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All Eyes On Yellen As Dollar Slumps On Trump Revelations, Stocks Rebound

The dollar was broadly weaker after dovish comments from Fed Governor Lael Brainard amid reverberations from reports of Donald Trump Jr.’s contact with a Russian lawyer; European equities rebounded with oil while S&P futures were 0.2% higher at 2,428 as traders eagerly await Janet Yellen’s Congressional testimony (House today, Senate tomorrow) for further clues on the trajectory of monetary policy while the Bank of Canada is expected to hike rates later.

The release of emails by President Donald Trump’s son that said Russia backed his father’s presidential campaign curbed demand for fresh dollar longs, according European traders cited by Bloomberg. The U.S. currency was also weighed down by dovish comments from Federal Reserve’s Lael Brainard.

As Bloomberg further notes, investors now look for Yellen to offer some guidance on the timing of a potential shrinking of the Fed’s balance sheet and also on the outlook for inflation and interest rates.  The greenback traded mixed versus its Group-of-10 peers and pared losses as measured by the Bloomberg Dollar Spot Index after some profit-taking in euro longs and as the pound dropped toward $1.28. The U.S. currency orbited the 1.29 level versus the loonie before the Bank of Canada’s much awaited policy decision.

Comments overnight from two of Yellen's colleagues calling for caution on further interest rate rises have pushed back the probability of a hike again before the end of the year to 50 percent, according to the CME's Fed watch data.

"The Yellen testimony remains the key event risk in today's session but we remain optimistic about the dollar's outlook and putting on a long position against the sterling is the best way to execute that view," said Adam Cole, head of FX at RBC.

Some more thoughts on Yellen's speech from DB's Jim Reid: "For today, will Mrs Yellen choose to reinforce the recent more hawkish global central bank speak or will she attempt to pull things back a little? DB expect her to reinforce the message from the June 14 post-FOMC press conference and continue to guide the market towards an announcement of the beginning of balance sheet normalisation at the September 20 meeting as well as a rate hike by year-end. There will be plenty of eyes on Yellen’s comments around inflation too and our US economists expect the Chair to stick to the script that the recent pause is likely due to transitory factors. So it’s worth seeing if there is any change from this mantra."

A pushback on further Fed tightening will be questions about the trajectory of US wages, and specifically why growth remains so anemic.

Distractions from the White House come as Federal Reserve Chair Janet Yellen prepares to give two days of testimony that will be dissected for clues on when she will start shrinking central bank bond holdings, while the Bank of Canada is expected to hike interest rates Wednesday. The release of emails by the younger Trump about his controversial meeting may give the Fed pause as it seeks to dismantle a decade of monetary stimulus, according to market strategist Bill Blain of Mint Partners, a global brokerage firm in London. “The pressure on markets and gridlock on Washington spending plans is probably enough to keep the Fed from doing anything extraordinary,” Blain said in a note to clients.

While the Federal Reserve chair is expected to say that the Fed remains on a hawkish course of steadily rising rates, any signals on how the bank is viewing a retreat in inflation and muted wage growth will be closely watched.

The Euro Stoxx 50 gained 0.6 percent, led by automakers and energy companies, and the FTSE 100 rose 0.7 percent. S&P 500 futures were steady.

Crude oil and WTI has tested the $46.00 handle this morning finding upside momentum from the latest API inventory data last night which showed the biggest draw down in crude stockpiles since September 2016 (-8.13mln vs Exp. 2.45mln) with Cushing coming in at -2.028mln, the largest draw since February 2014 according to Amplify Trading. As ever, the US output number will be key in this afternoon’s DoE release and in the interim period we have the OPEC monthly oil market report coming out shortly after midday, a report that should give insight into compliance levels and the strength of global demand.

Alongside the Dollar's decline, the aussie and yen outperformed G-10 peers; emerging market currencies were led higher by won. Sovereign yields drifted lower following yesterday's Trump Jr revelations; T-note yield down two basis points at 2.34%. The Nikkei slipped 0.6% while in China the PBOC injected liquidity for a second day; The yuan strengthened after official central bank publication called for wider trading band and less government intervention; H-shares and Hang Seng rally. WTI crude holds onto API-inspired overnight gains; Dalian iron ore 0.8% higher. The pound rebounded after U.K. payrolls data beat estimates and unemployment fell to a 42-year low. That offset an earlier decline following a report a key Bank of England policy maker isn’t in favor of higher rates.

