US stocks closed in the red with the NASDAQ suffering the most losses at 0.38% down while the S&P and the DOW fell 0.20% and 0.17% respectively. The Consumer Price Index rose 0.1% in April, its smallest increase since January while the cost of living slowed to 1.8% YoY from 2%. While the measure is not as closely watched by the Federal Reserve, the evidence that price growth is slowing could validate the market’s belief that a rate cut is imminent. Yield on 10Y USTs was about flat closing at 2.1205%.
Boris Johnson finally launched his campaign for leadership of the Conservative party. Seemingly taking cue from Chancellor Philip Hammond’s warnings that a no-deal would be disastrous for Britain, Boris dialled back his rhetoric on the issue, saying a no-deal would be employed as a last resort. European Commission President Jean-Claude Juncker indicated that the deal that was brokered with May is not up for negotiation as far as the contents of the agreement are concerned so Boris or whoever will take over leadership has a tough act in waiting as all of them are promising a better deal to what May had. The pound fell against the dollar to 1.2689 while yield on 10Y UKTs was up 3.2bps to 0.8663%.
Market reaction has generally been muted in response to the ECB’s dovish turn at their last policy meeting. The euro, which usually drops on signs of impending central bank stimulus, has largely been on an upward trajectory since the meeting. While the muted reaction could be a reflection of the view that the Federal Reserve will soon cut rates – thereby hitting the dollar and lifting the euro – it also highlights lingering concerns that the ECB doesn’t have the ammunition available to its cross-Atlantic counterpart particularly as its main refinancing rate is at zero compared to the US federal funds rate which is between 2.25% and 2.5%. The euro was lower against the dollar at 1.1287 while yield on 10Y DBRs fell to -0.2378%.
ASIA PACIFIC & CHINA
Asian markets largely did not recover from their negative openings to close mixed today following losses on Wall Street yesterday and the turmoil in Hong Kong. The HANG SENG closed just lower at -0.05% having opened 1.5% down while the NIKKEI followed suit with a -0.46% close and the CSI bucked the trend gaining 0.05%. Protests were subdued on Thursday as heavy rains descended while the debate on the extradition bill was delayed.
Brent surged over 4% in the morning after unconfirmed reports that two oil tankers had been attacked in the Gulf of Oman prompting an evacuation of their crews. The US Navy said it was assisting the tankers as UK Maritime Trade Operations acknowledged the incident and was investigating. The incident comes amid heightened tensions in the Middle East following attacks on tankers and oil infrastructure in the region last month. Brent shot to $62.56 having closed at $59.97 yesterday.
The CBRT held interest rates for a ninth month amid speculation that easing was no longer an inconceivable move after a slowdown in prices. While the room for easing still remains with the lira being the best performer in emerging market currencies this past month, political risks largely remain with a contentious rerun of the Istanbul elections up this month and tensions with the US over purchase of a Russian missile defence system. In addition, investors remain skeptical about the lira which has the highest three-month implied volatility. The lira traded as high as 5.7693 against the dollar after the decision before closing at 5.8086 while TURKEY 47s closed lower at 79.590.
President Jair Bolsonaro scored a political win by sealing a deal with the opposition to approve additional credit to pay for current expenditure. The deal lifted market expectations about the chances of of approval of pension reform as well as stemmed a fallout following the Carwash scandal. President Bolsonaro hasn’t commented on the involvement of his Justice Minister Sergio Moro abruptly ending a news conference yesterday when asked about the issue. Moro himself is only scheduled to talk about the leaked messages at a congressional committee next week. The real closed about flat at 3.8674 to the dollar while BRAZIL 47s closed higher at 103.823.
Yields on Russian bonds have tumbled in the wake of an expected dovish turn by the central bank to levels last seen in July 2018. With expectations that the central bank’s meeting on Friday will herald a rate cut, the market is already seeing another rate cut in September with Barclays forecasting 75bps easing by the end of the year. A Bloomberg survey is forecasting a 25bps rate cut announcement at the Friday meeting. The ruble opened 0.23% higher in the morning with Russian markets having been closed yesterday while traded about flat at 107.787.
Nigerian President Buhari, in his first public speech since his inauguration in May last month, announce that Nigeria’s economy is expected to grow by 2.7% this year which is moderately lower than the Central Bank’s estimate of 3% which was announced in March. The President declared that the economy had made solid progress in his first term. The yield on NGA -9YR was 8.060% at close of market yesterday.