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US equity index futures are flat in pre-market trade and are well within recent ranges, with markets well and truly in wait-and-see mode ahead of this Friday’s key US jobs data release. E-mini S&P 500 futures this morning trade almost bang on 4200 ahead of the US open, with prices having barely moved more than 10 points away from the psychological level on either side. Indeed, the index future contract (as has been the case with the underlying cash index) has traded in a thin 4180-4230 range for more than a week now. Price action in US bond markets is equally subdued this morning; US 10-year yields continue to remain glued within a couple of basis points of the 1.60% level. US financial markets are awaiting further evidence on how the US economic recovery is progressing, particularly with regards to the pace at which the US labour market is recovering back towards its pre-Covid-19 pandemic health, given that this will impact the Fed’s policy normalisation timeline. The fact that nominal US 10-year yields remain around 1.60% and 10-year break-evens are consolidating below recent highs in the mid-2.40s% indicates that markets inflation fears for now remain contained; though this is a theme to watch, as inflation is being cited by fund managers as a key risk to stocks at current valuations.
In terms of commodities this morning, crude prices continue to rise, with both WTI and Brent up about another 50 cents each this morning to above the respective $68.00 and $70.50 levels, though both remain a tad below yesterday’s respective $68.80ish and $71.30ish highs. The complex continues to derive support from the ongoing demand recovery story in North America and Europe as the regions head into the summer driving season, but geopolitics may also be helping; the largest ship in the Iranian Navy has caught fire and sunk in the Gulf of Oman. Details about what happened to the ship remain unclear but be on the lookout for any signs of Israeli or US involvement, as that would of course further heighten military tensions in the region. Talks with between the later and Iran regarding a return to the 2015 nuclear deal and a subsequent removal of oil export sanctions seem to be on track, (the Iranian President reiterated that key issues have been resolved). Elsewhere in oil relevant news, OPEC+ agreed to patiently stay the course with their previously agreed output cut easing scheduled as expected as they observe the impact of the Covid-19 pandemic on demand in Asia and the prospect of a return of Iranian supply. Elsewhere, precious metal sentiment has taken a modest hit amid the stronger US dollar, though spot gold’s losses remain modest as spot prices range either side of the $1900 level. Subdued US bond market conditions and real yields that are still down a couple of bps on the week are helping to keep the complex supported.
Turning to FX markets; yesterday’s underwhelming US ISM Manufacturing PMI survey for the month of May, which saw the unemployment subindex posting a big miss on expectations for a reading of 61.5 and coming in at 50.9 (a negative signal for how the US labour market performer in May ahead of Friday’s key official May jobs report), did not deliver a lasting dent to US Dollar sentiment. Indeed, USD is actually the outperforming G10 currency this morning and this has seen the US Dollar Index (DXY) climb back to test its 21DMA at 90.20, a pretty solid roughly 0.75% recovery from last week’s lows. However, the DXY does continue to trade within its ranges of recent weeks, and the gradual downside bias trade seen throughout April and May does still seem intact. The 21DMA has acted as decent resistance since the start of May, so maybe a break above it could be a sign that USD might continue to recover, perhaps back towards 91.00. However, traders and market participants are likely to keep their powder dry ahead of this Friday’s crucial US jobs data, so currency speculators would probably be wise not to expect any big, large volume driven moves until this key risk event is out of the way.
Sticking with the G10 currencies; NZD and CHF are the worst performers. USDCHF has vaulted back to the north of the 0.9000 level as it falls victim to the buck’s modest recovery, despite a lack of any Swiss specific fundamentals to explain underperformance (perhaps SNB CHF selling once more..?) and the pair is currently attempting a push back to the north of its 21DMA. NZDUSD, meanwhile, has fallen back below its 21DMA at 0.7228 to the 0.7210s and has managed to print lows under last Friday’s 0.7213. Dovish commentary from the RBNZ’s head of financial market operations Raynor are being cited as a negative; she said that the balance sheet is likely to remain large for a long time, though she conceded that this would be up to the bank’s MPC (of which she is not a member).
AUD, EUR and JPY, meanwhile, are each down between 0.3-0.4% on the session versus the US dollar, enough to push AUDUSD back under 0.7250, EURUSD back under 1.2200 and USDJPY back towards the 110.00 level. Note that all still trade well within the confines of recent ranges. Australian GDP data for Q1 2021 was better than expected, with the economy growing at a rate of 1.8% QoQ (versus forecasts for 1.5%) and 1.1% YoY (versus forecasts for 0.6%). Any positive impact this may have had seems on the currency seems to have been undone by the stronger dollar and confirmation that the lockdown in Melbourne, Victoria is to be extended for another week, though RBA officials have been talking down the impact of recent short lockdowns on economic activity. The euro has meanwhile shrugged off slightly hotter than expected preliminary PPI inflation numbers for the month of May, while comments from BoJ member Adachi last night did not surprise in anyway, with the dovish central banker reiterating his stance that further easing would need to be implemented without hesitation in the case of another external shock to the economy.
Finally, GBP and CAD, though both lower on the day by between 0.1-0.2% on the day versus the US dollar, sit near the top of the daily G10 performance table. The former continues to derive support from oil prices, as well as yesterday’s slightly better than expected GDP reading for the month of March. The UK, meanwhile, saw zero Covid-19 deaths yesterday for the first time since the start of the pandemic, though the government continues to maintain that it remains too early to commit to moving to the final stage of lockdown easing on the 21st of June owing to the accelerating spread of the more transmissible Indian Covid-19 variant in some parts of the country that has recently seen the UK’s Covid-19 reproduction rate (i.e. the average number of people each infected persons passes the virus onto) move back above 1. While a move to the final stage of lockdown easing would likely not deliver too significant a boost to economic activity, it could still give GBP sentiment a further boost. A delay to the final lockdown easing stage is thus a minor risk to GBP in the coming weeks.
The Day Ahead
Conditions are likely to remain subdued today, with not much on the calendar that poses any significant risk of altering the underlying macro backdrop. CAD traders will be on the lookout for the release of Canadian Building Permits data for the month of April at 1330BST. USD traders, meanwhile, will have to navigate through another hefty dose of Feds Speak, with Harker, Evans, Bostic and Kaplan all speaking at various times throughout the afternoon/evening. ECB President Lagarde is also slated to give remarks at 1810BST. Finally, crude oil traders will be watching out for the release of weekly Private API inventory numbers at 2130BST.
