U.S. Opening Bell: Dollar Tumbles; Oil Sags; Markets Shrug Off Italian Risk

Key Events

European equities fluctuated on Thursday morning, as the STOXX 600 struggled to gain traction on the upward momentum of Asian shares. Equity markets in Asia were boosted by rising US Treasury yields, which nonetheless failed to lift the dollar.

The greenback is extending losses today after it suffered its worst selloff since January on Wednesday, as market focus shifted once again from Italian political risk to US-China trade disputes. However, the downbeat dollar helped oil move higher after yesterday’s gains, which marked the biggest jump for the commodity since early April. However, as of this writing, WTI has been losing ground, down right now by 0.60 percent as the European session has progressed.

The failure by European shares to gain upward momentum from the Asian session may underscore investor confusion over a market narrative that, on Wednesday, had transformed a stock selloff into a buying dip. From this standpoint, the volatile market reactions seen earlier in the week from Italian headwinds may now look impulsive and unwarranted.

Overall, it seems, the gravity of broader geopolitical risk is dampening the upward momentum that started during yesterday's US session—which saw US major benchmarks post their strongest performance in three-and-half months.

Although Asian equities rebounded across the board earlier today, it was on a much smaller scale. Plus, by the time the upbeat momentum had reached European markets, it was already showing signs of petering out. Does this mean that by the time the opening bell rings on Wall Street, momentum will reverse? Futures on the S&P 500, Dow and NASDAQ 100 are posting mixed signals, hovering around neutral levels at the time of writing.

However, US stocks are not necessarily bound to replicate European weakness. We have recently pointed out that, for reasons we have yet to understand, as of late, global optimism seems to skip the European session. On more than one occasion we have see equities rally in Asia, drift lower in Europe and then pop again during the US session.

At least from a technical perspective, yesterday's S&P 500 buoyancy confirmed that the current environment is a buyer's market, just as the Treasury yield rebound highlighted that it’s a seller's market for bonds, thereby confirming higher demand for stocks.

The SPX enjoyed its biggest rally since February 11 on Wednesday, confirming an upside breakout of a symmetrical triangle and suggesting a resumption of the uptrend prior to the February selloff. However, a bull trap may be in the works, as only an aggressive 1.00-percent filter has been satisfied.

Global Financial Affairs

During the Asian session, traders raced to buy into the equity selloff-turned-buying opportunity, as they grew more and more convinced that gloomy market reactions to Italian political jitters had in fact been overly pessimistic.

Japan’s TOPIX gained 0.6, trimming yesterday’s losses from 1.45 percent to 0.8 percent and ending an 8-day decline. Still, it wasn’t smooth sailing, as prices kept fluctuating at least 0.2 percent in either direction.

China’s Shanghai Composite opened 0.65 percent higher and extended gains to 1.8 percent intraday. It ended 1.55 percent higher, halting a 6-day rout.

Hong Kong’s Hang Seng opened 0.45 percent in the green, extended gains to an intraday 1.2 percent. It settled with a 0.95 percent gain, ending a two-day retreat.

South Korea’s KOSPI opened 0.8 percent higher but failed to maintain those levels, retreating to 0.3 percent midday, closing 0.6 percent into positive territory, ending a two-day slide.

Australia’s S&P/ASX 200 gained 0.45 percent, trimming an earlier 0.7 percent gain.

Despite political turmoil, the London FTSE looks to end the month as Europe’s best performing major stock index. Oil majors have kept the index afloat as result of higher oil prices, while mining companies have also played a role. Shares in Glencore (LON:GLEN) were up 1.57%, with Anglo American PLC (LON:AAL) also up 1.55%.

Following a quarterly reshuffle of shares within the London stocks on Thursday, online grocer Ocado (LON:OCDO) moved into the FTSE 100 for the first time from the FTSE 250 Mid-cap index. The UK grocery site announced a deal with the US supermarket Kroger (NYSE:KR) earlier this month, lifting the company’s market capitalisation to £6.1 billion. Shares in Ocado were up 1.19% on Thursday.

