Stocks in Asia were uninspired by the slight gains on Wall Street during Monday trading. Although the easing of U.S.- China trade tensions was supposed to be positive for risk assets, the rise in global yields is making stocks less attractive. Comments from the Bank of France Governor, François Villeroy de Galhau, that the European Central Bank will not delay exiting quantitative easing pushed yields on European bonds higher, promoting profit taking. Meanwhile, U.S. 10-year treasury yields are back above 3%, suggesting that investors will require more risk premium for holding equities. Unless growth offsets the rise in risk premium, equities will likely face some challenging times ahead. European stocks are set to open lower and U.S. futures are also indicating a lower open.
Brent above $78
Brent continued its upward momentum on Monday, reaching a new three-and-a-half year high of $78.53. Conflict escalation in the Middle East following the U.S. ‘s withdrawal from the Iranian nuclear deal and the inauguration of the U.S. embassy in Jerusalem, added further geopolitical risk premium to the already elevated prices.
Higher oil prices, which were recently a positive indicator of risk, will start having an adverse effect on global equities. If energy prices sustain their upward trajectory, it will be just a short matter of time before we start seeing the shockwaves reaching Wall Street. The energy sector weighs only 5.90% in the S&P 500, but the effect of company costs and consumer disposable income will largely outweigh the benefits for this relatively small sector, compared to the overall economy.
Pound traders await jobs report
The Pound has lost more than 800 pips from April highs, after a series of weak economic releases led the Bank of England to stand pat on rates. A slight improvement in data will likely be enough to bring the bulls back, so will the UK jobs report boost confidence?
Economists expect unemployment to hold steady at 4.2%, but it’s the average earnings that will drive the direction of the pound. After U.K. inflation fell to 2.5% in March from 2.7%, an upside surprise in wages will refuel expectations of a BOE rate hike leading to a recovery in the British pound/U.S. dollar (GBP/USD) currency pair.
Turkish Lira hit new record low
Turkish President Recep Tayyip Erdogan’s intention to exert more influence on monetary policy if he wins the general election next month wasn’t received well by traders. The Turkish Lira fell to a new record low of 4.39 after his comment. On Wednesday, the Turkish president called a meeting to discuss the exchange rate. Market participants thought that this meeting would lead to a hike in interest rates; however, this now seems off the cards, so expect further losses in the coming weeks.