Headlines

* World Bank brightens 2023 global growth view, downgrades 2024

* RBA’s Lowe: Too early to declare victory in battle against inflation

* China exports drop more than expected, adding to economic risks

* Rally in Hong Kong stocks bolsters Asian equities

FX: USD is tracking sideways in a narrow range so far this week. The index is hovering just above 104 in the middle of its recent range. Similarly, the 2-year yield is trading in between its recent high and low around 4.5% The 10-year yield is dallying with the 200-day SMA at 3.66%.

EUR dropped below 1.07 and remains lacklustre. Softer eurozone data and inflation expectations are painting a weakening economy in the region. GBP printed a relatively narrow range “inside day” around 1.24. USD/JPY pulled back from the resistance zone around 140 amid narrowing yield differentials. AUD is just about higher this morning, gaining for a fifth straight session. The RBA’s surprise hike was partially offset by disappointing Australian GDP and China trade data. The 200-day SMA sits at 0.6690. USD/CAD has touched trendline support just above 1.34 a couple of times ahead of the BoC rate decision later today. Consensus expects no change to rates.

Stocks: US equities closed higher with gains limited amid light volume and the lack of top tier data. The benchmark S&P 500 gained 0.24%. It settled at its highest close this year. The Nasdaq 100 added 0.36%. The Dow lagged, finishing 0.03% higher. The small cap Russell 2000 outperformed strongly with gains led by regional banks. This follows a bullish outlook on the US economy by Goldman Sachs. They famous investment bank cut its probability of a US recession within the next 12 months to 25% from 35%. It forecast US GDP growth of 1.8% this year surpassing the Fed forecasts and most private sector estimates.

Asian stocks mostly gained after the high close in the benchmark S&P 500 and Russell 2000 rally. But advances were capped due to softer-than-expected Chinese trade data. The Nikkei 225 wiped out early gains in a 700-point swing. It found support beneath the 32,000 level. The Hang Seng was positive led by tech after the largest banks cut deposit rates to boost the economy.

US equity futures are mixed.  European equity futures are pointing to a higher open. The Euro Stoxx 50 closed flat yesterday.

Gold was subdued around $1960. The precious metal is off nearly 5% from its peak last month. Eyes are on next week’s US CPI data which is released a day ahead of the FOMC meeting. A pause in its tightening cycle is expected. But markets see over a 50% chance of another 25bp hike in late July.

Day Ahead – Low volatility…the calm before the storm?

Markets are currently in standby mode as they await next week’s hit of major risk events (US CPI, FOMC, ECB and BoJ meetings). Even then, a “skip” in rate hikes is fully priced by markets while the ECB is expected to hike rates by 25bps. Of course, this presumes that the inflation data doesn’t blow out one or the other.

The VIX index which measures volatility for the next 30 days in the S&P 500 closed below 14 yesterday. That its lowest level since before the pandemic in early 2020. Earnings estimates for the next 12 month continue to be revised up indicating the stock markets isn’t concerned about a recession. This is in contrast to some leading Wall Street economists and curve inversion in bond markets. FX markets are also quiet with realised volatility measures in EUR/USD falling back to pre-Ukraine invasion levels. Bond market implied volatility seen in the MOVE index is at its lowest levels in a year. The calm ahead of a…?

Chart of the Day – USD/CAD trading on support

The RBA has sparked speculation the BoC may follow them and surprise with a rate hike later today. Consensus sees no change but money markets price in a 46% chance of a 25bp move. Stronger-than-expected GDP and CPI data have supported expectations around the BoC keeping rates higher for longer. Minutes from its last meeting show discussions around raising rates due to concerns about persistent inflation.

The CAD is the best performing G10 currency over the past month. A hike could see a break of near-term trendline support. Loonie bulls would eye up major support at 1.33 in USD/CAD. A hawkish hold is probably the minimum markets expect. Anything less, and the major will jump back up towards 1.35. A confluence of simple moving averages resides around here.