Asian equities recovered from early weakness as a lower yen supported Japanese stocks and firm exports boosted South Korean markets. A fall on Wall Street on Thursday after the United States said it would impose tariffs on aluminium and steel imports from Canada, Mexico and the European Union, set the initial tone in Asia. Fears of a global trade conflict, which had partially receded in past weeks, were reignited as Washington’s allies retaliated against the U.S. measures.
The political uncertainty which has gripped Italy has shaken up the markets and boosted gold prices this week. President Sergio Mattarella is looking for a way to avoid new elections, after an inconclusive election in March. The two largest parties, the League Nord and the Five Star Movement proposed a eurosceptic finance minister, but this was blocked by the pro-European Matterella. This triggered a political crisis which led to a selloff of Italian stocks and bonds.
Is the Federal Reserve moving closer to a neutral monetary policy? Recent statements by FOMC policymakers appear to support such a conclusion, which would mean that the Fed would let the economy ‘ride on its own steam’ without intervening by adjusting interest rates. In the meantime, the Fed continues to project two more rate hikes in 2018, after raising rates by a quarter-point in March. The most likely dates for a rate hike are June and September. A fourth hike in December is possible, with a likelihood of about 40%. The minutes of the May meeting noted that policymakers would consider allowing inflation to rise above the Fed’s 2% target for a temporary period, which means that the Fed would not rush to raise rates based on the inflation target.
In Currencies, EURUSD was little changed at 1.1679, holding onto modest gains made on relief overnight as Italy’s anti-establishment parties reached a deal to resurrect their proposed coalition government. USDJPY is trading 109.15 supported by U.S. yields reversing their overnight declines.
In Commodities Gold is trading within the range of 1284 to 1308 supported by the political situation in Europe and the fear of global trade conflict. Brent crude dipped 0.1 percent to $77 a barrel. U.S. crude was down 0.25 percent at $66 a barrel.