US equity markets sold off sharply on Monday, with tech and growth stocks leading the declines (hence the Nasdaq 100 index performing the worst and dropping 2.6% on the day). Losses were spurred by a surge in inflation expectations (10-year break-evens surged above 2.50%, up from closer to 2.3% one month ago), alongside the continued sharp rise in global industrial metal and raw material prices. This has pushed long-term nominal US bond yields higher, which is typically negative for duration sensitive stocks (such as tech). Further selling pressure is being witnessed in pre-market trade this morning, as nominal yields continue to push higher (though inflation expectations have stabilised and the move higher this morning is as a result of rising real yields). US 10-year yields current trade around 1.60%, up sharply from last Friday’s post-NFP low at 1.47%. Meanwhile, E-mini S&P 500 futures are down about 0.8% in the premarket (meaning losses on the week stand at around 1.8%) and trade around the 4150 mark.
Downside in US stocks has infected global markets and European equities are suffering this morning (Stoxx 600 -2.1%), with Asia equities fairing little better overnight. Indeed, Chinese PPI data, which showed factory-gate prices rising to their highest levels since 2017, may be contributing to continued inflation angst this morning, as likely is further upside in the likes of copper, iron ore and steel prices on Tuesday. Downside in equities is exerting some pressure on crude oil prices; WTI is down about 0.6% and trading in the mid-$64.00s, as upside in wake of the cyber attack on a major US pipeline over the weekend is unwound. Crude oil traders continue to monitor the tragic situation in India, which shows no signs of letting up any time soon, and to monitor the situation with regards to Middle Eastern geopolitics (US/Iran and Saudi Arabia/Iran talks continue, but there were reports of a tense encounter between the US navy and IRGC in the Strait of Hormuz). Oil largely ignored the release of the latest OPEC Monthly Oil Market Report, in which the cartel left their oil demand growth forecast for 2021 unchanged.
In terms of FX markets, things are more mixed given the conflicting influences of higher global bond yields, downside in stocks, softness in crude oil, but upside in other key commodities. Higher US bond yields (including 10-year TIPS yields rising back to around -0.9% from yesterday’s close to -1.0% lows) and the downturn in stocks is helping to keep the US Dollar Index (DXY) above the 90.00 level for now, though the DXY is still trading with modest losses of about 0.1% on the day. That means USD is in the bottom three in the G10 performance table on the day, alongside CAD and CHF.
By contrast to its Canadian G10 peer, NOK (up over 0.4% on the day versus USD) is currently the best G10 performer, which is a little odd given lower crude oil and equity prices would typically be a negative for the currency and there has not really been any domestic news to support the currency. EUR and SEK are the next best performers this morning, up about 0.3% versus the buck. The former seems to be gleaning some support from a much better than anticipated German ZEW survey for the month of May, as well as positive vaccine commentary, while the latter is perhaps getting some help from a very slight increase on May 1-year Money Market CPIF inflation expectations (to 1.5% YoY from 1.4% in April).
AUD, NZD, JPY and GBP are all up about 0.1-0.2% on the morning versus the buck. AUDUSD has been caught in thin ranges just under the 0.7350 level for most of the overnight and morning session as traders weigh the conflicting forces of higher iron ore and copper prices (both key Aussie exports) against evidence of further Aussie/Chinese tensions (China could target Australian LNG exports soon, according to Aussie press) and negative comments from S&P with regards to the latest Australian budget, which was release by the government this morning and puts the government into a record deficit.
The Day Ahead
A whole host of FOMC members will be speaking this afternoon and most will likely comment that the expected surge in US CPI in April (we get the data tomorrow) will be transitory, i.e. that the Fed remains committed to its ultra-easy policy until achieves full employment, which may not occur until 2024. Any expressions of concerns about inflation (key commodity prices have moved a lot higher since some of these Fed members last spoke) may be taken badly by markets and worsen downside in equities. Otherwise, focus will be on US JOLTS Jobs Openings for the month of March at 1500BST, a speech from BoE Governor Andrew Bailey at 1530BST and weekly private API crude oil inventories out at 2130BST.