Overnight, attention again shifted on Kuroda and whether the BOJ would intervene in the bond market to extend yield curve control to other sectors besides the benchmark 10-year after the recent jump in bond yields; After yesterday's 5Y bond auction which saw strong demand, the central bank raised purchases of 3-5yr debt to JPY330b at its regular bond buying operation from JPY300b on July 5; it left purchases of 1-3yr at JPY280b and 5-10 yr at JPY500b. Response to BOJ’s offer to purchase was varied; the 5-10yr bid-to-cover ratio rose to 3.42 from 3.10 at the previous operation on July 7; the 1-3 yr bid-cover ratio fell to 3.75 from 4.14 at last operation on July 5 while 3-5yr ratio declined to 3.69 versus 3.87 at same auction. Japanese yields fell after the operation with 10-yr declining 0.5bp to 0.9%, retreating further from psychological 0.1% level; the 5-yr yield dropped 1bp to -0.04% after rising to -0.035% earlier this week

WTI crude climbed 2 percent to $45.96 a barrel. Gold was little changed at $1,218.90 an ounce. U.S. crude producers are set to pump record amounts of the commodity next year, but less so than previously projected, according to the latest government estimates. OPEC monthly market report is due today. In commodity markets, oil prices got a reprieve from worries about oversupply after the U.S. government cut its crude production outlook for next year and as fuel inventories plunged. Brent crude futures rose 1.3 percent while U.S. West Texas Intermediate (WTI) crude futures were up 2 percent.

Bulletin headline summary from RanSquawk

  • Asian equities traded mixed following a similar lead from Wall Street with political tension mounting amid the Trump Jr email revelations
  • A beat in UK data, however a dovish Broadbent leaves GBP undecided
  • Looking ahead, highlights include the OPEC monthly report, BoC rate decision, DoEs, Fed's Yellen

Market Snapshot

  • S&P 500 Futures up 0.2% at 2428.50
  • EUR/USD: -0.2% at 1.1446
  • USD/JPY: -0.5% to 113.36
  • GBP/USD: +0.1% at 1.2857
  • WTI Crude: +1.8% to $45.86/bbl
  • U.S. 10Y Treasury yield: -2bp to 2.34%

Top Overnight News

  • President Donald Trump’s credibility took a sharp blow after his son released emails that directly contradict months of assertions that investigations of possible campaign collusion with Russia were nothing more than a partisan “witch hunt”
  • Bank of England Deputy Governor Ben Broadbent said he’s not ready to vote for higher interest rates, even though he sees pressures to do so building up
  • U.K. pay adjusted for inflation drops 0.5% between March and May, as unemployment falls to 4.5% -- lowest since 1975
  • National Economic Council’s Gary Cohn is said to be top candidate to replace Janet Yellen as Fed chair: Politico
  • Fed’s Mester says reversing QE sooner rather than later preferable; Kashkari says he’s looking for wage pickup to precede inflation
  • France to cut taxes by about EU11 billion, PM Philippe tells Les Echos
  • China should widen the yuan’s trading band, PBOC newspaper says
  • BOJ increases purchases of 3-5-year JGBs at regular QE operation
  • API inventories according to people familiar w/data: Crude -8.1m; Cushing -2.0m; Gasoline -0.8m; Distillates +2.1m
  • Oil majors face ratings cuts amid weak recovery, S&P Global says
  • Saudi is said to cut Aug. oil exports by 600,000 B/D: Reuters
  • Total starts work at biggest Qatari oil field to maintain output
  • Saudi is said to exceed oil-output cap for first time
  • Abe said to have urged Xi to halt oil exports to N. Korea: Nikkei

Asian markets traded in mixed fashion following a relatively indecisive lead from Wall Street. ASX 200 (-0.96%) underperformed with all but one sector (materials) trading in the red, while the Nikkei 225 (-0.5%) slipped amid JPY buying. The Shanghai Comp (-0.17%) conformed to the tone with the index trading with marginal losses despite another PBoC injection, with the Hang Seng (+0.64%) today's outperformer breaking above 26,000 amid the surge higher in financials. In fixed income, JGB yields ticked lower with the curve slightly steeper, while the BoJ also increased their purchases of 3-5Y bonds.
PBoC injected CNY 40bIn in 7-day reverse repos and CNY 30bIn in 14-day reverse repos. PBoC set CNY mid-point at 6.7868 (Prey. 6.7983)

