U.S. Opening Bell: Oil Eyes $73; Euro, Pound Rise; Dollar Consolidates

Key Events

Global stocks painted a mixed picture on Tuesday, only one day after the US-China trade truce allowed them to enjoy an unexpected rally.

The STOXX Europe 600 opened 0.15 percent higher but shortly afterward trimmed gains to less than 0.5 percent. A sudden 0.4 percent spike in the euro seems to have dragged stocks lower, just as Italian bonds were bouncing back. US futures for the S&P 500, NASDAQ 100, Dow and Russell 2000 are all pointing to a higher US open.

A similar mechanism was visible in the FTSE 100: after hitting a record high yesterday, the UK's benchmark index opened in the green today but later lost all its gains due to the strengthening pound, which benefited from speculation of a fresh round of UK elections. The FTSE remains nonetheless one of the only two global major indices trading at record highs, alongside the US small cap Russell 2000.

Mining companies helped the FTSE reach a fresh record high on Tuesday thanks to a weaker dollar. Shares in BHP Billiton (LON:BLT) were up 0.25%, Fresnillo (LON:FRES) was up 3.90%, while Glencore (LON:GLEN) shares increased 1.11%.

Japan's TOPIX dropped 0.22 percent, to a combined two-day, 0.3 percent slide. Technically, today’s decline confirms yesterday’s shooting star, which in turn confirmed Friday’s hanging man. The selloff was led by Sony (T:6758), which shed 1 percent after the multinational conglomerate announced a $2.3 billion buyout of Abu Dhabi-based Mubadala Investment Company's stake in EMI Music, giving Sony 90 percent of the equity in the EMI catalog (the remaining 10 percent is owned by the estate of Michael Jackson).

Chinese stocks on the Shanghai Composite also slipped, losing 0.1 percent—a downbeat performance after Monday's 0.65 percent leap. The Asian index was nonetheless helped by dip buyers, who took over and trimmed down a steeper 0.55 percent plunge, which had been led by real estate and banking firms. Real estate took a hit after several cities introduced tighter rules to curb speculation in the housing sector.

Baby care stocks bucked the trend, boosted by reports that the government is considering dropping all limitations over the number of children per Chinese family, as it seeks to counter China's ageing population trend. Investors saw this policy shift as the prelude to a Chinese baby boom, and bid up baby-care related stocks.

Hong Kong and South Korean markets were closed in celebration of the birthday of Siddhartha Gautama, more commonly known as Buddha.

Australia’s S&P/ASX 200 plunged 0.7 percent, posting a four-day loss of 1.05 percent. Tuesday marked the Aussie index's worst day in almost eight weeks; it sank to a three-week low. The selloff was sparked by the country’s “Big Four” banks admitting to misconduct. Sellers pushed bank shares 0.7 percent lower—in perfect alignment with the broader benchmark.

Global Financial Affairs

The widespread selloffs seen across global markets today are crushing investor hopes that yesterday's equity rally, prompted by diplomatic breakthroughs between the US and China, would have a somewhat longer lasting effect.

The S&P 500 jumped 0.74 percent, with all sectors in the green. Industrials (+1.51 percent) far outperformed Energy shares which tied with Real Estate, for second place; both gained 1.1 percent. The trade truce signaled by US Treasury Secretary Steven Mnuchin on Sunday had such a meaningful impact on multinational industrial firms that it outweighed the surging oil price, which, on Monday posted the fastest rise in years.

Industrials broke a downtrend line since the late-January record, thereby completing a bullish falling wedge. The price move suggests investors believe the US-China trade truce will last in the longer run.

We don't necessarily agree. However, given the market's twists and turns this year, along with fluctuating geopolitical risks, we freely admit that though we're pessimistic, we have been surprised repeatedly by recent market developments.

The Dow climbed 295 points, or 1.2 percent, but trimmed an earlier gain of 369 points, or 1.5 percent. The advance marked the Dow's highest level since mid-March, completing a bullish pennant and suggesting prices will continue to follow an upward trajectory.

The NASDAQ Composite jumped 1 percent intraday, but gave up half of those gains at the end of the trade session.

The Russell 2000 climbed 0.67 percent, posting a fresh record high.

As a reminder, the late-January double-digit US equity market correction—the first since the November 2015-February 2016 stock slumps—was provoked by a sudden shift in the outlook for the pace of tightening after Treasury yields reached a 4-year high. Therefore, minutes from the last FOMC meeting (released later today) hold special significance. Investors will scrutinize the release for any clue on the pace of interest rate hikes—especially after dovish comments by Federal Reserve Bank of Philadelphia's president Patrick Harker, who said on Monday he continues to support raising rates "judiciously".

