Market Recap
Chaos in Italy as the Prime Minister resigns almost before taking office! The premier-designate Guiseppe Conte on Sunday 28^th of May met with President Sergio Mattarella and handed back his mandate for forming a new government. The issue was the finance minister. The coalition wanted to name someone who’s in favor of leaving the euro. President Mattarella has to approve the Prime Minister and all ministers, but he refused to sign off on the finance minister. Now there’s talk that leaders of the Five Star Movement may try to impeach President Matterella. It looks like the President may appoint an interim government while the parties prepare for new elections. A former International Monetary Fund (IMF) official is being mentioned as a possible interim Prime Minister (PM).

Meanwhile in Spain, the no-confidence motion that the largest opposition party filed on Friday 25^th of May will be considered by the other parties today. Apparently the other parties all have a variety of demands and might not agree to support the motion. Recent opinion polls show that they have little to gain from new elections, so they may prefer the status quo to the possibility of losing seats in a new election.

It looks like chaos, but from the market’s point of view, the worst-case scenario of a euro-skeptic Italy has been avoided. The euro is actually up as a result, rising from a low of 1.1646 on Friday afternoon to 1.1715 this morning. We could see continued EUR strength today as these events offer the possiblity of a more settled future, rather than just a descent into chaos.

Oil collapsed after Russia and Saudi Arabia said they want the Organization of the Petroleum Exporting Countries (OPEC) meeting next month to discuss suspending its output restrictions. The Saudi energy minister said there were proposals to increase production by some 300 kb/d-800 kb/d, with Saudi Arabia favoring the low end and Russia favoring the high end. Russian President Putin said the country was happy with oil at $60/bbl, substantially below current levels. (Brent was $79.42 on Thursday 24^th of May, before this talk began.)

The other OPEC countries however don’t see any upside in this for them. Most are producing at their limit anyway; only Russia and Saudi Arabia have room to increase production. In theory those two countries could just boost production unilaterally, but OPEC rules say the group has to agree. To win the agreement of the others and also to make up for a long period of low prices, it is expected that the group will probably want to keep the supply/demand balance relatively tight, which means leaning more towards the lower increases that the Saudis prefer. Under that scenario, prices would probably fall modestly but still remain well supported above $50/bbl. Raising output by 800 kb/d, as Russia prefers, would probably mean an oversupplied market eventually and send prices materially lower.

Oil prices are expected to continue their slide, particularly WTI, as US production is rising and inventories, which have come down a lot, have started rising again. The Brent/WTI spread, now at its widest level of the year, could widen out even further.
Lower oil prices and continuing fears over North American Free Trade Agreement (NAFTA) sent CAD down sharply. In this uncertain environment, one could expect a dovish Bank of Canada statement on Wednesday 23^rd of May that could cause investors to reconsider their interest rate expectations and push the currency lower still.




NZD, AUD and JPY were generally higher as it appears that the meeting between US President Donald Trump and Supreme Leader of North Korea Kim Jong-un may be back on. US stock futures gained in early trading. New Zealand announced plans to eradicate a cattle disease that’s been troubling the country’s important dairy sector, but this was announced well after NZD began shooting up. A surge in Chinese industrial profits – up 21.9% yoy in April vs +3.1% in March 2018 – may have also boosted sentiment for these currencies, although again this news too came out after the surge began.

USD was also higher despite US interest rates being lower across the curve. The US currency seems to have momentum behind it.

The weak GBP is to some degree the counterpart of a stronger EUR, as a lot of EUR positioning recently has been through EUR/GBP. Scottish First Minister Nicola Sturgeon will go to Brussels this week to meet with EU Chief Negotiator Michel Barnier. There’s increasing concern that Scotland could vote to break away from the UK and remain in the EU if and when Britain leaves the EU. Separately, it appears that the UK Electoral Commission has  set aside GBP 829,000 for a European Parliament election that’s scheduled to take place eight weeks after Brexit is supposed to occur.

Commitment of Traders Report

Investors continue to trim their USD shorts and EUR longs. They are modestly long the DXY index and modestly short JPY. Still long GBP suggests that there’s plenty of room for them to sell the beleaguered British currency, though. CHF shorts increased, as did CAD and NZD.

Speculators decreased their long WTI positions a little, but there’s lots of room to cut further there as OPEC considers cutting its output.



Today’s market

The only point of interest during the European and US day is the three Italian note auctions. These are all reopenings of existing issues. It will be a good guide to whether people see the recent rise in Italian yields as an opportunity or a warning.
 
It’s noticeable that even with all its problems, Italian 10-year yields are still lower than US 10-year yields!




Overnight, the Japanese unemployment rate does seem significant for the yen, but with the rate expected to stay unchanged, the small rise in the job-offers-to-applicants ratio may go unnoticed. This could be neutral for JPY.



 
The Fundamental Analysis is provided by Marshall Gittler who is an external service provider of Claws and Horns (Cyprus) Limited, an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.