European bourses trade in the green as the futures bounced following the release of Trump Jr's email chain, confirming he had contact with Russian representatives. Energy is the clear out performer, as the out performance in the oil complex bolsters the energy names. The other 9 sectors in the Stoxx 600 also all trade in the green, as Burberry out-performs amid the beat in their retail sales and as a result, bolstering the other retail brands. Fixed Income have seen a slow grind, likely affected by yesterday's political concerns emerging out the US. The data filled day sees paper on sale, with 10-years in focus as Germany and the US are both set for auctions. Spreads will be watched, with the Italy/Germany flat on the day, holding the 177bps region. UK paper has seen some early volatility with Gilts seeing a slight uptick following Broadbent's dovish comments.

In currencies, the busy data day began with the UK employment data, strong average weekly earnings, supported by ILO unemployment falling to 4.5% did prove strong reading for the UK, however, many do still stay bullish GBP/USD, as some investors could see this data release as a selling opportunity. The greenback is likely to await Yellen's testimony, expected at 15.00 BST, with a text pre-release due at 13.30 BST, with CAD awaiting the latest BoC interest rate decision. As many stay FX traders remain conserved following a busy US evening and ahead of these events, USD trade has been subdued. However, post yesterday's close JPY was the main beneficiary from Trump Jr's email chain publication, with rising yields continuing to pose a risk.

In commodities, oil out-performance was a result of the API inventories where the headline crude inventories fell 8.1 min bbls compared to expectations of a 2.9min bbl decline. A draw in gasoline stocks also supported the energy complex, lower by 801 k bbls compared to a forecast for a 1.1 min bbl build. Further support came from the EIA yesterday, downgrading its production outlook for next year, now expecting a 570K BPD increase, prey. 680K. WTI once again traded through USD 45/bbl and is looking towards 46.00, with the next resistance level expected around the 46.60 area. The Precious metal complex continues to bounce, with gold finding a slowdown around the 1220 level, if this can be broken, we can expect an attack of the previously rejected 1228 level. Silver and platinum have also followed gold, in finding support in recent trade.

Looking at the day ahead, this morning in Europe the UK June employment data came out printing at 4.5%, below the expected 4.6%. In the US the key event is obviously the Yellen testimony at 10am. Away from that, while there is no data due out the Beige Book will be released in the evening. The  Fed’s George will also speak at 2.15pm, while it’s worth also keeping an eye on the BoC monetary policy decision where the consensus is for a 25bp hike.

US Event Calendar

  • 7am: MBA Mortgage Applications; Jul 7, prior 1.4%
  • 8:30am: Fed releases Chair Yellen’s testimony to Congress
  • 10am: Yellen to appear before U.S. House panel
  • 2pm: Fed releases Beige Book
  • 2:15pm: Fed’s George speaks in Denver on economic outlook

DB's Jim Reid concludes the overnight wrap

We've had a bit more excitement this week than financial markets have but yesterday saw things liven up a little (see below) and we now also reach the business end of this quiet week so far. Today we have Yellen's testimony to the House which she'll repeat tomorrow to the Senate with Q&A to follow. Today’s speech is due at 3pm BST however Congress is scheduled to release Yellen’s testimony at 1.30pm BST. In addition we have US PPI (tomorrow) and US CPI (Friday). Friday also sees US retail sales and three major US banks reporting. So plenty of life yet in a dull week.

For today, will Mrs Yellen choose to reinforce the recent more hawkish global central bank speak or will she attempt to pull things back a little? DB expect her to reinforce the message from the June 14 post-FOMC press conference and continue to guide the market towards an announcement of the beginning of balance sheet normalisation at the September 20 meeting as well as a rate hike by year-end. There will be plenty of eyes on Yellen’s comments around inflation too and our US economists expect the Chair to stick to the script that the recent pause is likely due to transitory factors. So it’s worth seeing if there is any change from this mantra.