UK high street stalwart Marks and Spencer (LON:MKS) narrowly avoided demotion from the FTSE 100 in this reshuffle. Shares in the retailer were down 3.08% on Thursday.

The risk of a fresh round of elections in Italy, which would raise the risk of euroskeptic parties winning yet more voters and clearing the way for more intransigent anti-euro policies, subsided on Wednesday. The 5 Star Movement - League coalition is in fact looking to present President Sergio Mattarella with a re-jiggered government plan, which seems to be helping investors set the issue aside and focus on more immediate concerns.

US jobs numbers are set coming out on Friday. This report is particularly crucial since it's the last reading before the Fed meets to decide on interest rates during its June session, amid increased expectations for a rate hike—which would mark the seventh rate rise since December 2015. As such, might it be time to invest in yield rather than fixed-income stocks? Not necessarily.

In other news, market fundamentals including trade war worries and the upward revision of GDPs for France and other EU countries, coupled up with technical to push the dollar even further into its selloff, after it reached a price level on Wednesday where it was besieged by supply.

The British economy looked to be thawing into the second quarter on borrowing data released from the Bank of England on Thursday. Bank of England consumer credit for April showed borrowing rose more than expected to £1.832 billion, a marked increase on March's chilly £425 million. Analysts had forecast an increase in borrowing of £1.3 billion.

The USD's slide supported oil, which held on to most of Wednesday's gains in early trade. The fundamental driver of the WTI upward push was the decision by OPEC and Russia to keep production at current levels rather than stepping it up to cover potential supply glitches from Venezuela and Iran.

Technically, the price of WTI confirmed the uptrend line since February 11.

Up Ahead

• UK manufacturing PMI will be released on Friday.
• The US jobs report for May—the last, pivotal employment reading before the Fed's next monetary policy meeting which takes place in June—comes out on Friday.
• Automakers report US sales for May on Friday.
• Also on Friday, 234 China large cap A shares will officially be included in MSCI's global indexes.
• On Saturday, US Secretary of Commerce Wilbur Ross will travel to Beijing for more talks with Vice Premier Liu He, covering trade and issues surrounding Chinese telecom group ZTE (HK:0763).
• Alt-currency EOS's mainnet launch is scheduled for Saturday as well. Many are wondering if it will crash Ethereum.

Market Moves

Stocks

• The UK’s FTSE 100 gained 0.3 percent.

• The STOXX Europe 600 gained 0.1 percent as of 8:18 a.m. London time.

• The MSCI World Index of developed countries climbed 0.3 percent.

• The MSCI AC Asia Pacific Index gained 0.8 percent, the largest increase in almost three weeks.

• Japan’s Nikkei 225 gained 0.8 percent, the biggest gain in almost three weeks.

• The MSCI Emerging Market Index climbed 0.8 percent, the largest increase in three weeks.

• Futures on the S&P 500 dropped 0.1 percent.

Currencies

• The British pound increased 0.2 percent to $1.3314, the strongest in a week.

• The Dollar Index fell 0.3 percent, extending a selloff to its second day and an aggregate 1.05 percent, to the lowest in a week.

• The euro climbed 0.2 percent to $1.1688, the strongest in a week.

• The Japanese yen gained 0.3 percent to 108.63 per dollar, the strongest in almost six weeks.

Bonds

• The yield on 10-year Treasuries increased one basis point to 2.86 percent.

• Germany’s 10-year yield fell less than one basis point to 0.37 percent.

• Britain’s 10-year yield climbed one basis point to 1.257 percent.

Commodities

• West Texas Intermediate crude dipped 0.3 percent to $67.98 a barrel.

• Gold rose 0.3 percent to $1,305.14 an ounce, the highest in more than two weeks on the biggest advance in a week.