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Market Update
US equity markets erased early session losses on Wednesday to ultimately close in the green for a second day running, with the S&P 500 index closing back above 4700 level for the first time this week. The gains were led by strength in tech stocks, with the Nasdaq 100 index gaining 0.4% for its first positive session on the week. There was a heavy dump of US data on Wednesday, with various releases brought forward given the US public holiday on Thursday for Thanksgiving. By and large the data was strong; the second estimate of US Q3 GDP growth was decent at an annualised pace of 2.1%, core Durable Goods Orders grew in October, PCE inflation rose to its highest level in 40 years at 5.0% YoY in October while the core PCE rose as expected to 4.1% and, largely due to seasonality-related volatility in the data, the latest weekly initial weekly jobless number dropped under 200K for the first time in many years and well below pre-pandemic levels.
The data didn’t have much of an impact on US stocks, but likely support the US dollar somewhat at the time. Hawkish comments from Fed’s Daly (who indicated her openness to accelerating the QE taper in early 2022 and sooner rate hikes) and a hawkish tone to the minutes (which underscored the hawkish shift occurring within the Fed towards accelerated monetary tightening in 2022) led to a sharp flattening of the US treasury curve later in the session. The 2s rose to fresh post-pandemic highs around 0.65% and the 30s dropped back a few bps to back under 2.0% again. A more hawkish Fed, as seems to be the shift at the moment, dampens the outlook for longer-term inflation, hence the curve flattening. Lower long-end yields were likely the reason why duration sensitive tech names outperformed. More broadly, as long as US (and global) equity markets don’t start to fear that the Fed might end up making a hawkish mistake in tightening policy sooner, stocks should broadly exhibit resilience, though if long-end yields start rising again, this will weigh on tech.
Moving on to today’s markets. Asia markets lacked conviction and the same can be said about European markets this morning. The Stoxx 600 is up 0.2% at 480, putting it on course for a second consecutive session in the green, though the index remains about 2.0% below the record highs printed earlier in the month. European equities have been resilient to news of further Covid-19-related curbs in Europe, with Italy announcing restrictions on the unvaccinated over the Christmas period and the EU proposing that its Covid-19 travel pass expire after nine-months unless a person gets a booster jab. The broad lack of conviction in markets isn’t too surprising given that US markets are closed today for Thanksgiving holidays.
Oil markets are also subdued, with WTI around $78.00 per barrel at the moment and trading close to flat. WTI finished yesterday’s session modestly in the red following a mixed official inventory report and a rise in the latest weekly Baker Hughes rig count. The main theme in crude oil markets remains how OPEC+ responds to the US (and other major oil consumer) reserve release. OPEC+ meet next week and it seems a slowing of output hikes is on the cards. Looking elsewhere in the commodities complex; spot gold prices continue to languish underneath the $1800 level amid the recent rise in nominal and real yields prompted by strong US data and hawkish Fed vibes.
Looking at FX markets; short-covering after a period of prolonged underperformance, as well as perhaps a toning down of European Covid-19 lockdown concerns after the incoming German coalition rejected Merkel’s request for another lockdown and France remains reluctant to lockdown, is seeing the euro modestly outperform on Thursday. EURUSD has managed to clamber back to the north of the 1.1200 level again and this has pushed the DXY back from within touching distance of 97.00 to under 96.70. NZD is the underperformer as markets continue to reprice for a less hawkish than hoped for RBNZ over the coming years. The rest of the G10 is pretty flat, which is unsurprising given the holiday market conditions.
Day Ahead
The rest of the session is set to be relatively quiet, with just a few central bank speakers to keep an eye on. ECB President Lagarde speaks at 1330GMT, followed by the BoE’s Haskel at 1405GMT and then Governor Bailey at 1700GMT. Trading across all markets then closes between the hours of 1800GMT and 2300GMT.
