Market Drivers June 6, 2016
Cable tumbles on Brexit polls
Markets tread water ahead of Yellen
Nikkei -0.37% Dax 0.30%
Europe and Asia:
AUD Job adverts 2.4% vs. -0.8%
USD Yellen speaks 12:30
Cable tumbled out of bed on the first trading day of the week gapping lower as dealing opened in Asia and eventually falling all the way to 1.4351 before bids at that level arrested the plunge.
The decline was driven by a fresh set of new polls that suggested the Leave vote was picking up considerable momentum with less than three weeks to go ahead of the voting. The latest Daily Telegraph polling of their subscribers showed as many as 69% were inclined to vote for Leave vote. Overall the weekend polls showed that the Leave side was ahead by 3%. That’s still within the margin of error but close enough to worry the financial markets which generally remain convinced that UK will stay in the EU.
The trading in cable will only grow more volatile as the vote approaches and many retail brokers have already started to raise their margin on the pair afraid of another SNB disaster on their hands. For now however, the general consensus from the markets as well as UK bookies is that the Stay vote will win, but with sentiment is clearly fluid the risks to the downside in cable remain significant.
Elsewhere the price action was very subdued as currencies essentially tread water ahead of Janet Yellen’s speech later today at 1630 GMT. Despite Friday’s woeful NFP numbers not all market participants are convinced that the Fed will remain on the sidelines until the end of the year. Goldman Sachs believes that Ms. Yellen will not be spooked by the one month dip in data and that she may even reaffirm the “coming months” language in her remarks today.
Furthermore as analysts at Convergex point out, “The lousy jobs number on Friday is a good reason to review one of our alternative measures of the U.S. labor market: individual tax and withholding data from the U.S. Treasury. May 2016 receipts for wage-earning individuals were fine, up 9.9% after two months of essentially flat growth. Gig economy workers, who submit their taxes on a non-withheld basis, are doing even better with payments there up 31%. Year-to-date receipts for each cohort are similarly strong: up 5.0% for wage earners and 9.7% for gig workers, for a combined gain of 5.9%. And while the Federal Reserve may not cite this data directly in policymaking, it does filter through in terms of wage gains (up 2.5% in May) and therefore inflation pressures. Bottom line: the weak May jobs report makes the Fed’s job of communicating policy even more difficult. Inflation pressures are quietly mounting even as job growth stalls.”
The buck therefore may find some support as the week begins. USD/JPY is already up through the 107.00 level and if Ms. Yellen remains neutral in her assessment today the pair could make a run towards 108.00 as the day proceeds.