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Market Update
There has not been a great deal of fresh fundamental catalysts since the end of yesterday’s US session; in terms of a quick recap of yesterday’s US session, US equities were subdued and mostly traded within recent ranges, although the Dow did manage to eke out a fresh all-time high close, with markets largely shrugging off concerns in the US about rising Covid-19 cases as well as financial stability concerns following the liquidation of Archegos Capital Management’s portfolio.
Despite the lack of fresh macro catalysts, things are getting a little more interesting this morning with US government bond yields back on the front foot and some parts of the treasury yield curve hitting post hitting fresh post-pandemic highs. The 10-year yield is currently around 1.76%, up roughly 4bps on the day, up from closer to 1.65% at the start of the week. Notably, the latest move higher is being driven by rising real yields, not inflation expectations; 10-year TIPS yields (the inflation expectation adjusted yield on the 10-year) are about 9bps higher on the session to just above -0.6%, though this is still a little below recent highs at -0.53%.
Either way, rising US yields is having an impact on broader markets; duration-sensitive stocks (Big Tech and growth stocks like Tesla) are underperforming, meaning that Nasdaq 100 futures are down 0.6% this morning. For reference, S&P 500 futures are down a more modest 0.2% and still not too far from all-time high levels, while Dow futures trade flat and remain right at record levels.
Higher US yields is supporting the US dollar, particularly versus its low yielding counterparts EUR, CHF and JPY (i.e. the countries where the central bank has negative interest rates). As a result, the DXY has surged above the 93.00 level to hit fresh annual highs. The stronger dollar mean commodities are struggling; WTI is down just under $1.0 to under $61.00 again and industrial metals are mostly lower.
Crude oil markets participants will be kept busy this week monitoring the path of the Covid-19 pandemic in the EU (in lockdown), US (early signs of cases rising) and other key markets (more of a mixed picture) as well as the April 1st OPEC+ meeting. Regarding the latter, the Saudis reportedly support an extension of current output cuts through June and are likely to extend their own voluntary cuts as they see global demand as not yet strong enough to bring supply back online.
Back to commodity markets, precious metals are having a particularly difficult time and are suffering from the double whammy of a stronger dollar and higher real yields. Remember that precious metals are negatively correlated to both. Spot gold prices are down about $20 on the session and are back below $1700 again and trading close to $1690.
FX Markets
As noted, the dollar is firmly on the front foot this morning amid rising yields, with particular strength versus its lowest yielding counterparts; EURUSD has slumped under the 1.1750 level to fresh annual lows, down about 0.3% on the day, and the bears have their sights set on last November’s 1.1600ish lows. Stronger than expected inflation numbers out of various German regions and Spain for the month of March this morning has done little to impact euro sentiment. USDJPY, meanwhile, is up about 0.5% on the day and has surged above the 110.00 level; traders will be targeting an eventual move to 2020 highs between 111.50-112.50. Better than expected February retail sales and unemployment number out of Japan last night have not come to the yen’s aid. Finally, USDCHF, meanwhile, is up about 0.4% on the day and has rallied back to the north of 0.9400 and to fresh annual highs.
Looking elsewhere in the G10; risk-sensitive AUD, NZD and CAD are all suffering a little but only really as a function of USD strength, not because of any bad domestic news or because of markets being risk off (markets are not really risk off this morning, the story is more about rising US bond yields). AUDUSD has nonetheless slipped back towards the 0.7600 level from previous highs above 0.7650, NZDUSD has dropped back under the 0.7000 level again, but continues to trade within recent ranges and USDCAD is flirting with the 1.2600 level and trading towards the top of recent intra-day ranges.
GBP, meanwhile, is an outperformer in the G10 and sits in joint top spot with USD, with GBPUSD flat on the session and consolidating above the 1.3850 mark. EURGBP is thus eyeing a move back towards yesterday’s multi-month lows close to the 0.8500 level. Market commentators are attributing relatively strength in GBP to the country’s ongoing vaccine rollout success and the fact that Covid-19 infection rates continue to trend lower. This is in contrast of course to the EU, but also now to the US, where cases are again rising. While US government officials are pushing for state governors to halt reopening plans, the UK is cautiously pressing ahead with its reopening plans and on Monday entered stage two of its roadmap out of lockdown (less restrictions on households meeting and on outdoor activities). The country remains on track to reopen non-essential retail on April 12th.
The Day Ahead
Preliminary German inflation numbers for March are released at 1300GMT. Various states released their regional inflation numbers and the general trend is that the YoY rate of inflation saw a spike in March, so expect the German national CPI data to show the same thing (the YoY rate of inflation will likely rise close to 2.0%). FOMC member Quarles will then be speaking at 1400GMT, at which time US Case Shiller House Price data will also be released. The final US data of interest will be released at 1500GMT; Conference Board’s Consumer Confidence survey for March, which is expected to show a rise to 96.9 from 91.3 last month. A few more Fed speakers (Bostic and Williams) will be on the wires in the evening ahead of weekly Private API inventories, which could trigger some volatility in crude oil markets.
More broadly, the main themes to keep an eye on include the path of the pandemic in the EU, US and elsewhere, any leaks as to the Biden administration’s plans for the infrastructure package and any more leaks about OPEC+ member thinking ahead of Thursday’s meeting.
