Risk appetite has improved globally as weaker US inflation data (CPI 0.2% vs. 0.3% exp) suggest that worries of a quick Fed-tightening cycle is unfounded. Yesterday read point to a significant slowdown the Fed favorite inflation indicator PCE. US equites rallied with S&P 500 trading above 100dma and demand treasuries sent 10 yr yields below 3%. With the FOMC less than 1-month away front end yields remain supportive help flatten the curves toward historical lows. USD remains supportive against EM but lost ground in the G10. We still see the sources of recent USD correction as unrealistic. Our longer term view is unchanged as markets have yet to reprice US slowing growth and EU positive growth outlook. EM inflation outlook has not changed at close to target indicated that a central banks reaction is no expected (expect from Turkey and Argentina). We remain constructive on NOK and CAD (slightly less on AUD) against USD on the commodity rebound story.
Optimism grew as news flow indicate that President Trump might actually achieve a foreign policy coup by halting North Koreas nuclear program at summit planned to 12th June in Singapore. With liquidly lower due to holidays popular opinion is likely to drive price about deeper analysis. This has pushed to the side for now, middle-east tensions between Iran / Israel and news that anti-establishment and anti-EU 5-Star Movements and the far-right league are close to forming an Italy government. Elsewhere, oil prices fell as drop in Iranian exports could be replaced by Saudi and US supplies. Trader should stay cautions, as markets are fickle searching for the latest driver ahead of fundamentals.
By Peter Rosenstreich
