Opening Bell: Yields, USD Rise On Hike Certainty; Trade Weighs On Stocks

• Stocks in Asia retreat though Japan shares buck the trend
• European shares, US futures eke out gains ahead of today's Fed
• Fed rate increase a foregone conclusion, as investors focus on outlook
• S&P closes at highest point since correction
• Both NASDAQ and Russell post fresh records
• Pressure on export-sensitive mega-caps suggests investors still concerned over trade
• Dollar expected to weaken against euro on end of ECB QE and Trump’s trade policy

Key Events

This morning, European equities crawled higher, as have US futures for the S&P 500 and NASDAQ, after stocks in Asia, except for those in Japan, retreated. US yields—ahead of the Federal Reserve rate decision, due out later today—extended a slow advance to a fourth day, boosting the dollar which in turn pushed emerging market currencies lower.

The pan-European 600 Index opened higher, led by miners and media firms.

The robust global mid-session alongside higher US futures raises trader hopes that the US equity market advance will resume today, even after stocks in Asia declined. This could signal that global traders, unlike their Asian peers, have moved past yesterday's US-NK summit, focusing instead on the upcoming trifecta of central bank meetings this week including an expected rate hike today from the Fed.

Earlier, China’s Shanghai Composite fell 0.8 percent, trimming yesterday’s 0.9 percent gain to just 0.1 percent. Technically, bears are continuing to hit the psychological 3,000 level, a demand line since January 2017.

Hong Kong’s Hang Seng closed down 0.65 percent, wiping out two days of gains. Technically, trading is extending and retesting Fridays low, a 1.8 percent selloff that erased three-and-half days of gain, confirming a symmetrical triangle development since February.

Even South Korea’s KOSPI—seen to be the biggest beneficiary among stock benchmarks from a denuclearized north—gave up a 0.35 percent advance; it ultimately turned into a 0.05 percent slide. On the other hand, the index did bounce from a deeper, 0.3 percent retreat. Technically, the price was pushed back by a downtrend line since mid-May, culminating in Thursday’s shooting star, formed when an advance loses steam.

Shares on Japanese indices bucked the regional trend however. The Nikkei advanced 0.35 percent led by automakers Toyota Motor Corp (T:7203) (+1.55 percent) and Honda (T:7267) (1.1 percent).

Technically, the price in Tokyo is nearing a downtrend line since late February, which itself is guarded by the 200 DMA, providing a shorting opportunity. Conversely, a breakout above 3,831 would complete a double bottom reversal.

Shares listed on the TOPIX rose (+0.5 percent), boosted by a weakening yen, which fell for a third straight day, ending a week’s consolidation and taking on the May 21, 111.41 dollar-yen high.

Note in the chart above, equities rose in tandem with a falling yen, as the USDJPY moved higher, followed by both retreating simultaneously. Like multinational US firms, Japanese companies are hyper-dependent on exports for growth. A weaker currency lowers the exchange rate for foreign importers, boosting sales.

Global Financial Affairs

Today’s global financial market trade follows yesterday's US session in which three important technical milestones were achieved:

1. the S&P 500 registered its highest close since its first double-digit correction in two years, during late January/early February.
2. The NASDAQ Composite posted a fresh record, overcoming Thursday’s major bearish engulfing pattern, and
3. The Russell 2000 reached its own new price level.

The Dow Jones Industrial Average, which is 'burdened' by mega cap multinational companies that have grown past just domestic markets, was the single US major index that bore the brunt of the trade uncertainty, the lingering effect of Us President Donald Trump's trade policies that were on full display at this past weekend's G7 summit. In our opinion, this oldest US index is the single purest indicator of the market's actual opinion on global trade.

Apparently, despite Monday’s rally after the G7 meeting, which only served to exacerbate a global trade conflict, markets have remained flat for the two days following. Technically, Monday’s advance remained pressured below Friday’s weakness, expressed with a shooting star. The last two trading sessions reinforced bearish superiority.

While the S&P 500 posted a new peak, its gains were modest. Moreover, technically, its trading pattern demonstrated uncertainty.

Finally, the bearish presence at the height of yesterday’s SPX shooting star won out for a second consecutive day. Internally, defensive Utilities (+1.15 percent) far outperformed among the sectors. However, to be fair, though the defensive utility sector had the most demand on an absolute, per sector basis, the Technology sector's 0.49 percent boost had an incomparably bigger impact. Its weighting in the SPX is 25.84 percent, versus a far less significant 2.94 percent for Utilities.

Yesterday's total supply and demand positioning within US equities overall provides a high resolution visual confirming that investors still fear trade tariffs. Yesterday's small gains and potential technical weakness are due to investor focus elsewhere.

