May 19, 2022

“The dollar index’s rebound from weekly lows in the 103.20 region has lost some steam just ahead of the 104.00 mark amidst the resumption of the risk-on sentiment – the corrective decline comes hand-in-hand with the negative performances of the US yield curve.”

Tim Hallinan – Trading Director

Main Headlines

US President Joe Biden has invoked Korean war-era powers to boost baby formula production, in an effort to ease shortages that are becoming a political liability for the White House and congressional Democrats. The move by Biden comes after growing criticism from Republicans in Congress, who have seized on the limited availability of baby formula as the latest example of an economy struggling to cope with high inflation and supply chain shortages. Invoking the Defense Production Act, and launching Operation Fly Formula, US health and agriculture agencies will be able to use defense department aircraft to fly in imported baby formula from overseas. The shortage has also exposed the high level of market concentration in the sector in the US, leading to insufficient supplies from other producers to fill the gap. “Directing firms to prioritize and allocate the production of key infant formula inputs will help increase production and speed up supply chains,” the White House said in a statement.

Ministers are pushing businesses to help workers cope with the cost of living after inflation hit 9% thanks to a surge in energy bills, after the energy price cap was raised for the first time since the global increase in wholesale gas prices. Rishi Sunak promised to cut taxes for firms in the autumn but said that in return they must invest more, train up their employees and become more innovative to grow the economy. The Government has also privately told oil and gas companies they will be hit with a windfall tax if they do not produce concrete plans to increase their investment in the North Sea and renewable energy over the coming months. The Chancellor is under mounting pressure to step in sooner rather than later with tax cuts, targeted support for the poorest Britons, or both.  Three Cabinet ministers went public with demands for lower taxes yesterday while growing numbers of backbenchers support the idea of a windfall tax even as Boris Johnson again criticised the policy.

GBP

Sterling is well bid against most major currencies overnight. Rapid increases in the UK’s minimum wage helped to narrow inequality but have done nothing to lift the country’s persistently poor productivity, according to an independent review of the policy. The UK’s minimum wage rose at twice the rate of median hourly pay between 2015 and 2020, raising pay either directly or indirectly for more than a third of workers and delivering wage gains well in advance of inflation. This raised average weekly pay without any significant hit to jobs or to workers’ chances of pay progression. Banks and building societies will be subject to Financial Conduct Authority (FCA) powers to help ensure financial inclusion. In the Queen’s Speech last week, the government promised that access to cash would be protected through the Financial Services and Markets Bill. The government has confirmed that the FCA’s new power to ensure communities have cash withdrawal and deposit facilities will feature in the legislation.

EUR

The euro is stronger against the dollar and weaker against sterling this morning. Sweden must cut their ties with a Syrian Kurdish militia, whom Turkey views as terrorists, or President Erdogan will continue to block their application to NATO, Ankara’s ambassador to Stockholm has warned amid a deepening crisis over the Scandinavian country’s bid to join the transatlantic defence alliance. The European Union (EU) have unveiled a plan to bolster solar and wind power and to become more energy efficient, but European Commission officials conceded it would take time for green energy to displace the massive flow of Russian fossil fuels. The EU will rustle up another €210 billion ($315 billion) to fund renewable energy infrastructure, and to build LNG and oil facilities that would underpin the switch to non-Russian supplies. Japan will double fiscal aid for Ukraine to $600 million in a coordinated move with the World Bank to back the country’s near-term fiscal necessities damaged by Russia’s invasion, Prime Minister Fumio Kishida told reporters today.

USD

The dollar is weaker than most major currencies in the early morning trade. Cash holdings among global fund managers have risen to their highest level since the 9/11 terrorist attacks in the US in a shift that reflects large investors’ worries about the deteriorating outlook for stock markets. Cash balances have swelled to 6.1% on average across the portfolios of global asset allocators according to Bank of America. US companies are accelerating capital spending despite slower economic growth, as the impact of supply chain disruptions and “deglobalisation” override worries about a looming recession. New York authorities have filed a complaint alleging Amazon discriminated against pregnant workers and workers with disabilities by denying them reasonable accommodations. The complaint claimed that Amazon’s policies forced pregnant workers and workers with disabilities to take unpaid leaves of absence, rather than allowing them to work with reasonable accommodation.

Markets

US equity futures fell, and European stocks opened lower, as concern that high inflation is cutting into corporate performance overshadowed bargain hunting of beaten-down stocks. Futures on the S&P 500 Index slid 0.4% after the equity benchmark posted the biggest single day drop since June 2020 yesterday. Nasdaq 100 contracts were down 0.5%. The Stoxx 600 retreated more than 1% as Europe’s technology shares joined a global selloff. Oil rebounded after a two-day drop. Bets that robust earnings can help investors weather this year’s turbulence were thrown in doubt after US consumer titans signalled growing impact of high inflation on margins and consumer spending. Meanwhile, Federal Reserve officials reaffirmed that tighter monetary policy lies ahead, and investors fretted over stagflation risks. Stocks of retailers and consumer-discretionary companies posted some of the biggest losses in Asia and Europe after US investors questioned the lofty valuations of companies like Target Corp. in the backdrop of rising interest rates.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: Sweden 1Q industry capacity
10:00 a.m.: ECB March current account
10:30 a.m.: Italy March current account
10:30 a.m.: Spain to sell bonds
10:50 a.m.: France to sell bonds
11:00 a.m.: Eurozone March construction output
11:50 a.m.: France to sell linkers
12:00 p.m.: UK May CBI Trends Total Orders
1:30 p.m.: ECB publishes account of April policy meeting
2:30 p.m.: ECB’s de Guindos speaks
2:30 p.m.: US initial jobless claims
5:00 p.m.: Riksbank’s Floden speaks
6:00 p.m.: EU’s Vestager, ECB’s Holzmann at award ceremony
South African Reserve Bank rate decision
Finnish President, Swedish PM meet Biden
PGA Championship begins at Southern Hills Country Club in Tulsa

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