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Market Update
A big pullback in US government bond yields on Tuesday (10-year yields dropped from above 1.60% to the low 1.50s%) allowed long-term interest rate sensitive stocks (such as Big Tech names and high price-to-earnings ratio stocks like Tesla) to have a fantastic. The Nasdaq 100 rose 4%, its best day since November. Tech and growth stock outperformance amid the retracement in bond yields dragged global equities broadly higher in tandem. Things are much more subdued this morning, however, US equity index futures, having pulled back a decent amount from yesterday’s highs, trade mixed (S&P 500 futures are up 0.1%, Nasdaq 100 futures are flat and Dow futures up 0.4%).
US bond yields have been gradually creeping higher (10-year yields are nearly 2bps point up already today to back above 1.56%, before the US session has even gotten started) and if this move continues, this could weigh on stocks. There has not been much by way of fundamental catalysts to drive markets so far this week; US President Biden’s $1.9T “rescue” package passed the initial procedural hurdle in the US House of Representatives which means a final two-hour debate on the bill and a final vote can occur today – this was expected. Nonetheless, news of the bill being voted through by the House (which is what markets expect) could still lift sentiment.
Meanwhile, in terms of the US dollar, as has been the case since midway through yesterday’s European session, the Dollar Index (DXY) remains rangebound either side of the 92.00 handle. The buck is a little stronger this morning, as it remains supported above the 92.00 level for now but continues to trade within recent ranges. Tentative trade this morning in FX and stock markets should not come as a surprise ahead of key risks events Stateside today including 1) US CPI at 1330GMT/0830EDT and 2) an auction for $38B in 10-year US government bonds. Bond yields, and so also the dollar and equities, could be choppy in wake of both events.
Turning to commodities; crude oil prices have stabilised following yesterday’s pull back from multi-year highs set earlier on in the week, with WTI having recent rebounded from the low $63.00s to back above $64.00 and now trading modestly positive on the day, though still well below Monday’s highs of closer to the $68.00 level. Brent, meanwhile, is back in the upper $67.00s following a brief dip below the big figure. Increasing oil production and refinery activity in Texas, as the region continues to recover from February’s cold weather-related disruptions, is being touted as having weighed on prices as of late, as well as “bearish” oil demand growth forecasts in yesterday’s US Energy Information Agency, who released their monthly Short-Term Energy Outlook report and cut oil demand growth forecasts for 2021 (though increased them for 2022). Spot gold and silver, meanwhile, are pulling back a little after yesterday’s rally (that was enabled be a drop in bond yields), but XAUUSD is holding above $1700 and XAGUSD continues to trade above the $25.50 mark; the main drivers of precious metals remain bond yields and the US dollar.
G10 FX
The euro is the second best G10 performer on the day after the US dollar, but EURUSD is broadly conforming to rangebound dollar conditions and gains in the pair have been capped for now at the 1.1900 level. Strong French Industrial Production data this morning for the month of January is likely giving the euro some impetus and helping it to modestly outperform most of the rest of its G10 counterparts, though the single currency is likely to remain somewhat subdued ahead of tomorrow’s ECB meeting. GBP is seeing similarly rangebound conditions, with GBPUSD having dropped back form a brief trip above 1.3900, though seemingly unimpacted by news that EU countries are throwing their support behind the EU’s decision to take the UK to court over its unilateral actions on Northern Ireland.
Elsewhere. the recent pullback in crude oil prices weighed heavily on the loonie on Tuesday, but things are stabilising on Wednesday ahead of the Bank of Canada’s latest rate decision (which will be released at 1500GMT/1000EDT). At the moment, USDCAD is trading around the 1.2650 level, around which it is likely to remain rangebound ahead of the BoC.
The antipodes are not the worst G10 performers on the day, but neither are doing particularly well, with AUDUSD trading around the 0.7700 level and NZDUSD trading around the 0.7150 mark, having slipped back from overnight highs in the 0.7180s. Both pairs mostly trade as a function of USD flows and, as such, are likely to remain rangebound ahead of key stateside events later in the day. But there are a few non-dollar related factors to note; firstly, RBA Governor Lowe was speaking overnight and was unequivocally dovish, stating that he disagreed with market pricing of RBA rate hikes in 2023 and reiterated his expectations for now hikes until 2024. This, combined with the fact that iron ore prices have been under pressure (falling over 3% last night) amid new pollution controls in one of China’s largest steel producing cities, is being touted as weighing on the Aussie. Meanwhile, the RBNZ removed some Covid-19 liquidity facilities, though Governor Orr said that this has nothing to do with the bank’s policy stance (and does not seem to have affected NZD).
Finally, with US bond yields turning a little higher this morning but the market remaining in a broadly upbeat mood, low yielding safe-haven currencies JPY and CHF are the G10 underperformers this morning, both down about 0.3% on the day versus the US dollar. The latter seems unimpacted by recent comments from SNB Chairman Zurbruegg, who welcomed recent weakness in the CHF and said that it is premature to talk about a long-term adjustment in interest rates, whilst reiterating that negative rates and FX intervention remains necessary. The SNB has spent CHF 100B in FX intervention over the past year, he noted.
Day Ahead
US CPI data at 1330GMT/0830EDT is the first key event of the day to keep an eye on and the dollar, US bond yields and even stocks could be choppy. The next main event will be of more interest to CAD traders but could have implication for the US dollar as well if any move in CAD is large enough; the BoC will be releasing their latest monetary policy decision at 1500GMT/1000EDT.
Focus will then turn to the latest weekly EIA crude oil inventory numbers at 1530GMT/1030EDT, on which crude oil markets (and any crude oil linked currencies) could be choppy, ahead of a $38B auction of US government 10-year bond notes; the auction is being seen as a test of the demand for US debt at these higher yields and if it goes badly, we could see US bond yields continue to rally (this could be USD positive and stock market negative).
