H2 2021 draws to a close, month-end volatility inbound?

Month/quarter/half-end flows have not yet proved to produce much by way of fireworks across markets. US and global equity bourses continue to trade at/very close to record high levels (E-mini S&P 500 futures are flat around the 4280 marks in pre-market trade after nearly going above 4300 earlier in the week) – global equity indices point to strong gains of about 12% since the start of the year. But there is still one more US session to go until the first half of 2021 can truly be said to have drawn to an end, so market participants should be on the lookout for a pickup in volatility. US bond markets are seeing a little bit more activity; yields continue their steady decline, with the 10-year down another 2bps on the day to close to 1.45% and bull flattening generally the theme of the day. Bonds have seen strong demand as the year end approaches, seemingly as markets buy more and more into the inflation being transitory/deflation story – if the US (and developed world) does return to a deflationary environment, then this likely means a lower terminal Fed interest rate (i.e. that the coming hiking cycle will not take rates that high), hence why long-term bond yields remain close to record lows (albeit above initial post-pandemic lows).

Subdued sentiment in bond yields seems to be helping to keep equity markets (in particular tech stocks) underpinned for now and has helped prevent rising Covid-19 delta variant spread concerns under wraps; the more transmissible Indian variant is spreading and becoming the dominant variant across the world and, while well vaccinated regions (the UK, US, EU) should not see their economic recoveries derailed, the same cannot be said for most of the rest of the world. Attention now turns to US data going forward; yesterday US consumer confidence survey for the month of June was stronger than expected which is, of course, good news for the recovery. Meanwhile, we get ADP’s estimate as to employment change in the month of June today at 1315BST. This will help set expectations for Friday’s official US jobs report and NFP number, which will be the main driver of risk appetite on the week (and likely for the next few weeks).

Turning now to other asset classes; crude oil prices are higher this morning. A bullish weekly API crude oil inventory report out of the US last night has boosted sentiment and feeds into the narrative of a strong demand recovery over summer and of an ongoing supply/demand imbalance. Crude traders now await the official EIA report on US inventories are 1530BST today for confirmation. In the meantime, crude oil prices look well supported with WTI just under $74.00 and Brent just under $75.00, with crude oil traders also showing some caution as they await the decision on production policy from OPEC+ leaders later in the week, as well as fresh updates on Iran/US negotiations and the spread of the Covid-19 delta variant. Looking elsewhere, gold prices are trading just above last week’s lows, with a potential break to the downside which could open the door to a move down towards annual lows around $1680 looking increasingly likely, especially if US data over the coming three sessions is strong. For now, XAUUSD is trading around $1760.

Finishing on FX markets, things remain subdued and rangebound, as has been the case with other asset classes. The DXY is flat this morning and still trading just to the upside of the 92.00 level, bang in the middle of last week’s 91.50-92.50 range as FX traders await US data upcoming data releases. Month/quarter-end flows appear not to have had much of an impact on the buck, with their effects perhaps dampened by recent post-FOMC volatility. Looking at other USD majors; EURUSD is rangebound in a similar fashion to the DXY and trading just under 1.1900 – this morning’s Eurozone preliminary June CPI report was pretty much as expected (YoY rate of CPI was 1.9%) and will not have ECB members worrying about the need to talk about tightening policy any time soon. German jobs data, also for the month of June has also not stirred the pot at all, despite coming in a little stronger than expected (though the unemployment rate in the country remained unchanged at 5.9%). SEK, CAD, NOK and GBP are the modest G10 outperforming currencies so far on the session, each up about 0.1% versus the buck, the former three likely helped by strength in crude oil prices and the latter despite negative revisions to Q1 2021 UK GDP data and another decline in BRC shop prices. GBPUSD is currently ranging either side of the 1.3850 mark. Elsewhere in FX, CHF is the worst performer, down about 0.3% versus the buck this morning, weighed by a bad Swiss KOF report. JPY and the antipodes are meanwhile all subdued and trading with very modest losses versus the buck, following mixed Chinese PMIs overnight.

The Day Ahead

As noted, the 1315BST release of ADP national employment data is a key event to lookout for as markets may use it to gauge expectations for Friday’s NFP number. We then have the latest Canadian GDP number (for April) out at 1330BST, which could move the Loonie. Further US data in the form of Chicago PMI at 1445BST and Pending Home Sales at 1500BST will also both be worth watching ahead of EIA official weekly crude oil inventories. The final event of note of the session will be FOMC member Barkin speaking at 1800BST.