Capital Markets: "Ahead of US Jobs Report, the Greenback Remains Firm"

From Marc to Market:

Overview: The US April jobs data stand before the weekend, and the greenback is holding on to most of yesterday's gains as participants wait for the report. Equities in the Asia Pacific region were mixed without leadership from China and Japan, where the markets remain closed for the extended holiday. On the week, Australia's ASX was the worst performing. It lost 0.8%. Hong Kong was the best with a 1.6% gain, followed closely by Singapore's 1.3% rise. European shares advanced through the morning and pared the week's loss to 0.4% to snap a two-week gain. The S&P 500 reversed lower on Wednesday after setting a new record a little below 2955. It saw follow-through selling yesterday but found bid near 2900 and looks technically set to recovery further, depending on the US employment report. Benchmark 10-year yields are firmer today and adding to the week's increase. US 10-year yields are up three basis points on the week ahead of the jobs data. The UK yield is up five basis points and Germany up four this week. Italian and Spanish yields are slightly softer on the week. The dollar gained broadly yesterday and is holding on to most of these gains today. The Scandis and the Antipodean currencies are the heaviest on the week. Sweden's Riksbank tilted dovish, and the Norwegian krone has been sold on softer manufacturing data and the drop in oil prices. Brent has fallen for six of the past eight sessions. Around $70.20, Brent for July delivery is off a little more than 2.0% for the week, ending a five-week advance.

Asia Pacific
The Reserve Bank of Australia and New Zealand meet next week. Both meetings are live in the sense that a change of policy is possible. In New Zealand, the market thinks it is likely and discounted a little more than a 50% chance. In Australia, despite the plunge in building approvals reported earlier today (-27.3% year-over-year, after February's 12.3% drop), the RBA is seen waiting a little longer. There is about a one-in-three chance of a cut discounted.

Without Japanese and Chinese markets open, investors have to look for regional clues elsewhere. Today, Malaysia reported March trade data that suggest that while still challenged, the slowdown is easing. Malaysian exports slipped 0.5% year-over-year. They had fallen 5.3% in February and economists did not expect the magnitude of this improvement. Similarly, imports eased 0.1% after a 9.4% drop in February.

With the extended holiday in Japan, the market has been reluctant to move the yen very far. The dollar was on the JPY111-handle all week, and net-net is virtually unchanged on the week around JPY111.50. The Australian dollar is trading heavily. In late April, it dipped below $0.6990 but bounced back to close above $0.7000. It ran out of steam early this week near $0.7070 and closed at $0.7000 yesterday. Earlier today, it made a new marginal low since the January 3 flash crash (~$0.6085). There is a roughly A$870 mln option at $0.7000 that will be cut today.

Europe
The results from the local elections in the UK are not all counted yet, but the overall results are clear. The Tories, who had the most seats on the line, were punished severely. With less than half the councils reporting, the Conservative lost about 440 seats. Labour was also punished. With the partial results, Labour lost near 80 seats. The big winner for the Liberal Democrats, who picked up over 300 seats, and Independents. Small parties with a clear anti-Brexit message also did well, according to the early results. Many observers see even these partial results as likely adding to the pressure for the Tories and Labour to reach an agreement. On the other hand, some argue that Labour was punished for not being more supportive of a second referendum or being "strategically ambivalent." At the same time, there is speculation that after losing the Conservatives parliamentary majority and now this drubbing, pressure on May to leave may increase. This is not good for sterling as it appears to renew the risk of leaving without an agreement....

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