Oil prices crossed the midway point to $73 dollars a barrel—a target not eyed since November 2014, which increases investor nervousness. Equities have already been consolidating since the late-January record high, posting the longest consolidation range since mid-2012 on worries that inflation would rise too quickly, prompting hasty rate hikes. Oil's impressive 25 percent spike since February, or the even more sizeable 72 percent leap since the June 2017 trough, threatens to boost inflation aggressively.

We can’t stress enough how powerful oil demand is; these spikes are occurring concurrently with the dollar at a five-month high. However, the current two-day USD selloff is likely slowing the path to higher prices for oil.

From a technical perspective, oil prices are reaching a secular downtrend since the 2008 crash. Will the prospect of looming US sanctions against Venezuela’s production of 1.4 million barrels of oil a day—after already reintroducing sanctions against Iran, with a slew of Mideast conflicts brewing and no end in sight—boost demand past the $80 threshold, allowing it to take on the more natural $100 level, not seen since mid-2014?

To fully appreciate the oil bullishness on the backdrop of a stronger dollar, emerging market currencies slipped after the dollar’s spike, with the Argentinian peso (-23 percent) and the Turkish lira (-17 percent) leading the downfall. Of course, the latter has been also weighed down by Turkey’s bond selloff, after President Recep Tayyip Erdogan said he opposed higher interest rates and looked to tighten control over monetary policy. This is in line with the stance Erdogan has maintained over the last few years, which pleases his electoral base but worries economists and foreign investors.

In the UK, members of the Bank of England's Monetary Policy Committee testified in front of the UK government Treasury Select Committee on Tuesday morning to discuss the May inflation report. Governor of the Bank of England Mark Carney defended the decision not to hike rates in May and stated that the lost economic momentum in February and March as a result of the weather will in all likelihood not be recovered.

UK public sector borrowing surprised to the upside on Tuesday. The Office for National Statistics released a report showing finances were stronger than expected in April as the UK government borrowed £6.2 billion, compared with £7.3 billion one year ago.

Up Ahead

• On Tuesday, Facebook's (NASDAQ:FB) founder and CEO Mark Zuckerberg will be grilled by the European Parliament on FB policies over personal data. After shares of the social media giant took a beating on the company's recent data breach scandal, is the worst now over for Facebook stock?
• Brexit negotiations started in Brussels on Tuesday and are expected to last until Thursday. On Wednesday negotiations will focus on the issue of the Irish border.

• UK inflation data is released on Wednesday, CPI is expected to hold steady at 2.5%.

• The Fed releases minutes of its May 1-2 monetary policy meeting on Wednesday
• US new home sale for April, will also be reported tomorrow, as will euro-area and Japan PMIs.
• UK retailer Marks and Spencer (LON:MKS) will release full year results on Wednesday. The high street retailer is expected to post a second straight decline in profit forecasts for the 2017-8 period.
• Thursday sees the Bank of England Markets Forum take place at Bloomberg London. Speakers include BOE Governor Mark Carney and New York Fed President William Dudley.
• UK retail sales will also be released on Thursday.

• A revised estimate for UK GDP for the first quarter will be released on Friday.

• A St. Petersburg Forum panel this coming Friday includes Russian President Vladimir Putin, France's PM Emmanuel Macron, IMF Managing Director Christine Lagarde, and Japan's PM Shinzo Abe
• Also on Friday, European Union finance ministers discuss the latest Brexit developments in Brussels.

Market Moves

Stocks

• The FTSE 100 turned a 0.11 percent advance into a 0.02 decline, finally yielding to pressures from a stronger pound.

• The STOXX 600 gained 0.02 percent, paring a 0.2 percent gain.

• The MSCI All-Country World Index advanced 0.1 percent to the highest level in a week.

• S&P 500 Futures advanced 0.1 percent to a two-month high.

Currencies

• The British pound gained less than 0.05 percent to $1.3433

• The Dollar Index slipped 0.21 percent, to a two-day total loss of 0.31 percent

• The euro fell 0.2 percent to $1.1771, the weakest in about five months

• The South African rand advanced 0.7 percent to 12.5833 a dollar

Bonds

• Britain’s 10-year yield advanced one basis point to 1.476 percent.

• The yield on 10-year Treasuries gained one basis point to 3.07 percent.

• France’s 10-year yield slid less than one basis point to 0.816 percent, the lowest level in more than a week.

• Germany’s 10-year yield climbed two basis points to 0.54 percent.

Commodities

• WTI crude gained 0.2 percent to $72.69 a barrel, the highest level in more than three years.

• Gold fell 0.2 percent to $1,289.75 an ounce, the weakest level in almost 21 weeks on the biggest fall in a week.