Here’s what FT markets are watching as a new trading week beckons.
Will the euro break out of a major trading range versus the US dollar?
The single currency has raced nearly 11 per cent higher this year against the US dollar, and at about $1.1650 is only half a per cent off the top of a well defined trading range spanning more than two years.
The euro’s latest leg up follows last week’s European Central Bank meeting. ECB President Mario Draghi was reticent about giving up further clues on policy normalisation, but investors focused more on his mild dovishness — and they are also now comparing European political stability with ongoing uncertainties in the White House.
Investors are particularly intrigued by how the ECB would respond to a stronger euro. Mr Draghi did say the euro’s repricing had been discussed by the governing council, but he left it at that.
That is because to some observers, the euro is undervalued and the ECB accepts this. He “did not argue forcefully enough . . . to dampen the enthusiasm for the euro,” said Marc Chandler at Brown Brothers Harriman, and that he “seemed fairly relaxed about his currency’s strength”.
Others, such as BNP Paribas, view a stronger euro as a threat to the inflation target, calculating that a 3.5 per cent appreciation in the currency knocks 0.16 per cent off inflation.
“The ECB should be more concerned about euro appreciation than its current rhetoric suggests,” they said.
Some analysts are warning that the euro’s rally may be looking a bit stretched. As Martin Arnold at ETF Securities noted, the long euro trade is overcrowded, with futures positioning at its highest since 2011.
Throw in inflation weakness, and his expectation is for the euro strength to falter in the short term “until a more urgent need for tighter monetary policy for the eurozone becomes a more strongly voiced position”.
Will oil prices gain as big producers meet in Moscow?
Several Opec members and other big producers including Russia are set to hold a Joint Ministerial Monitoring Committee meeting in St Petersburg on Monday. The oil market will be watching closely. Brent crude has risen back towards $50 a barrel, up from a low around $46 earlier this month as Opec’s supply reductions have started to draw down US oil inventories.
A supply deal was extended in May for a further nine months, and traders are focused on any talk about limiting rising output from Nigeria and Libya, the two Opec members not bound by the current production agreement.
Helima Croft, global head of commodity strategy at RBC Capital Markets, writes: “Libya and Nigeria are sending representatives to the meeting, but not surprisingly, they are reluctant to accept any output restrictions. Offering both countries an arrangement similar to Iran [who has an output cap] looks viable in our view, but it will be an uphill battle to obtain their consent.”
She adds: “In the end, we believe that the JMMC statement will signal a determination to deal with the additional African volumes, either through the eventual ending of exemptions or additional output cuts at a later date to aid the rebalancing process.” Michael Mackenzie
Any fireworks from the Federal Reserve meeting?
US central bank officials convene this week and the tone of the Federal Reserve’s policy statement will be the focus of attention as the July meeting is not followed by a Janet Yellen press conference.
Since the Fed chair addressed Congress earlier this month, the market has absorbed another round of tepid inflation and retail sales data for the economy. Currently the rise in core personal consumption expenditures prices — a closely watched indicator for the Fed — is running at 1.4 per cent, well below the central bank’s target of 2 per cent.
Economists at Deutsche Bank note: “It will be important to see how the Fed describes this recent weakness in the statement. We anticipate that they will acknowledge a further decline in (PCE) inflation since the June meeting, but that their medium-term view that inflation will return to target remains unchanged. Any deviation from this description would be notable.”
Another area of note regards details about when the Fed starts shrinking its vast balance sheet. Up to now, the Fed has told the market that it may start the process later this year. Investors currently think that a firm start date will be announced at the September policy meeting. Michael MackenzieWill UK securitisation prices fall?
A last-minute change to draft regulation for Europe’s securitisation industry threw investors and analysts into turmoil last week. The rules, originally designed to boost the industry in 2015, now outlaw the securitisation of self-certified mortgages.
The problem is that many outstanding securitisations, especially in the UK, but also across Europe, have significant amounts of self-certified mortgages packaged into their structures. Securitisation is a process where loans are bundled together and sold on as bonds to investors.
The question now is the extent to which markets will reprice outstanding bonds backed by these loans. Investors say there have been no major moves so far, but that could change. Many such deals are designed to be called after several years and refinanced through another securitisation, which is now implausible if the new rule stands, meaning that the duration of the bonds effectively increases.
Prices may need more time to digest the regulatory situation. Many believe that the European authorities will be able to “fudge” the change through the implementation of the regulation, which comes in 2019. Not for the first time, bond investors will need to be closely attuned to the mood music in Brussels. Thomas Hale