Markets got a bit of a warm-up yesterday with a host of central bank speak over the course of the day. Over at the ECB we heard from board member Benoit Coeure who focused most of his comments on the impact of QE and negative rates on currency depreciation. The bigger focus leading into the day however was on the BoE’s Broadbent who’s exact position on the BoE dove-hawk scale is still a little open for debate. His speech ended up being a bit of an anticlimax however after steering clear of any comments on monetary policy and instead focusing much of it on the impact of a significant curtailment of trade with Europe post Brexit. Away from that Germany’s Merkel also made a rare comment on the ECB, saying that “we’re not yet back to where we want to be in terms of the ECB’s monetary policy” but that “the good news is that all euro zone member states are growing again”. European bond markets were broadly speaking another 1-5bps higher in yield yesterday while equity markets were a fair bit weaker (Stoxx 600 -0.65%) not helped by the headlines emerging out of Washington late in the session.

Indeed across the pond, we had a very minor flash crash yesterday with the S&P 500 falling 15 points in around 20 minutes which seemed to coincide with Donald Trump's son releasing email exchanges with a Russian lawyer from last year that indicated the Russian government was trying to damage Mrs Clinton and backing his father’s presidential campaign. Markets quickly recovered their losses over the next 3 hours but the S&P 500 still closed down -0.08%. Treasury yields also fell a few basis points following the headlines but the end of day move was also fairly muted with the 10y ending 1.3bps lower (for the second day in  a row) at 2.361%. The USD (-0.37%) was a bit weaker while Gold (+0.28%) found a bit of a bid. Oil continues to chop around in a tight range but is testing $46/bbl again this morning having closed just north of $44/bbl last week.

This morning in Asia it’s been a largely directionless session. The Nikkei (-0.31%), Shanghai Comp (-0.29%) and ASX (-0.75%) have all dipped lower, while the Kospi is flat and the Hang Seng up +0.72%. The latter is now up nearly +3% this week and above the 26,000 level. Previously the index had stalled in June as it approached what is seen as a key breakthrough level. Meanwhile the BoJ announced this morning that it is to boost purchases for 3y to 5y JGBs in a bid to cap the recent rise in yields. 1y to 3y and 5y to 10y maturity purchases were left unchanged.

Staying with the overnight news, it’s worth noting that Politico also ran a story suggesting that Gary Cohn – the current National Economic Council Director and ex Goldman Sachs President – is favourite to land  the Fed Chair job and replace Yellen next year with Trump increasingly unlikely to nominate Yellen for a second term. There also appears to be a bit of movement on the US health-care bill with Bloomberg running a story suggesting that Senate Republican leaders have dropped provisions that would repeal two taxes on higher earners in a revised draft of the bill. Senate Majority Leader Mitch McConnell supposedly told reporters that a revised bill could be released on Thursday followed by a new CBO estimate and procedural vote in the coming week. So potentially another backend- of-the-week event for markets to digest too.

Back to yesterday, there was also a bit of chatter from some of Yellen’s colleagues. The overall tone was a shade dovish. Governor Brainard said that “the neutral level of the federal funds rate is likely to remain close to zero in real terms over the medium term” and that “if that is the case, we would not have much more additional work to do on moving to a neutral stance”. She did however add to the chorus of officials in supporting a start to reducing the balance sheet “soon”. The Minneapolis Fed’s Kashkari said that he is still looking for signs that wage growth is picking up.

Yesterday’s economic data didn’t really move the dial. The only reports of note were out of the US where first of all we saw the NFIB small business optimism survey dip 0.9pts to 103.6 in June (vs. 104.4 expected) putting it over 2pts below the January high. Away from that the BLS JOLTS report for May saw job openings fall from 5.97m to 5.67m however the quits rate did edge up one-tenth to 2.2%. Finally the wholesale inventories print for May was revised up one-tenth versus the initial flash estimate to +0.4% mom.

Looking at the day ahead, this morning in Europe we’ll be kicking off in the UK where the May and June employment data is due out. Also due out this morning is the May industrial production report for the Euro area (+1.0% mom expected). This afternoon in the US the key event is obviously the Yellen testimony at 3pm BST. Away from that, while there is no data due out the Beige Book will be released in the evening. The  Fed’s George will also speak at 7.15pm, while it’s worth also keeping an eye on the BoC monetary policy decision where the consensus is for a 25bp hike.