There’s a lot going on this morning that could see markets heading for an active finish to the week. Stock markets are trading down slightly so far with the FTSE down 0.4%, the DAX down 0.7% and US index futures for the Dow and S&P down about 0.3% so far.
The main focus of trading so far this morning has been on the UK with the second day of the EU summit on trying to work out a deal to keep the UK in the EU ahead of a Brexit referendum underway. It appears talks have been more contentious and uncertainty over whether a deal may be reached and what it could contain appears to be overhanging sentiment toward GBP today particularly in the last few hours where GBP/USD has given back over half a cent. This decline appears to be more than just a correction of yesterday’s big rally as it has come despite otherwise positive news.
UK retail sales were a lot stronger than expected, indicating a robust economy and adding credence to overnight reports that Bank of England MOC member Weale thinks UK interest rates could rise sooner than expected. I don’t think Governor Carney is going to do anything before the Brexit vote still expected for June but all bets are off after that. The strong retail sales do appear to be helping UK stocks to offset deal concerns and falling oil prices with the FTSE down less than its continental peers. UK markets may remain active through the day depending on what does or does not come out of today’s EU summit meeting.
Crude oil is trading lower again this morning. WTI has dropped back to retest $30.00 which has been holding so far. This along with news of more dividend cuts out of the oilpatch (Enerplus (TO:ERF) this time) could drag on energy stocks. We could see some activity in oil this afternoon around the Baker Hughes weekly drill rig count report.
CAD is trading moderately lower this morning along with other oil sensitive currencies. Interestingly though it’s down less than other resource dollars like AUD which has come under pressure after John Edwards, a member of the RBA board suggested he would prefer to see AUD/USD closer to 65 cents, it had been trading recently near 72 cents.
The loonie could be active today around today’s big Canada data announcements at 8:30 am EST. Retail sales may attract particular attention with traders looking for a January retrenchment from a big December. Weather was pretty good across the country last month though, so there’s potential for a surprise. Sales may also give an indication of how consumers are responding to lower fuel prices and how the country’s economic transition is proceeding. Consumer price inflation, meanwhile, may indicate how much leeway the Bank of Canada has to cut interest rates again if needed.
It’s also a big day for US news with a lot of focus on the Fed again. Cleveland Fed President Mester is speaking this morning. She has been firmly in the hawkish camp indicating in recent weeks that she thinks recent volatility is part of the transition to rising rates (I think she’s completely correct on this). A number of FOMC members have dialed down their hawkishness lately preferring to keep their options open, with some suggesting further rate hikes could be delayed. We’ll see soon if she has changed her mind at all.
Today’s US consumer price report may also kick off more FOMC speculation. Many of the members leaning more dovishly lately have been blaming low inflation in addition to market volatility and overseas economic weakness. Today’s we'll get a better indication of what impact declining oil prices have had on inflation.
How US markets close today may also give indication of whether markets have really turned the corner or if the recent rebound was a dead cat bounce. Last Friday, markets rallied into the weekend but two weeks ago, markets sold off into a weekend. With more US party votes on presidential candidates scheduled for Saturday, the willingness of traders to hold stocks into the weekend may present a firm test of traders’ convictions.