% to 1,948.41 at 0516 GMT
  • India's S&P BSE Sensex was up 0.11% to 25,426.63 at 0510 GMT
  • Australia's S&P/ASX200 achieved its sixth week of gains on favourable corporate news
  • The S&P/ASX200 closed up by a robust 0.63% at 5,357.10 points.

Forex ahead

  • The US dollar managed to hold onto its perch above ¥110
  • The US dollar was worth ¥110.0850 at 0507 GMT
  • USDCHF above 0.9900 as risk appetite theme strengthens
  • The Australian dollar slipped again but held above 0.72; it was worth 0.7237 at 0643 GMT

From the Floor

Up widely. ”The dollar generally higher across the board”, Hardy says.

Downside. ”I like to sell global energy and the materials sector here – but only as long as oil stays below $50/barrel”, says Garnry.

Get all the latest from Saxo Bank's trading floors in From the Floor, out this morning.

In opinion

Despite a much weaker euro and cheap oil, the core Eurozone current account surplus has not shown signs of growth for years, says Juhani Huopainen

Sterling would take a pounding
A slump in the sterling exchange rate awaits if the UK votes to leave the EU, with large gaps where no prices would be immediately available as the result emerged, says John Hardy

EU means a great deal
Prime Minister David Cameron's deal with Brussels in March created a de facto two-tier Europe with one set of rules for the UK and another for the rest of Europe, says Steen Jakobsen

Bullish on yellow metal
US dollar strength is challenging, but the focus on inflation and the fact that trillions in sovereign debt costs money to own through negative yields will support gold prices, says Ole Hansen.

Samsung over Apple
Peter Garnry thinks the outlook for Samsung is much better than for its rival Apple and in this SaxoStrat, presents the idea to buy Samsung and hedge with Apple. 

China is stepping out in new-found confidence, but friction with the US over the South China Sea, as well as on trade and forex issues, poses a threat to global markets. Photo: iStock

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