50th record close for the S&P 500 so far this year

S&P 500 recorded its 50^th record close of the year yesterday, gaining another near 0.2% to close at 4486. The index has been able to consistently advance higher over the last 10 months amid a strong recovery in earnings and the US economy (aided by massive US government fiscal stimulus), as well as amid continued optimism about the prospect that the vaccine rollout and expectations for ongoing easy monetary policy. Equity traders have been citing further stimulus in Congress towards the passage of further spending bills as the major driver of yesterday’s gains; the US House voted to approve the outline of the bipartisan $3.5T budget, as well as to advance the $1T infrastructure spending bill (the latter of these bills is likely to be passed through Congress via budget reconciliation, i.e. without the need for any Republican votes). It remains unclear how much of this spending is going to be funded by new borrowing at present, however. As far as US equity markets are concerned, tax-funded spending is seen as having a net-neutral impact on the prospect (thus it is not called fiscal stimulus) for the US economy and likely will not boost equity prices. Conversely, debt-funded spending (which could be classified as fiscal stimulus) is seen as boosting the economic outlook over the medium-term and is likely to boost equities. With than logic in mind, equity investors will be watching events on Capitol Hill and assessing the prospects for further fiscal stimulus. Reports suggests further votes on the passage of these two spending bills will happen in around one month’s time.

In the immediate future, Fed policy is a much more important concern for US (and global) markets, with this week’s Jackson Hole event set to take centre stage. The main event will be Fed Chair Powell’s address at 1500BST on Friday, which will be eyed for any new hints on the Fed’s potential taper timeline. But from Thursday, there will be a barrage of Fed speak from other FOMC members that will also be worth watching for any clues as to how worried the Fed is or isn’t becoming with regards to the uptick in Covid-19 infections and deaths in the US over the past weeks. In terms of what markets are up to this morning; major US index futures are all trading flat close to yesterday’s record closing levels, while all the risk on gains seen in equity markets this week has seen US bond yields continue to rally and the treasury curve bear steepen, with US 10-year bonds now back above the 1.30% mark.

Looking at European markets, the Stoxx 600 hasn’t yet been able to recover back to record levels, but currently trades within 1.0% of its recent peaks. The widely followed IFO survey (for the month of August) was released this morning out of Germany and, like the preliminary German August Markit PMI surveys out earlier in the week, showed that business sentiment weakened on the month, with survey participants citing continued worries about rising Covid-19 cases and supply bottlenecks. The headline Business Climate index fell to 99.4 from 100.7 in July, lower than analysts’ estimates for 100.4. Meanwhile, the Business Expectations Index fell to 97.5 from 101.0 in July, larger than the expected drop to 100. According to analysts at Citi, “equity markets (outside China) have not yet seen the usual wobble associated with a PMI roll-over, so could be vulnerable… nevertheless, past experience suggests that investors should buy any dip as long as another global recession is not imminent… (and) we don’t think it is”. This view seemed to chime with the results of a Reuters poll; 18 strategists predicted strong earnings will keep European stock markets close to current record levels for the rest of 2021, though concerns about US monetary policy tightening, German elections and the continued Chinese regulatory crackdown could cap gains.

Turning now to commodity markets; crude oil prices are a little choppier this morning, having swung between losses and gains in recent trade amid profit taking after strong run of gains in recent days. Nonetheless, WTI is currently up by just under 0.5% on the day and trading not too far below $68.00, meaning WTI is nearly 10% up from the lows it hit earlier in the week under the $62.00 level. A production outage amid a fire in a big Mexican oil platform, which has taken more than 400K barrels per day in supply offline, is one factor that has helped prices this week. Moreover, the recent China Covid-19 outbreak looks to have been brought under control, with cases well down from recent peaks and in the low double digits again. Analysts at ANZ cited a pick-up in the traffic data in the Beijing and Shanghai areas as evidence that authorities in China have gotten the outbreak under control, but caution that a pickup in airline in the country activity may lag. Elsewhere, yesterday’s private weekly API inventory data showed a smaller than expected draw on crude oil stocks of 1.6M barrels in the week ending on the 20^th of August, less than the 2.7M barrel draw expected. This may be contributing to some of the choppiness seen in crude oil since yesterday evening. However, the idea that crude oil markets remain heavily in deficit, something most commodity strategists suspect if not going to end any time soon, ought to keep prices supported and many are calling for a return to the $70.00 level.

Elsewhere, higher equity and (non-precious metal) commodity prices this week, which reduces the demand for safe haven assets such as gold, seem to be preventing spot gold prices from reconquering the $1800 level for the time being, despite the drop being observed in the US dollar (which would normally be gold positive) and the subdued tone to US bond markets. Precious metal markets are likely to remain in limbo until this Friday’s Jackson Hole address from Fed Chair Jerome Powell and then the post-speech reaction may well depend on the reaction seen in USD and US bond markets.

Speaking of the US dollar; the DXY is this morning consolidating either side of the 93.00 level. FX markets in general appear to have now calmed right down after a flurry of activity, particularly in commodity linked G10 and EM currencies (which saw a sharp rally at the start of the week as global equity and commodity markets recovered). NZD, AUD, GBP and EUR are all pretty much flat versus the buck this morning, with NZDUSD trading around 0.6950, AUDUSD trading around 0.7250, GBPUSD still consolidating just to the north of the 1.3700 level and EURUSD trading slightly below 1.1750. CAD is the underperformer out of the G10 currencies, down about 0.3% on the day versus the buck, pushing USDCAD back above 1.2600, but the Loonie is still up by more than 1.5% on the week versus the US dollar. JPY and CHF, meanwhile, are also FX underperformers, seemingly having been weighed amid the recent rise in US bond yields, with USDJPY now pushing on towards 110.00 and USDCHF rebounding towards 0.9150. Back to the buck, analysts continue to cite upside risks to USD when Fed Chair Powell speaks at the end of the week, if he does hint toward the timing and pace of QE tapering. Ahead of that, “global growth concerns, or lack thereof, will likely remain the major driver of the USD until Friday”, said analysts at Commonwealth Bank Australia.

The Day Ahead

US Durable Goods Orders for the month of July is out at 1330BST and will be closely watched as always, though will be unlikely to shift market sentiment much either way. Official weekly crude oil inventory data is out at 1530BST and could result in some choppiness in crude oil markets. This evening at 1800BST, there is a US 5-year note auction, which could result in some bond market volatility (a strong 2-year auction yesterday sent 2-year yields lower). Other than this, things are likely to be quiet, with focus on the global pandemic.