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Market Update
US equity markets posted solid gains on Tuesday, with the S&P 500 rallying 0.4% to close back to the north of the 4700 level and coming withing only a few points of touching the record intra-day highs set at 4718 back on the 5th of November. Strong US Retail Sales and Industrial Production data, as well as strong earnings from brick-and-mortar US retailers such as Walmart and Target, were attributed as supporting sentiment at the time. Asia stocks were not able to maintain the positive momentum seen on Wall Street, with the region weighed amid Covid-19 fears as South Korea reported its second highest ever daily toll of Covid-19 infections, which caused the Kospi 50 to drop over 1.0%. The boost to sentiment in the region in wake of the positive tone of the Biden/Xi call on Tuesday has thus proven fairly short lived.
Despite the negative APac handover, European equities are mostly pointing higher and the Stoxx 600 is at record levels above 490 and up roughly 0.2% for a sixth consecutive session of gains. For now, European equities are shrugging of concern about souring European natural gas prices and rising Covid-19 infection rates. Reportedly, hospitals in Slovakia are at a critical point and Austria is about to approve measures that will limit the access to services for the unvaccinated, after it recently introduced a lockdown on only the unvaccinated. US equity index futures are this morning subdued, with E-mini S&P 500 futures currently trading just below the 4700 level and broadly flat on the day ahead of the open. There isn’t too much on the calendar that could change the broad macro narrative on Wednesday; US housing data at 1330GMT won’t get too much attention. More attention will be paid to the six Fed speakers scheduled to come out of the woodworks during the US session. For reference, hawkish Fed’s Bullard yesterday called for the Fed to turn more hawkish and to accelerate the pace of taper to make space for potential Q1 rate hikes, while Fed’s Daly urged that the Fed should be patient and Barkin said that more months would be needed to observe whether or not inflation is transitory. Speaking of the Fed, US President Biden yesterday said that he would announce a decision on the Fed chair within about four days (meaning the decision could come on Saturday).
Looking at bonds; US yields are flat and subdued, just like US equities. US 10s are around 1.63% and 2s are around 1.52%, both are a few bps higher than they were this time yesterday in wake of strong US retail sales and industrial production data that had USD STIR markets bring forward slightly their Fed rate hike bets. European bond yields are also flat and subdued, as the region awaits rhetoric from ECB’s Schnabel and President Lagarde later in the day. Both are likely to reiterate the bank’s dovish stance that inflation is transitory and financing conditions must remain accommodative to help the recovery. Notably, UK real yields have taken a hit in wake of the latest UK inflation report which exceeded expectations.
Speaking of; the UK YoY rate of CPI in the UK hit a 10-year high in October of 4.2%, according to ONS data released this morning, above analyst forecasts for a rise from 3.1% in September to 3.9%. Analysts broadly agree that the data bolsters expectations for the BoE to hike interest rates by 15bps in December. Energy bills were the largest contributor to the sharper than expected rise. Producer prices also rose more than expected (to 8.0% YoY), which analysts saw as a sign of broadening price pressures. The data briefly offered support to GBP, though much of these gains have now been unwound; GBPUSD briefly popped to fresh weekly highs in the 1.3470s but has since dropped back under 1.3450. EUR/GBP, meanwhile, dropped to fresh 21-month lows under 0.8400, but has since reversed back above this level.
Elsewhere in FX markets, the dollar continued its recent bullish run-on Tuesday and early on Wednesday, with the DXY hitting 16-month highs overnight in the 96.20s, before moderating back under 96.00 again where it currently trades flat on the session. USD has been gaining amid the recent run of positive data surprises that has boosted Fed rate hike bets, whilst the euro has been suffering from dovish ECB rhetoric and rising Covid-19 infection rates in Europe, while JPY has been weighed by the recent move higher in US bond yields. EURUSD fell under 1.1300 briefly overnight, printing fresh year-to-date lows in the 1.1260s, before reverting back above the big figure, whilst came within a whisker of the 115.00 level and is currently probing key resistance in the form of the May 2017 through to October 2018 highs in the upper 114.00s area. Finally in FX, the Aussie is an underperformer, with the Wage Price Index growing at 2.2%, in line with expectations, but still well below the 3.0-4.0% region where the RBA wants to see it before it starts hiking rates.
Looking quickly at commodities; oil prices are a little lower, weighed despite a larger than expected drop in US gasoline inventories last week (according to the latest weekly API inventory report). The draw on gasoline stocks is seen as increasing the chances that the Biden administration releases crude oil from the SPR. The US has reportedly asked China to release crude oil from its reserves in a joint effort to lower prices, but Democrat lawmakers are split over the appropriateness of an SPR release. For reference, gasoline stocks drew 2.8M barrels in the week ending on the 12th of November, much bigger than the expected draw of 600K barrels. WTI is currently trading just under $80.00 per barrel, down about 1.0% on the day, but still within recent ranges, albeit trading bias over the last week or so has been negative. In precious metal markets, spot gold dipped back to $1850 overnight but found strong demand and has since pushed back above $1860, as investors continue to demand it as an inflation hedge.
Day Ahead
US October Building Permits and Housing Starts data is scheduled for release at 1330GMT, as is the Canadian CPI report. This will be closely followed by CAD traders as it could inform expectations for when the BoC is going to start hiking. We than have ECB’s Schnabels speaking at 1400GMT, Fed’s Williams speaking at 1410GMT, official US crude oil inventories at 1530GMT, Fed’s Bowman at 1600GMT, Fed’s Waller and Daly both at 1740GMT, a 20-year US bond auction at 1800GMT, ECB President Lagarde at 1830GMT and Fed’s Evans and Bostic speaking shortly after 2100GMT.
