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Market Update
Markets continue to trade with a broadly defensive bias this morning; European equity bourses (Stoxx 600 -0.9%) are trading in the red as they play catch up to losses seen on Wall Street after the European equity market close last night and US equity index futures are extending recent losses, with S&P 500 (e mini) futures have fallen to fresh weekly lows in the 3860s. US government bond markets are seeing modest safe-haven demand, with 10-year yields down around 1bps but still holding above 1.60% and the US dollar continuing to trade with a modestly positive bias.
Meanwhile, risk-sensitive commodities like crude oil and industrial metals are also lower, with WTI down nearly $2 on the session and back under $60.00; downside in crude oil markets comes despite reports from the Suez Canal Authority that operations to refloat the stranded tanker that is currently blocking the main canal (and reportedly holding up 13M barrels of crude oil from reaching their destination) could take days to weeks. One source of crude oil downside might be concerns regarding the worsening Covid-19 outlook not just in Europe but also now in a few developing market economies; newly recorded cases in Brazil and India are at record highs, with the latter increasingly moving towards vaccine nationalism and threatening to block AstraZeneca vaccine exports.
In terms of fundamental drivers, recently released US weekly jobless claims data was better than expected, with initial claims last week dropping to 684K from 781K versus forecasts for a drop to 730K and continued claims dropping to 3.87M from 4.134M versus forecasts for a drop to 4.04M. Meanwhile, the latest Q4 2020 US GDP growth estimate was revised higher to an annualised growth rate of 4.3%. The positive data has broadly been ignored, however.
Market commentators attribute the more defensive tone, particularly in US equity markets, to increased chatter regarding possible US corporation tax hikes to help fund the Biden administration’s soon to be unveiled infrastructure spending package; key Democrat officials, including Treasury Secretary Yellen have been talking about bringing corporation tax more in line with OECD peers. Meanwhile, centrist Democrat Senator Manchin (who has typically been one of the more fiscally conservative Democrats and whose vote needed if any Democrat sponsored legislation is to pass the Senate) reportedly backs corporation tax hikes, meaning proposals are likely to clear Congress.
Given the above, US President Biden’s press conference at 1745GMT today will be closely followed for further information on the infrastructure package and how the Biden administration plans to pay for it. Elsewhere, some traders are already starting to talk about the influence of month-end flows on the price action; a number of desks (including Bank of America and UBS) are calling for selling in equities and buying in bonds (which, to be fair, is in fitting with this morning’s price action). In terms of FX, Citi expects USD flows to be broadly balanced, but for some flows from JPY into USD (again, this appears to have been the case this morning).
FX Markets
Whilst equity, bond and commodity market trade are notably more defensive this morning, FX markets are seeing trade that is a little more mixed. Granted, safe-haven USD continues to grind higher, but this is mostly due to weakness in fellow safe-haven currency JPY that has taken USDJPY back to the north of the 109.00 level. Strength in USDJPY has been enough to push the DXY to fresh year-to-date highs above its 200DMA at 92.63 and to press on towards the 92.70s. If DXY does manage to convincingly clear the 200DMA to the upside, there is not much by way of notable levels of resistance ahead of the late-October/early-November 2020 highs around 94.30.
That would be a quiet a rally but is not outside the realms of possibility should the US economic outlook continue to improve; US bond yields continue to rise and market expectations for Fed policy continue to become more hawkish. One Fed member yesterday voiced surprise about yields being as low as they are, which further adds to the narrative that the Fed is very much comfortable with higher yields, a bullish cocktail for the dollar.
In terms of the rest of the G10; GBP and AUD are modest outperformers, both up about 0.1% on the session, with GBPUSD having managed to just about reclaim the 1.3700 level, although the pair does remain locked within the last two day’s 1.3670-1.3730ish range. AUDUSD, meanwhile, is also seems locked within recent 0.7580-0.7620ish ranges but does seem to be trading with a negative bias and threatening a break to the downside.
NZD and CHF are both flat versus the buck on the day, with today’s Swiss National Bank rate decision not offering up any surprises with policy held steady as expected and reaffirming that it thinks CHF is highly valued. NZDUSD is currently testing lows of its recent range in the upper 0.6950s, while USDCHF continues to range between the 0.9350-0.9370s.
Finally, though neither are performing quite as poorly as the yen, the euro and loonie are both lower versus the buck on the day by about 0.2%; the former is weighed by softer crude oil prices, while the latter seems to be trading as a function of the stronger dollar amid a lack of fresh fundamental drivers out of the Eurozone.
The Day Ahead
As has been the case for most of the week thus far, Fed speak continues to be an important driver of sentiment and comments from Fed Vice Chair Richard Clarida at 1410GMT, then NY Fed President John Williams at 1430GMT will be worth watching (they are number two and three in the Fed after Chairman Powell). There will also be some ECB speak to be aware of and a US government debt auction (7-year notes), which could move bond yields. Otherwise, focus remains on the usual topics, i.e., the state of the global Covid-19 vaccine rollout and pandemic.
