U.S. Opening Bell: USD Keeps Sliding; Global Stocks Rally; Oil Losses Extend

Key Events

Wednesday's global stock rally, which saw US equities hit some fresh new records, continued during the Asian and European sessions on Thursday, as a weaker dollar helped shares shrug off geopolitical headwinds.

US futures on the S&P 500, Dow and NASDAQ 100 are also pointing higher, suggesting the rally will resume during the US session. Investors turned to risk-on trade after US employment data last Friday gave them some tangible confirmation that the global synchronized growth trend is intact. Upbeat job readings allowed them to focus on the economy and put aside trade war worries—to which they seem to have become increasingly desensitized.

Investor rotation out of security and into growth assets also continued to push US yields higher for the sixth session out of seven. In late January, when yields on the 10-year Treasury hit a 4-year high and provided the catalyst for the first double-digit stock correction in two years, the surge underpinned an expectation for a faster pace to interest rates hikes by the Fed.

Conversely, the current upward move is seen as bullish, as it underscores renewed investor appetite for risk. The yield on the 10-year note is now less than two basis points below the 3 percent psychological mark. Would that key level prompt another equity selloff? We don’t know, but we wouldn’t be surprised.

Global Financial Affairs

This morning STOXX Europe 600 followed Asian stocks higher, jumping on a gap and challenging the highs it had posted on Monday and Tuesday, triggered by back-to-back bearish shooting stars. Hong Kong’s Hang Seng outperformed with a 0.8 percent gain, but formed a bearish high wave candle by swinging between highs and lows and closing near the open. This demonstrates a lack of direction, as investors seem to act on whim rather than on well-defined plans.

Traders had a delayed start at London’s Stock Exchange on Thursday morning, with the LSE citing ‘technical issues’ as the reason for the delay. The LSE (LON:LSE) hit a record high shortly after the open.

Chinese shares on the Shanghai Composite underperformed, closing 0.2 percent lower after giving up a 0.4 percent gain.

Yesterday, US stock indices were boosted by an ongoing slide in the dollar. The S&P 500 edged higher for a fourth straight day (+0.86 percent), led by gains in Basic Materials (+1.85) and Financials (+1.82 percent)—while defensive sector Utilities (-2.38 percent) was the only sector in the red.

The Dow Jones Industrial Average made its biggest leap in nearly two months (1.38 percent) and peaked above the preceding, May high, thereby extending the uptrend since April 2.

The NASDAQ Composite hit a new all-time-high—after its mid-March record high—as well as its third consecutive record close on Wednesday. Finally, the Russell 2000 further strengthened its recent record performance to close very near the high of the day.

Meanwhile, David Stockman, director of the Office of Management and Budget for former US President Ronald Reagan, dubbed the current environment a "daredevil market” in which assets are "way overpriced for reality." Shares on the S&P 500 are at 25 times P/E Ratio, Stockman pointed out, marking this perhaps as “the end tippy top of the business cycle, with recession ahead." The Russell 2000 is also trading at 90 times reported earnings, he added, warning against the implications of these unsustainable levels.

The veteran politician, who is also a high-profile investor, said that the SPX could easily drop to 1,600 because earnings could drop to $75 a share during the next recession. He then went on to cite the governor of Bank of India, Urjit Patel, who warned on Wednesday that the Fed's tightening path threatens to rile the global apple cart by causing a dollar shortage. After eight years of monetary expansion—which marked unprecedented levels of accommodative policy—the implications of unwinding the central bank balance sheet both in the US and in Europe is not even remotely priced in, Patel said.

