Stocks to fresh highs as French bonds stabilise

Headlines

* Dollar eases against the euro as European political jitters subside

* Nasdaq, S&P 500 make more record highs ahead of data, Fed comments

* BoJ’s Ueda says will scrutinise FX moves, impact on prices

* Gold trades lower as US Treasury yields rebound

FX: USD fell after the European close and settled marginally lower on the day. In truth, it was a predictably quiet start to the week after US CPI and the Fed meeting yo-yoing last Wednesday. Friday’s high is 105.80 while the 200-day SMA is below at 104.46. Current market pricing sees around one and a half Fed rate cuts this year. There is lots of Fedspeak today.

EUR found a bid after struggling to six-week lows last week below 1.07. Stability in French bonds soothed nerves. ECB policymakers indicated over the weekend that there was no panic in Frankfurt. Further comments from officials tried to calm the outlook with the current situation described as “not disorderly”.

GBP had a quiet day as buyers emerged pushing cable narrowly above 1.27. A soft close on Friday after two prior net declines possibly tilts the risks to the downside. But sterling has not weakened for three sessions in a row since mid-April. It’s a big week for the pound with Wednesday’s CPI data released ahead of the BoE meeting the following day.

USD/JPY edged higher as it nears Friday’s six-week top at 158.25. Is this an inevitable move towards 160? Watch for renewed verbal intervention, though volatility and price action are relatively very measured. Japan CPI is released on Friday.

AUD continues to trade in a range between roughly 0.66 and 0.67. The 50-day SMA sits below at 0.6582. The RBA meeting should be quiet, with an unchanged decision and the bank remaining vigilant on upside inflation risks.  CAD was little changed with an upside bias in the major if prices stay above the 50-day SMA at 1.3705.

US Stocks: Wall Street’s main indices posted fresh all-time highs for a sixth consecutive day on the benchmark S&P 500 and Nasdaq. The blue-chip S&P 500 finished up 0.77% at 5,473. The Nasdaq 100 settled higher by 1.24% at 19,903. The tech-dominated index hasn’t been this overbought since 2018. The Dow closed up 0.49% at 38,778. Large cap sectors, consumer discretionary and tech, led the gainers, with just three sectors, utilities, real estate and healthcare in the red. Tech was buoyed by Micron after its price target was raised by a few big brokers ahead of its earnings next week.

Asian Stocks: APAC futures are mixed. Asian stocks were mostly negative after the soft China data. The ASX 200 was rangebound ahead of today’s RBA meeting. Sellin gin tech offset gains in financials. The Nikkei 225 dipped below 38,000 as markets digested Friday’s BoJ meeting.US exporters were hit hard. The Hang Seng was positive on tech strength, but the mainland struggled on the mixed activity data.

Gold fell by just over 0.5% as Treasury yields rebounded from recent lows. Resistance sits at the 50-day SMA at $2333 and a Fib level at $2343.

Day Ahead – RBA meeting, US Retail Sales

The RBA will leave rates steady at 4.35%. Minutes from the most recent meeting stated officials considered whether to raise rates but judged the case for steady policy was stronger. That said, it was hard to either rule in or out future changes in the cash rate. The bank also acknowledged a rate rise could be appropriate if forecasts proved overly optimistic. Recent mixed data probably support the case to stay on hold. GDP disappointed, jobs figures showed an improvement, but April CPI was firmer than expected. That means some vigilance from policymakers should be expected.

 US retail sales is the major data point Stateside this week. The headline is forecast to rise 0.3% m/m and the ex-auto number 0.2%. Lower gasoline prices are likely to weigh on the dollar value of retails sales. Softer household disposable income growth is becoming more evident as the US population become modestly more cautious. That said, Fed Chair Powell recently characterised the US consumer as “solid”.

Chart of the day  – EUR/AUD hovers just above support

This pair tumbled last week with five straight days of losses. That was last seen in late April. The European poltical chaos saw heavy selling in the single currency with traders watching the OAT/Bund spread – that’s the French government bond versus the German government bond differential. Prices fell to long-term support at the December 2023 lows around the 1.6160/70 zone.

But French bonds steadied yesterday which gave some respite to the euro. Short-dated volatiltiy remains elevated and who gets the top jobs in Brussels will be of rare interest. We may have to wait until June 30 and the following week when the French elections take place to really see poltical risks assauged. Of course, a more hawkish RBA could see a retest of the support area. The flip side and more dovish Board would see the cross continue to rebound.