While traders have priced in a 92.5 percent probability for a second hike this year after the March increase, a much bigger impact on markets would be the Fed’s outlook for monetary tightening amid a surviving expansion, even this late in the business cycle.

Projections from the Fed’s March meeting suggest a benchmark rate of 2.1 percent at end of 2018, based on the median forecast of central bank policymakers, which would mean three rate hikes in total this year. However, six-year high inflation has led some to expect a total of four hikes for the year. US CPI rose 2.8 percent in the last 12 months, up from 2.5 percent in April.

Based on remarks last week by the ECB's chief financial economist, the European Central Bank appears to be set to end QE during its Thursday policy meeting, making a reduced supply of euro stronger, while in the same time the dollar is expected to take a hit on Trump’s ongoing trade war.

Technically, the EUR/USD has crossed above its downtrend line, signaling a potential trend reversal. Since then, it has increased the probability of an uptrend by developing a pennant, a continuation pattern, completed with an upside breakout. Also, the MACD shows that recent prices are advancing relative to older prices.

The Bank of Japan's June monetary policy decision and press conference takes place on Friday. An ally of BoJ Governor Haruhiko Kuroda said a strengthening US economy may push the USDJPY higher. He doesn’t think that Kuroda will intervene before it reaches 125.00 to 130.00, according to The Japan Times.

From a technical perspective, the dollar strengthened against the yen after yesterday's signing of the denuclearization agreement between the US and North Korea, when traders rotated out of safe havens into risk assets. As the pair climbed, it yesterday crossedover the 200 DMA, extending its advance today, something many traders consider a bullish event.

The Mexican peso hit a 16-month low of 20.724 pesos to the dollar while the South African rand dropped to a six month low of 13.345 per dollar, extending its decline, triggered by disappointing GDP data last week.

Oil dipped after data from the American Petroleum Institute showed a surprise build of 833,000 barrels in U.S. crude stockpiles. Analysts had expected a decline of 2.7 million barrels.

Yesterday Bitcoin fell to a 2-1/2-month low of $6,461 at the Bitstamp exchange, on mounting regulatory and security concerns, after the weekend hacking of South Korean cryptocurrency exchange Coinrail.

Up Ahead

• A Fed hike today is a foregone conclusion.

• Canada’s New Housing Price Index for April is released Thursday.

• The ECB decision comes Thursday followed by a briefing from President Mario Draghi.

• Canadian Foreign Securities Purchases for April are released Friday

• Canadian Manufacturing Sales for April are released Friday.

• On Friday the Bank of Japan is forecast to maintain the status quo on its monetary policy.
• FIFA expects more than 3 billion viewers for the World Cup that begins this week in Russia.

Market Moves

Stocks

• Canada’s S&P/TSX Composite gained 0.15 percent on Tuesday to hit a new three-month high.

• The Stoxx Europe 600 Index decreased 0.05 percent, trimming a 0.25 percent gain.
• Futures on the S&P 500 Index advanced 0.1 percent, reaching the highest in more than three months on its ninth consecutive advance.
• The U.K.’s FTSE 100 declined 0.4 percent, the largest drop in more than a week.
• Germany’s DAX dipped less than 0.05 percent.
• The MSCI Emerging Markets Index sank 0.5 percent to the lowest in more than a week.
• The MSCI Asia Pacific Index decreased 0.3 percent to the lowest in more than a week.

Currencies

• The Canadian loonie was down 0.08 per cent against the U.S. greenback early Wednesday, trading at 0.7677.

• The Dollar Index advanced 0.05 percent.
• The euro increased less than 0.05 percent to $1.1746.
• The British pound declined 0.1 percent to $1.3358, the weakest in more than a week.
• The Japanese yen decreased 0.15 percent to 110.60 per dollar, the weakest in more than three weeks.
• The Turkish lira sank 0.4 percent to 4.6154 per dollar, the weakest in more than a week.

Bonds

• Canada’s 10-year yield was down early Wednesday at 2.288, a 0.44-percent decrease.

• The yield on 10-year Treasuries gained one basis point to 2.97 percent, the highest in a week.
• Germany’s 10-year yield dipped less than one basis point to 0.49 percent.
• Britain’s 10-year yield fell one basis point to 1.401 percent.
• Italy’s 10-year yield decreased nine basis points to 2.774 percent, the lowest in more than a week.

Commodities

• West Texas Intermediate crude fell 0.8 percent to $65.86 a barrel, the biggest fall in a week.
• Gold dipped 0.1 percent to $1,294.80 an ounce, the weakest in more than a week.