US dollar mixed ahead of US inflation data, Turkey decides

Asian stocks were mixed on Wednesday, after the US equities closed flat following a five-day winning streak in New York. Hang Seng (-1.36%) has been the worst performer on the back of street protests against the extradition bill in Hong Kong. Though the Hong Kong dollar has strengthened to the highest levels since January.

The FTSE (-0.27%) and DAX (-0.39%) futures turned red in the Asian session. The FTSE 100 is set for a softer open in London, after having shortly traded above the 7400p mark and closed a little shy of this level on Tuesday. Cable is steady above 1.27 after the jobs data showed a significant downside revision in UK’s jobless claims last month, while the average weekly earnings growth declined from 3.2% to 3.1% in April, less than 3.0% expected by analysts.

Safe haven currencies outperformed, whereas the Aussie (-0.16%) and the Kiwi (-0.15%) cheapened versus the US dollar.

The Japanese yen has been the leading winner against the greenback in Tokyo, although the data showed that the producer prices eased 0.1% month-on-month in May due to softer commodity prices. The machine orders jumped 5.2% m-o-m in April however, against 0.8% contraction penciled in by analysts. The mixed data left the Bank of Japan (BoJ) doves undecided, opening a window of opportunity for risk-off traders to take over the market. The USDJPY remained offered near 108.50.

The euro gained some territory against the greenback and steadied above the 200-day moving average (1.1320).

Gold rebounded past $1330 in Hong Kong, after having tested the $1220 support on yesterday’s risk-on trading session. Traders could take advantage of the actual correction into the European open, as risk-off gold purchases could be temporary given the broad-based increased appetite for riskier, higher-yielding assets.

In China, the consumer price inflation picked up momentum and reached 2.7% y-o-y in May. The rise in food and vegetable prices are visibly felt by Chinese consumers and the yuan depreciation is certainly a major responsible for the current price dynamics. The rising inflation could be a barrier for the People Bank of China’s (PBoC) policy easing efforts. Shanghai’s Composite index (-0.59%) edged lower as the PBoC doves became less convinced with their positions after the solid inflation data.

Have the US treasury markets gone ahead of themselves?

The US 10-year yields recovered to 2.14%, as the US treasury markets began questioning how realistic the Federal Reserve’s (Fed) rate cut speculations are. In fact, markets have a short memory and investors tend to overweight the recent events. As such, the markets may have gone well ahead of themselves after last week’s jobs report pointed at a softening labor market in the US and the Fed Chair Jerome Powell hinted that a rate cut could be considered to give support to the economy.

So, if the US inflation figures, due later today, confirm a slowdown in consumer prices in May as expected, the recovery in the yields could halt or even reverse. In fact, the US headline inflation may have eased from 1.9% year-on-year versus 2.0% printed a month earlier, although the inflation excluding food and energy is seen steady at 2.1% over the same period.

While the recent events and data may justify a softer Fed policy to some extent in the coming months, this do not necessarily mean that the Fed should start gearing back as soon as the July meeting. The US unemployment rate hit the lowest levels in two decades and the US GDP growth remained above 3% in the first quarter, despite the downside revision due to slower investment. This being said, the Fed may have put itself in a challenging position face to the financial markets. Given the jump in rate cut probabilities, the Fed could eventually be brought to act sooner than it intended to, to avoid disappointing the market and injecting an unwanted price volatility in stock markets during the low-volume summer months.

Hence, we could expect a further upside volatility in the US yields before and after the Fed’s June 19 meeting. Should the Fed readjust its tone to a less dovish policy stance, the yields could jump, and the probability of the next Fed cut, if any, could take a sharp dive.

Apple in focus, as US-China relations get tenser

The US giant phone-maker Apple is in investors’ focus, as the escalating trade war between the US and China could squeeze the company, first because China is clearly one of the highest growth potential markets in the world and second, because the low cost production plants in China could soon be forced to relocate elsewhere.

However, there is no need to panic just yet. A leading Apple supplier Foxconn which produces most of iPhones and iPads in China, said that it has enough capacity outside China to meet the demand. Yet, if Apple becomes an arm for China to fight back the US trade attacks, relocation outside China could clearly be an option to be considered. In the latter case, investors already question whether it would lead to a substantial price increase in Apple products, an important decline in company profits or perhaps both. Apple hasn’t asked for a production shift for now.

Apple’s share price recovered to $196 per share as a result of the June risk-rally. But short positions could challenge Apple’s positive price trend into the 200$ mark.

Turkey to stay pat despite rising temptation to ease policy

The Central Bank of Turkey (CBT) is expected to keep its policy rate unchanged at 24%, despite the growing temptation to unwind its 625-basis-point tightening over the past year. And indeed, with the markets fiercely pricing in a Fed rate cut as early as July this year, investors could be in a better position to absorb lower Turkish rates.

But, in spite of the prospects for softer US yields, a stronger lira and the softening consumer inflation, the June meeting may not be the right moment for the CBT to cut the rates, given that the controversial rerun of the mayor election in Istanbul on June 23rd could rise tensions in Turkish markets and weigh on the lira, despite a favorable market environment for high yielding currencies.