Emerging Markets Hold Down Risk Assets Ahead of G-7

 

EM Troubles Lead to Flight to Quality

Despite the Brazilian central bank intervening on behalf if it’s freefalling currency for the second time in as many days, the Real (BRL) continued to lose value against the US dollar (USD), setting off a flight to quality.  Treasury markets rallied on this move with yields falling 1-6 bps across the curve, with the yield on the 10yr Treasury note closing the day at 2.92%.  In equity markets, the NASDAQ couldn’t hold on to the record close from yesterday and finished the day off 0.70%.  The S&P ended the day mostly unchanged losing less than 2 pts, down 0.07%. The DJIA closed up 0.38% on the day, led by McDonald’s which was up 4% on the announcement of a plan to streamline operations.  While the USD gained vs EM currencies it was largely unchanged vs other major currencies where it was down 0.2% vs the Euro (EUR) and down 0.1% vs the Pound (GBP).  Oil was up on the day, with WTI crude oil futures gaining 1.9% closing at $65.95, on the news that Venezuela is behind on delivery of its exports and OPEC may not be as eager to increase production.

 

 

Jobless Claims Remain Low

An otherwise light day for key economic data releases was highlighted by a report from the Labor Department which showed initial jobless claims in the US holding near historic lows.  The number of new claims for the week ended June 2nd edged lower by 1,000 to a seasonally adjusted 222,000 (matching expectations), while the four-week moving average of claims ticked 2,750 higher to 225,500.  Also detailed in the report, the number of continuing claims climbed by 21,000 to 1.741 million for the week ended May 26th.

 

 

International Meetings in the Spotlight

With little in the way of key data due out until next week, financial markets will look to take their cue from news out of the G-7 summit in Canada, along with President Trump’s trip to North Korea.  There has been much angst expressed at the G-7 meeting in the wake of the Trump administration’s trade tariffs, with several of the major industrialized nations attending the summit expressing their dissatisfaction with America’s hardline stance.  A senior EU official confirmed that the tariffs “have increased tensions significantly before the meeting,” while stating the EU’s “extremely low expectations” for a breakthrough.  French President Emmanuel Macron, who only months ago was described as in a “bromance” with Trump, even conveyed a “G-6 plus one” theme as he voiced that “We must not fall apart. The six other nations of the G7 represent a market that is larger than the American market.”

 

 

Despite the negativity heading into the G-7 summit, there remains a wave of optimism (at least within the Trump administration) heading into President Trump’s meeting with North Korean leader Kim Jong Un expected next week.  Talking to reporters today, Trump presented a sense of confidence as he stated that “I think I’m very well prepared — I don’t think I have to prepare very much.”  He confirmed that it would be “much more than a photo op”, but recognized that reaching an agreement on the future denuclearization of North Korea would only be the start and that the follow-through actions (from both nations) would be far more important.