Sterling Slumps, Wall Street Rebounds, Bitcoin, Crude - What's Moving Markets

© Reuters.

By Peter Nurse

AiVIF.com -- Sterling is under pressure as cases rise of a new Covid variant, while U.S. stocks edge higher in what has been a difficult week. Crude and sterling head lower, Bitcoin struggles for investor friends, and the RBA looks to 2023 to move. Here's what's moving markets on Friday, June 18th.

1. Sterling under pressure as cases rise

The positive vibes surrounding sterling are starting to disappear as a surge in coronavirus cases is hitting the optimism that greeted the country’s successful vaccination program.

The pound dropped 0.3% against the U.S. dollar Friday to $1.3885, falling to its weakest level since early May, and dropping by 1.6% since Wednesday’s Federal Reserve meeting.

The country recorded more than 11,000 new cases of Covid-19 virus on Thursday, the highest number since Feb. 19, despite the country having injected more than 42 million people, around 80% of the adult population, with one dose of a vaccine, and over 30 million with two jabs.

The problem has been the rise of the Delta coronavirus variant, first discovered in India, which doubles the risk of hospitalisation compared with the previously dominant variant in Britain, according to a Scottish study.

This increase has already persuaded Prime Minister Boris Johnson to delay the total reopening of the country’s economy by a month, while retail sales fell unexpectedly by 1.4% between April and May.

Adding to the difficulties facing sterling is the increasingly fractious nature of the relationship between London and Brussels, especially regarding trade between Northern Ireland and the rest of the U.K.

“Brussels' patience with London's [attempt] of having its cake and eating it is wearing thin,” said analysts at ING, in a note. “Indeed, there is a risk of protocols being triggered and tariffs being threatened more seriously.”.

The political pressures facing the U.K. government are not only external after PM Johnson suffered an embarrassing defeat when his Conservative Party lost a parliamentary by-election in his party’s heartland, just a few miles from his own seat.

This all marks a change in tone for a currency that has risen 0.7% since March, fueled by a successful vaccination effort and speculation this could lead to an early recovery and the Bank of England raising interest rates sooner than its peers.

2. Stocks edge higher ahead of triple witching

U.S. stocks are seen opening marginally higher Friday, but largely look set for a losing week in the wake of the Federal Reserve’s hawkish turn.

By 6:25 AM ET, Dow Jones futures were up 20 points, or 0.1%, S&P 500 futures were 0.1% higher and Nasdaq 100 futures climbed 0.2%.

The Fed’s decision to point towards interest rate raises in 2023, a year earlier than expected, has taken the gloss off large parts of the equity markets, as investors have to begin to adjust to a reality without the very easy funding conditions.

On Thursday, the blue-chip Dow Jones Industrial Average dropped 0.6%, broad-based S&P 500 closed 0.1% lower, while the tech-heavy Nasdaq Composite outperformed, gaining 0.9%.

For the week to date, the Dow has fallen 1.9%, the S&P 500 has dropped 0.6%, while the Nasdaq has gained 0.7%.

There are no economic numbers of note due later and the earnings slate is largely empty. But it's a triple witching Friday, with options and futures on indexes and equities set to expire, which could lead to a volatile trading day.

In corporate news, Adobe (NASDAQ:ADBE) will be in the spotlight after the software giant easily beat second quarter targets when it reported after the close Thursday.

General retailer Kroger (NYSE:KR) will also be in focus after delivering strong first quarter numbers, while raising its guidance for 2021. 

3. The year 2023 and the RBA

It’s not only the Federal Reserve for which the year 2023 could be transformative, after strong employment data pointed to Australia’s central bank choosing to raise its interest rates in the same year.

May’s employment data showed 115,200 net new jobs were created in the month, way above expectations of 30,000, while unemployment dropped sharply to 5.1%, from 5.5% in April.

The strength of this release will likely cause the Reserve Bank of Australia to stop and think, especially as the RBA has often been seen as the odd man out as other central banks in the developed world turn more hawkish, notably the U.S. Federal Reserve and the Reserve Bank of New Zealand.

