Markets are seeing quiet a subdued start to the session; US equity futures are narrowly mixed in premarket trade (S&P 500 futures up 0.1%, Dow futures down 0.1% and Nasdaq 100 futures up 0.6%). European equities are also lacking conviction, with the Stoxx 600 up a modest 0.2%. Other asset classes are subdued; crude oil markets are pretty much flat on the day, with WTI close to $60.50 and back from overnight highs at $61.00, gold and silver are flat and consolidating in the $1680s and just above $24.00 respectively, and US and European government bond markets are broadly unchanged (US 10-year yield is flat at 1.726%).
Subdued trade makes sense given key risk events that loom later in the session, namely US ADP national employment data for the month of March at 1330BST, which will help set expectations for this Friday’s official March labour market report, and then US President Biden’s infrastructure spending announcement, which is going to happen at 2120BST (1620EDT), according to Politico. With regards to Biden’s announcement, the US President is expected to announce a $2.25T spending package, the first of a two-part infrastructure bill, which is to be spent over the next eight years. Of the $2.25T, $650B will be for roads and bridges, $300B will be for housing, $400B for clean energy credits and $400B for the elderly and Biden is expected to announce that the spending will be funded by an increase in the corporation tax to 28% – how Biden plans to fund the spending is likely to be the most important aspect of today’s announcement, so traders will be on the lookout for any indications of tax hikes on the wealthy to go along with corporation tax hikes.
In terms of the latest news on the pandemic; France is reportedly said to be considering a national lockdown amid the continued rise in Covid-19 infections. French President Macron will be delivering a speech at 1900BST tonight, where he could unveil tougher restrictions. The French parliament will debate and vote on these measures on Thursday. Markets seem to have become much less sensitive to bad Covid-19 news coming out of Europe at this point – if the bad news starts to come from other key markets such as the US or UK, expect markets to be much more sensitive. Separately, a week-long lockdown has been imposed in the city of Yunnan in China after new Covid-19 cases were detected.
FX markets are mixed this morning, with traditional safe-haven currencies CHF and JPY performing the worst in the G10; USDJPY surged overnight and nearly hit the 111.00 level but has since pulled back towards 110.50. Needless to say this was fresh multi-month highs for the pair; market commentators attributed importer demand and M&A related buying as bullish factors in play overnight, while other have been citing quarter-end rebalancing, which some desks forecasted would involve USDJPY buying. Note also that overnight Japanese industrial production data was weaker than expected, also not doing JPY any favours.
Strength in USD/JPY helped push the Dollar Index (DXY) as high as the 93.40s during the overnight session, however, a recovery from lows in the dollar’s non JPY or CHF G10 counterparts has pushed the DXY back from highs and the dollar is now lower on the day; EUR, GBP, CAD, NZD and AUD are all now stronger versus the buck on the session. Starting with the former; EURUSD buying ahead of the key 1.1700 level has helped the pair to recover back into the 1.1730s. Preliminary March CPI data for the Eurozone saw the headline rate inflation pick up to 1.3% YoY from 0.9% in February as expected (this did not affect the euro at all). Comments from ECB President Lagarde have also been shrugged off, but for reference, she said; the economic situation is marked by uncertainty, the bank’s recent decisions have been guided by the rise in yields and the PEPP (the bank’s pandemic emergency QE programme) will be used with maximum flexibility. Meanwhile, Lagarde also said she does not think the German Court challenge will impact the EU recovery fund if the matter is resolved soon.
Turning to sterling; having found support at the 1.3700 level yesterday, the pair has now managed to recover back towards 1.3800 again amid the broad weakening of the US dollar this morning against most of its G10 counterparts. The second estimate of UK Q4 2020 GDP was better than expected, showing the economy growing at a QoQ pace of 1.3% – pretty good going given the economy spent most of the quarter under relatively severe lockdown restrictions, which shows the economy has become more resilient to lockdown as time has gone on (this bodes well for Q1 2021 GDP not being as bad as some fear it might be). This data is likely to be giving sterling a helping hand this morning.
Note that Chinese PMI data released overnight was much stronger than expected and this is giving tailwinds to the yuan, Aussie and Kiwi, the latter two of whom are amongst the best performing currencies in the G10 on the day. For reference, Chinese NBS Manufacturing PMI for the month of March came in at 51.9 (expected was 51.0), up from 50.6 in February, while non-manufacturing PMI came in at 56.3, well above expectations for 52.0 and last month’s 51.4 reading. As a result, composite PMI rose to 55.3 from 51.6. Also helping the Aussie was the release of stronger than expected Building Approvals in February (up 21.6% MoM vs forecasts for a 5.0% gain), while the kiwi has shrugged off a deterioration in NBNZ Business Confidence (which dropped 4.1% in March) and Activity Outlook (which fell to 16.6% in March from 21.3% in February). AUDUSD has managed to reconquer the 0.7600 level and is trading closer to 0.7620, while NZDUSD has rebounded from overnight lows in the 0.6960s and is now testing the 0.7000 level again.
Finally, the Loonie is also fairing pretty well heading into Wednesday’s US session, up about 0.3% versus the dollar on the day (which is similar to the gains being seen in GBP and AUD). After finding strong resistance at the 50DMA yesterday at close to 1.2650, USDCAD has pulled all the way back to the 1.2600 level, which it is now currently flirting with ahead of the release of January monthly GDP growth data at 1330BST.
One of the key themes for crude oil markets this week, aside from demand-side factors like Biden’s infrastructure announcement, the pandemic and key US data releases, is Thursday’s OPEC+ meeting. The OPEC+ Joint Technical Committee (JTC) met on Tuesday (this is a technical committee off delegates from OPEC+ nations whose job it is to analyse the situation in oil markets and sometimes provide policy recommendations to the oil ministers who make up the OPEC+ cartel). The JTC revised lower the OPEC+ estimate for oil demand growth in 2021; the cartel lowered its forecast for 2021 oil demand growth the 5.6M barrels per day from the 5.9M barrel per day forecast released in the OPEC monthly report just three weeks ago.
Meanwhile, the Saudis are reportedly pushing for a rollover in current production curbs through to the end of June and are reportedly also willing to extend their 1M barrel per day involuntary additional cuts for the same time period. However, Russia appears to have signalled that it wants to increase output. They are likely to face pushback from the likes of the Saudis and other cautious OPEC+ members, who will cite the recent downgrade in the oil demand growth forecast, lockdowns in Europe (and other parts of the world) and the recent pullback from highs in prices as reasons to be more cautious and rollover cuts. Looking ahead, markets expect that caution will prevail and OPEC+ and the Saudis will rollover current output cuts on Thursday
The Day Ahead
As noted, US ADP National Employment data for the month of March at 1330BST and Biden’s infrastructure announcement at 2120BST are the key events to watch. However, US market participants should also keep an eye on Chicago PMI at 1445BST ahead of Thursday’s ISM manufacturing data and on February Pending Home Sales at 1500BST. Meanwhile, as noted above, Loonie traders should watch out for monthly Canadian GDP data at 1330BST while crude oil market participants, aside from watching all of the above noted events and paying attention to the latest pandemic news, should also be watching official weekly US EIA crude oil inventory data at 1530BST.