While Stockman refrained from listing the possible catalysts of a bear market, we've been warning of multiple headwinds that could push traders to press the sell button:

1. 10-year Treasury yields crossing above the key 3.00 mark, sparking fears of higher rates
2. An extended global trade war that pitches the US against China on one side andG7 allies on the other—with EU member countries dealing a fresh blow on Wednesday as they outlined plans to retaliate against US tariffs by imposing $3.3 billion levies on American goods, effective next month
3. A populistic, euroskeptic government coalition in Italy threatening to lead a second key EU player out of the 28-nation bloc
4. An emerging stock market crisis that could spill over across global markets. For a bull market that has stretched over nine years—the second-longest winning run in equity market history—anything could trigger a reversal

In other news, WTI extended losses to a second day, after crude oil inventories surged by 2.072 million barrels last week, against expectations of 2 millions. Domestic production also climbed to 10.8 million over the same timeframe, from 10.77 million barrels a day in the prior week.

Technically, the WTI price has been trading within a five-day consolidation in what appears to be a second consecutive continuation pattern within a falling trend. What could trigger a downside breakout? Most likely, any positive confirmation that the US government asked Saudi Arabia and other OPEC members to increase oil production by 1 million barrels per day, which equals the expected supply gap from potential output glitches in Iran.

A Reuters poll showed that almost 60 percent, or 35 of 60 analysts, believe the recent climb of the USD could end within 3 months. Ten analysts forecast the greenback will end its rally a lot sooner—within a month. According to the poll, the single headwind that FX traders and investors have failed to fully price in is the potential for other global central banks to step up their hawkish stance.

Currently, what should have been a bullish falling flag in the dollar chart seems to be breaking down—which would support the view that a USD decline is already taking place.

The UK Prime Minister Theresa May spent the morning in talks with senior cabinet figures regarding difference of opinion on the Brexit backstop deal. Britain’s minister for leaving the European Union David Davis was rumoured to have threatened to resign unless an end date was included in the backstop agreement. The backstop agreement as it stands will keep the UK in a customs union with the EU for an unlimited time should there be a delay in implementing the deal on the UK’s future relationship with the bloc after the agreed transition deal’s end in December 2020. It is expected that a paper on the backstop will be released on Thursday.

In the latest hit to the UK high street, upmarket department store House of Fraser announced it would close 31 stores across Britain, costing over 6,000 jobs, as part of its rescue plan.

Up Ahead

• On Thursday, Japanese Prime Minister Shinzo Abe meets with US President Donald Trump at the White House to discuss the planned US summit with North Korea’s Kim Jong Un

• Also on Thursday, euro-zone GDP comes out.

• A Turkish rate decision is due on Thursday.

• The G-7 Summit starts in Quebec on Friday, through to June 9.

Market Moves

Stocks

• The UK’s FTSE 100 was unchanged.

• The STOXX Europe 600 gained 0.3 percent.

• Futures on the S&P 500 rose 0.2 percent.

• Germany’s DAX rose 0.4 percent.

• The MSCI Emerging Markets Index jumped 0.4 percent to the highest level in more than three weeks.

• The MSCI AC Asia Pacific Indexclimbed 0.6 percent to the highest level in more than three weeks.

Currencies

• The British pound gained 0.2 percent to $1.3445, the strongest level in almost three weeks.

• The Dollar Index dipped 0.25 percent for a fourth consecutive decline, totaling 0.9 percent.

• The euro advanced 0.4 percent to $1.1818, the strongest level in more than three weeks.

• The Japanese yen gained 0.2 percent to 110.01 per dollar, the biggest rise in more than a week.

• The Turkish lira sank 0.4 percent to 4.5746 per dollar.

Bonds

• Britain’s 10-year yield increased three basis points to 1.374 percent, the highest in more than two weeks.

• The yield on 10-year Treasuries climbed one basis point to 2.98 percent, the highest in more than two weeks.

• Germany’s 10-year yield gained four basis points to 0.50 percent, the highest in more than two weeks.

• Italy’s 10-year yield fell seven basis points to 2.872 percent.

Commodities

• West Texas Intermediate crude increased 0.4 percent to $65.00 a barrel.

• Gold climbed 0.1 percent to $1,297.99 an ounce, the highest in a week.