On Wednesday, the Fair Work Commission, an independent wage-setting body, said Australia's minimum wage will rise by 2.5% for the financial year starting in July, a faster pace than this year.

“The May employment report is a major ‘game changer’ for policy,” Westpac Chief Economist Bill Evans wrote in a research note Friday, Bloomberg reported. “The recovery is now clearly into a self-sustaining upswing and the need for emergency stimulus policies has eased significantly.”

He sees the RBA raising its key interest rate in early 2023, lifting the cash rate, currently at 0.1%, by 15 basis points in the first quarter of 2023, 25 bps in the second, and by a further 25 bps in the final three months of the year.

4. Differing Bitcoin views 

There are very few things that divide opinion in financial communities quite as radically as the suitability of cryptocurrencies, and Bitcoin in particular, as an investment vehicle.

Bitcoin, the world’s largest cryptocurrency by market capitalization, certainly has its backers, soaring in value to a record level of just below $65,000 in April. However, it has been under pressure largely since. At 6:25 AM ET, Bitcoin traded over 4% lower at $37,658.

Influential investment bank Goldman Sachs (NYSE:GS) has highlighted the different sides of debate. Earlier this week the Wall Street banking giant released a report which claimed that cryptocurrencies are not a “viable investment”, concluding that Bitcoin is not “a long-term store of value or an investable asset class”.

Fair enough, that’s a view of many in officialdom, including Bank of England Governor Andrew Bailey who warned earlier this week about the volatility of digital currencies.

However, this view contradicts a report the investment bank published only in May, which included the line - "Bitcoin is now considered an investable asset".

It’s probably fair to say that most investment managers side with the first point of view. The Bank of America’s Global Fund Manager Survey for June, released this week, found that 81% of fund managers continue to believe that Bitcoin is still in a bubble state.

Additionally,  Danske Bank said Friday it will maintain a ban preventing the trading of Bitcoin and other cryptocurrencies on its platforms, adding that it would review its position again once the cryptocurrency market “matures and is further regulated.”

5. Crude prices slip; Remain near multi-year highs

Crude oil prices weakened further Friday, continuing to slip in the wake of the stronger dollar after the Federal Reserve meeting, but remain near multi-year highs.

By 6:25 AM ET, U.S. crude was down 0.2% at $70.81 a barrel, while Brent was down 0.5% at $72.71.

The U.S. dollar has been one of the main beneficiaries of the Federal Reserve’s hawkish change of tone, pointing to two interest rate increases in 2023, a year earlier than previously expected.

The US Dollar Index, which tracks the greenback against a basket of six other currencies, hit a more than two-month high earlier Friday, and is on course for a weekly gain of 1.5%, its largest since September.

This has had an impact on the crude market, as a stronger dollar makes oil priced in the U.S. currency more expensive in other currencies, potentially weighing on demand. That said, losses have been limited, and the two benchmark oil contracts remain near multi-year highs, still on course to end the week largely unchanged.

On Wednesday, Brent settled at its highest price since April 2019 while WTI settled at its highest since October 2018.

After all, the fundamentals remain strong, with crude demand increasing as many countries, particularly those with high energy consumption in the West,  continue their economic recovery from the Covid-19 virus and gradually re-open.

A potential fly in the ointment could come from the potential addition of Iranian oil exports to the global market. This follows remarks from Iran's top negotiator on Thursday saying talks between Tehran and Washington on reviving the 2015 Iran nuclear deal have come closer than ever to an agreement.

An agreement between these two principals could see the U.S. lifting sanctions on the Iranian energy sector, potentially allowing the Persian Gulf country, which has the fourth largest proven oil reserves in the world, to resume exporting its crude.

Complicating the issue is that Iranians are voting Friday in a presidential election that is likely to see a hardline conservative replace the more moderate Hassan Rouhani, a move that is unlikely to be viewed too favorably in Washington.