Dow Futures Reach Fresh Record

Daily Analysis - 20/06/2017

US Equity Benchmarks Pushed Higher by Rebound in Technology Shares

Despite the mixed comments from key Federal Reserve officials, major US stock indices including the Dow Jones Industrial Average and S&P 500 touched new intraday highs and notched record closes. The gains were led predominantly by the resurgence in technology shares despite the more hawkish commentary from New York Federal Reserve President William Dudley.

US Tech Gains Spur Equity Rally

Although it was a volatile day for equities following conflicting comments from two important members of the US Federal Reserve, key global benchmarks managed to reach new heights on Monday. Remarks from William Dudley of the New York Fed echoed last week’s hawkish sentiment from Fed Chair Janet Yellen, indicating that any failure to keep tightening monetary policy could hurt the economy.

However, Chicago Fed President Charles Evans suggested during his own remarks that the Federal Reserve could delay any further tightening of interest rates should conditions merit such a response. The resulting reaction in equities was positive after the futures selloff that transpired after Dudley’s observations. Even though there are an abundance of concerns regarding the valuations of major technology companies, the rebound in Alphabet, Apple, Amazon, and Facebook helped spur gains in the Dow, with futures extending gains in early European trade.

Oil Finds Relief Amid Rising Tensions in the Gulf

The prevailing market dynamics continue to weigh on oil prices as evidenced by the most recent price action. Growing US production combined with the resurrection of shuttered Libyan and Nigerian production are once again hurting efforts by OPEC and non-OPEC nations to rebalance the oil market.

However, the one event that could conceivably trigger a rebound in oil futures is the threat of conflict unfolding in the Persian Gulf. Stoking the potential for conflict was a report that the Saudi Navy intercepted an Iranian vessel attempting to detonate explosives in the Marjan offshore oil field. The Saudis claimed to have captured three members of the Iranian Revolutionary Guards. However, the Iranian’s have categorically denied this version of events, indicating that the captured boat belonged to fishermen. Should mistrust continue to build, oil futures may found themselves back on the rebound after WTI found support just above $44.00 per barrel.

UK and EU Agree on Brexit Timetables

In the aftermath of the election debacle in the United Kingdom, the opening of Brexit negotiations with the European Union was reportedly positive despite a growing sense of acrimony between the two parties. Lead EU negotiator Michel Barnier met with his UK counterpart David Davis on Monday to outline a timeline for Brexit negotiations. The major development to unfold with the language confirming that the UK would be moving ahead with a hard exit, closing the door on the possibility of the “soft” Brexit desired by certain UK policymakers.

Ultimately, the UK is still pushing for exit negotiations and the track for future relationships to be negotiated in parallel. However, Europe’s demand for an exit payment may present a hurdle in upcoming negotiations. In the meantime, EURGBP is surging at the outset of European trade, with pair just below 0.8800.

RBA Minutes Underscore Risks for the Outlook

Following the decision by the Reserve Bank of Australia to hold rates steady at a record low of 1.50% earlier this month, minutes from the Monetary Policy Committee’s meeting highlighted the sense that policy could be accommodated further. According to the Central Bank, the two main risk factors that are being carefully monitored include the housing market and employment fundamentals. Even though employment has improved tremendously, with the jobless rate falling to a 51-month low of 5.50%, underemployment remains a real concern for policymakers.

In addition, wage growth remains sluggish and is being outpaced by inflation, hurting real income at a time when household debt has rapidly expanded. Although the RBA highlighted the option to accommodate policy further should conditions necessitate, the Central Bank maintained its 3.00% growth outlook for the year, triggering a rally in AUDUSD. The pair is back above 0.7600 after a surge higher before the European open.