Markets in a cautious mood

Markets are starting June in cautious mood, with equities and industrial commodity prices under pressure, as investors hunker down ahead of some big “risk events” while parsing a flood of economic data.

After a sharp loss for Tokyo led Asian bourses lower, the pan-European Stoxx 600 is down 0.9 per cent as the mining sector sheds 4.6 per cent. US index futures suggest the S&P 500 will slip 6 points to 2,091.

The tentative tone comes ahead of some potentially market moving events in coming days, with the start of Opec’s meeting in Vienna and the European Central Bank’s latest policy decision, both on Thursday, and the release of official monthly US jobs data on Friday.

The latter, if sufficiently robust, may help cement expectations for a summer interest rate rise by the Federal Reserve. Futures markets are currently pricing in a 53 per cent chance the US central bank will increase borrowing costs by 25 basis points in July, up from a round 15 per cent in mid-May following more hawkish commentary by Fed members.

The shift in Fed timing has been lifting the dollar and US government bond yields of late, but those trends are fading in the new session. The dollar index, which on Monday hit a nine-week high of 95.97, is slipping 0.3 per cent to 95.57 and the benchmark 2-year Treasury yield is steady at 0.88 per cent.

In contrast, the two-year German government bond yield is minus 0.51 per cent, reflecting the ECB’s policy of negative interest rates and asset purchases as it strives to boost growth and combat deflationary pressures.

No change in rates is expected when ECB president Mario Draghi announces the outcome of the monetary guardian’s latest meeting, though traders as ever will be keen to analyse accompanying comments for clues to policy trajectory.

In the meantime, the euro is up 0.3 per cent to $1.1158 despite a report showing the bloc’s factories are stuck in slow growth.

And the common currency is 0.5 per cent firmer versus its UK peer as the pound shrugs off better manufacturing data and suffers amid signs the “Brexit” vote” is getting tighter. The cost of hedging the sterling/dollar exchange rate over a one month period - known as 1-month implied volatility - has hit a seven-year high of 20.

The softer buck is doing little to help dollar-denominated commodities. Base metal prices are mostly lower and Brent crude is down 2 per cent to $48.89 a barrel as Opec delegates gather in Austria for their latest meeting.

Traders are not expecting the oil cartel to take any meaningful supply-cutting action to further boost prices that have already bounced sharply since hitting 12-year lows around $27 a barrel in January.

And further weighing on industrial commodity sector sentiment is a decidedly mixed bag of macroeconomic data in Wednesday’s session.

Some releases, such as Australian gross domestic product, were better at the headline level than the forecasts. Others, such as Japanese capital spending, showed slowing growth, while readings on activity in the manufacturing and services sector for a number of economies, including China, were generally disappointing.

The Australian dollar is up 0.4 per cent to US$0.7255 after GDP growth exceeded expectations. The economy grew 1.1 per cent quarter-on-quarter in the first three months of 2016, lifting the annual rate to 3.1 per cent.

The GDP figure is likely to reduce any urgency for the Reserve Bank of Australia to cut interest rates again, reasoning that contributed to Sydney’s S&P/ASX 200 equity index falling 1 per cent.

The yen is 0.9 per cent stronger at ¥109.88 per US dollar, benefiting from the broader “risk off” move and after Prime Minister Shinzo Abe confirmed a well-flagged delay to a rise in the national sales tax.

The Japanese currency initially swung in and out of negative territory as data showed the pace of capital spending slowed in the March quarter to 4.2 per cent year-on-year, but was still ahead of expectations. The exporter sensitive Tokyo stock market fell 1.6 per cent.

China’s official PMI for the manufacturing sector held steady in May at 50.1, just above the threshold of 50 that separates expansion from contraction. The gauge of activity in the services sector dropped to 53.1 last month from 53.5 in April.

That contrasted with the privately prepared manufacturing PMI survey by Caixin-Markit, which slipped 0.2 points to 49.2 from April to May, remaining in contractionary territory.

Reflecting on the official PMI readings, analysts at ANZ Banking Group said Wednesday's figure "ruled out the possibility of imminent broad-based monetary policy easing".

Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, said of the Caixin-Markit data: “Overall, China’s economy has not been able to sustain the recovery it had in the first quarter and is in the process of bottoming out. The government still needs to make full use of proactive fiscal policy measures accompanied by a prudent monetary policy to prevent the economy from slowing further.”

The Shanghai Composite equity index fell 0.1 per cent, shedding a bit of the 3.3 per cent surge on Tuesday which came on hopes some Chinese shares would be included in MSCI indices. Hong Kong’s Hang Seng mirrored the more subdued regional mood, dipping 0.3 per cent.

Manufacturing PMI readings for other countries were mixed. Activity in South Korea ticked into expansionary territory, the pace of contraction quickened in Taiwan, and in Japan the pace of contraction slowed.

Gold, which in May had its worst monthly performance since November because of rising bond yields and a firmer dollar, is up $1 on the day at $1,216 an ounce.

– Copyright The Financial Times Limited 2016