Markets in a more upbeat mood heading into the weekend

Market Update

Risk appetite is on a firmer footing on the final trading day of the week; European equity markets trade broadly in the green (Stoxx 600 +0.7%) and US equity index futures, aside from futures contracts for the tech heavy Nasdaq 100 (down 0.7%), also point to a positive open, with S&P 500 futures up 0.3%. Meanwhile, risk-sensitive commodities and currencies are performing well and bond yields are moving higher on both sides of the Atlantic – note, it is this rise in bond yields (the US 10-year yield is up over 6bps on the session to close to 1.68%) that is weighing on duration sensitive US tech stocks.

There is no specific fundamental reason as to why markets are in a more upbeat mood on the final trading day of the week. Consolidation/pre-quarter end positioning is the explanation being thrown around by some market commentators. Markets have for the most part shrugged off a continual flow of fresh bad news regarding the state of the pandemic in Europe and on geopolitics.

Starting with the former; commentary from European leaders regarding the bloc entering a third wave of the pandemic remains pessimistic. Most ominously, the leader of the German RKI said that there are clear signals that the current wave could be worse than the first while the German Health Minister is warning that the health system could hit capacity as soon as April. Another health official stated that there is a risk that new daily infections hit 100K. Pandemic related pessimism in Europe might be being offset by a very strong German IFO survey for the month of March, which showed the economy holding up significantly better than expected despite the recent rise in Covid-19 cases.

Turning to geopolitics, North Korea confirmed that it had test-fired a new tactical guided missile on Thursday, prompting condemnation from the US. This comes after fiery criticism of the North Korean regime on Thursday from President Biden. Meanwhile, in the Middle East, Thursday saw an Iranian missile fired at an Israeli ship and also multiple attempts by the Houthis in Yemen to launch attacks against military and Saudi Aramco facilities in Saudi Arabia – this news seems to be supporting crude oil prices, which in a way is likely helping stock markets as a result and perhaps contributing to the market’s better risk appetite.

G10 FX Markets

The US dollar is currently consolidating between the 92.70-92.90 levels as DXY bulls take a breather on the final trading day of the week, with positive flows into risk assets taking some of the wind out of the safe-haven USD’s recent upside momentum. The US dollar did not see too much by way of rection to a surprisingly weak February Core PCE inflation print; Core PCE came in at 1.4% YoY on the month, a little lower than expectations for a print of 1.5%. The YoY rate of inflation is expected to pick up significantly here on out given weak base effects from last year, so this slightly weaker than expected print is not a game changer.

JPY is the worst performing currency in the G10 this morning; the yen is receiving a double whammy from the market’s better risk tone and the move higher in US government bond yields, which has put upwards pressure on US/Japan rate differentials. USD/JPY has now advanced to fresh year-to-date highs in the 109.70s; bulls might now wait for a retracement back to support in the form of the prior year-to-date highs in the 109.30s to add to longs. A very slightly stronger than forecast Tokyo Core CPI reading for the month of March released last night has not come to the aid of the yen and showed that the Japanese economy remains in deflation with prices dropping 0.1% YoY.

At the other end of the G10 performance table, NZD and AUD are in the lead, both nursing a reasonable recovery rally after being battered earlier in the week (the kiwi was hit particularly hard). NZDUSD has still not quite managed to reclaim the 0.7000 handle but is at least off overnight lows in under 0.6950. AUDUSD, meanwhile, has recovered from yesterday’s lows in the 0.7560s back above the 0.7600 level, despite reports yesterday of China blocking hay imports from Australia and further escalating the two countries ongoing trade spat. The Aussie has also managed to shrug off a new dovish RBA call from Westpac bank (their predictions often move FX markets) that the bank will extend its QE programme in October.

Sitting in the middle of the G10 FX performance table is the likes of CAD, GBP and EUR, all benefitting from today’s slightly softer USD conditions with markets in a more upbeat mood. More specifically, the Loonie is enjoying the recovery rally in crude oil markets, the euro has been modestly enthused by today’s aforementioned strong German IFO survey for the month of March and sterling continues to seemingly garner encouragement from commentary from EU officials that they think they can work something out regarding the ongoing UK/EU vaccine spat. USDCAD is currently consolidating between the 1.2560s-80s, EURUSD has slipped back from a failed test of the 1.1800 level and trades closer to 1.1775, above yesterday’s 1.1760 lows and GBPUSD nearly managed to hit 1.3800 in earlier trade but is now consolidating just above 1.3750.

The Day Ahead

With US Core PCE data out of the way, the main focus of the session in terms of data will be on the preliminary University of Michigan Consumer Sentiment survey for the month of March, released at 1400GMT. At 1500GMT, Canadian Budget Balance data will be released for the month of January (Loonie traders ought to keep an eye). Budget data out of the US will then be released later in the evening. The final calendar event of note will be remarks from BoE’s Tenreyro, speaking at 1745GMT. Otherwise, the usual themes remain in focus; the path of the pandemic and vaccine rollouts, US fiscal stimulus, geopolitics and vaccine/trade wars.