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US bond yields saw a decent drop yesterday, with 10-year yields losing about 5bps to fall under the 1.50% mark again. Traders thus seem to have taken the small rise in yields seen at the end of last week (when 10-year yields went nearly as high as 1.55%) as an opportunity to buy the dip (remember when yields go up that reflects bond prices having fallen). That may prove to be a good omen going forward, though the risk that further hawkish vibes from the FOMC over the coming months could dent bond demand remains. Right now, 10-year yields are back to trading around the centre of last week’s ranges and conditions are likely to remain subdued ahead of key US data releases later in the week. Turning to stocks, US tech stocks had a good session yesterday with the Nasdaq 100 gaining 1.25% to cross above 14.5K for the first time ever, as tech stocks were boosted by the drop in yields. Gains in the big tech names helped push the S&P 500 to fresh record highs as well, with the index now only a few points from 4300, though gains were capped to 0.2% amid underperformance in cyclical (i.e. stocks whose earnings are heavily linked to economic performance) equity sectors. The more cyclically weighted Dow thus fell 0.4%. Conditions in US equity markets are subdued this morning with major US index futures broadly flat as equity traders await fresh catalysts which will come later this week in the form of tier 1 US data releases. Also note that with the month and quarter-end fast approaching (on Wednesday), we are likely to see a pickup in volatility related to portfolio rebalancing flows over the coming days as well.
Turning to commodities; not that there has been much way of fresh fundamental catalysts or news flow behind it, but crude oil prices have been trading with a negative bias so far this Tuesday. Front-month WTI futures are currently trading around the $72.50 mark, down about 0.5% on the session but over 2.0% so far on the week. Some are suggesting talk that OPEC+ might agree to increase output by a little more than previously signalled might be weighing. For reference, the cartel’s Joint Technical Committee (JTC) is meeting today to review supply and demand data and perhaps to then provide a recommendation of policy to the oil ministers. Headlines about how the meeting is going could spark some choppiness in crude oil markets, but the main event will be when the actual oil ministers themselves meet later in the week (where the policy decisions will be made). Turning to metals, London copper futures are down, with some citing ongoing concerns about the China crackdown as weighing on the complex, and gold and silver are also lower. Spot gold is currently down about 0.4% and trading around $1770 and spot silver is down a similar margin and trading around $26.00 as both keep one eye on developments in the US dollar, in bond markets (remember the close inverse relationship between real yields and precious metals). Key US data releases later in the week should spice things up for the precious metal complex.
Despite calls from a few banks that we will see month-end weakness in the US dollar, that is yet to materialise and the DXY is up about 0.2% this morning to back to the north of the 92.00 level again. Indeed, there seems to be a somewhat defensive bias in FX markets this morning, despite the subdued tone in other asset classes; the yen and US dollar are the best performing two G10 currencies on the day so far (USDJPY is thus flat just above 110.50). Japanese retail sales data from overnight, which was a little stronger than expected, may be helping the yen outperform. Risk sensitive G10 currencies, namely NOK, AUD, and NZD, are the worst performers this morning, each down about 0.5-0.6% on the day versus the buck (AUDUSD is back under 0.7550 and NZDUSD back under 0.7000); some are citing weakness in crude and other commodity prices as weighing, as well as also localised Covid-19 lockdown concerns in Australia and NZ. In terms of the latest on that front; a three-day lockdown in the state of Queensland was just imposed and four-day lockdown was just imposed in Perth. The news in NZ has been a little better, however, with the city of Wellington lowering its Covid-19 alert level and with the country on course to resume quarantine free travel to some parts of Australia.
In terms of the other G10 currencies, GBP and CAD are both down about 0.4% on the day versus the buck, with GBPUSD approaching the low 1.3800s, despite more positive sounding rhetoric on the UK/EU Northern Ireland conflict front and strong housing and BoE consumer credit data, and with USDCAD pushing back towards 1.2400 amid softness in crude. Finally, EUR, CHF and SEK are each down about 0.2-0.3% on the day versus the buck, with EURUSD recently dropping back under 1.1900, with stronger than expected European Commission June sentiment survey data doing little to help the single currency and as expected regional German June preliminary CPI releases not stirring the pot at all (the national German preliminary CPI report will be released at 1300BST).
The Day Ahead
Choppiness amid month-end flows is worth watching out for; traders ought to be more cautious than usual. Aside from that, look out for national German CPI (the preliminary June report) at 1300BST, which could move EUR. Attention will then turn to FOMC member Barkin (hawkish) who speaks at 1400BST, at which time US house price data for the month of April is also released, followed by US Consumer Confidence data out at 1500BST. ECB President Lagarde is also scheduled to speak at 1440BST.
