Things went from bad to ugly for risk assets during yesterday’s US session. In the end, US equities ended the session deeply in the red, with the S&P 500 down about 1.6%, Dow down about 2.1% and Nasdaq 100 down about 0.9%. All three are seeing a modest recovery this morning (E-mini futures for each index are about 0.5% higher), but not enough to fully unwind yesterday’s losses. Sentiment in Asian equities overnight was unsurprisingly also negative, as the region took its cue from the downbeat Wall Street session. Back to yesterday’s session, losses on the day in European equities were event greater and, for the most part, European bourses have failed to recover any lost ground this morning, with the Stoxx 600 flat on the session and still over 3.5% below recent record highs printed at the start of last week. For reference, E-mini S&P 500 futures this morning trade less than 3.0% below recent record levels, having found decent support at the 50DMA at the 4240 marks. All in all, though the headlines and media framing of yesterday’s losses seen across global equities were alarmist (unsurprising from the click desperate media), the losses are not yet that bad. Indeed, the S&P 500 has seen multiple 4-5% corrections from record high levels already this year. At this point, it seems there is no reason to be especially fearful that this correction will be any different given that 1) markets remain confident that the Fed put is still in play (i.e. that the Fed will panic if equity market losses get to grave and turn more dovish, as they have done time and time again in recent years) and 2) the vaccines are still seen as a game changer in the fight against the pandemic, as there is no sign (yet) of any new Covid-19 variant against which the vaccine is not effective.
Arguably the much more meaningful moves yesterday occurred in crude oil markets and bond markets. Starting with the former; front-month WTI futures eventually cratered all the way as low as the $66.00 level, a near $11 (or 13.5%) pullback from recent highs close to $77.00. On the way, WTI smashed through its 50DMA, which sits on the $70 level and is currently looking heavy as it probes support in the form of a triple high from back in May in the mid-$66.00s. Should this level go, more technical selling could drive WTI prices back as low as the next key area of support in the $57.00s, where the 200DMA and March lows reside, though this would likely require a more meaningful correction elsewhere, like in equities (which, as noted above, seems unlikely). Market commentators framed the reason for the downside as being down to the “bad timing” of the surprise OPEC+ deal on Sunday (which will bring 400K barrels per day more supply online from August) at a time of heightened fears about the spread of Covid-19 variants (and the potential subsequent hit to oil demand). Turning to bond markets; US yields saw a meaningful fall yesterday on safe haven demand and the US yield curve saw a meaningful bull flattening – something which analysts point out is common to see in the later-stages of the economic cycle. US 10-year yields cratered below their 200DMA at 1.25% and below 1.20% for the first time since early February yesterday and currently trade around 1.18%, while 30-year yields fell to their lowest since January in the low 1.80s%. All in all, US bond markets seem to be telling us that they think that 1) the steady state of US growth in the coming decades will be sluggish and 2) inflation over the coming decades will also be low. This could all be a reflection of fears that the pandemic will be with us and hurting global growth for some years yet but is also a reflection of the expectation that central banks (namely the Fed) are likely to keep a highly accommodative monetary policy stance by historical standards in the years to come.
Turning to FX markets; was it not for the downside being observed in US yields then perhaps the US dollar would be even stronger and maybe the DXY would have been able to push significantly above the 93.00 level. As things stand, 93.00 continues to cap the price action for the Dollar Index this morning, but USD continues to trade broadly supported against its G10 peers amid an underlying and persistent safe haven bid. Maybe a break above the 93.00 level in the coming session can provide DXY with the technical impetus needed to launch it on towards annual highs in the 93.40s. Perhaps a dovish outcome from Thursday’s ECB meeting could provide that impetus. Sadly for the DXY bulls, the PBoC refrained from easing its Loan Prime Rate overnight, keeping the 1-year and 5-year rates both unchanged at 3.85% and 4.65% respectively. Easing likely would have weighed on CNY/CNH, which would have boosted the DXY.
Elsewhere in FX markets, the risk-sensitive currencies that took a battering yesterday are for the most part still under pressure this morning; NOK is down a further 0.6% on the day versus the buck and NZD is down a further 0.5%. Indeed, NZDUSD finally dropped below recent support around 0.6920 yesterday and to fresh multi-month lows, but is yet to fall under the 0.6900 level, perhaps as the RBNZ’s hawkish stance continues to offer some solace. Losses in AUD are not as bad this morning, despite the worsening news regarding the spread of Covid-19 in the country that continues to see regional lockdowns tightened and extended – some regional banks are calling for a drop in GDP in Q3 this year as a result of the lockdowns and for the RBA to unwind its recent tapering of the monthly rate of bond buying to AUD 1B per week to offer more support to economic growth. A dovish RBA turn would obviously hurt the AUD, but the currency has undergone so much pain over the past few months (AUDUSD has dropped nearly 9.0% from annual highs set back at the end of Q1 above 0.8000 to current levels in the mid-0.7300s) that this may be keeping the bears cautious on further adding to their bets.
GBP is not doing very well this morning, seemingly a derivative of downbeat risk appetite rather than any fresh domestic news, though some have argued that going ahead with “freedom day” on Monday as planned despite the worsening outlook of the pandemic in the UK and elsewhere might amount to a mistake that could result in a net damage to the UK economy (i.e. if the current wave becomes too severe and the UK needs to snap back into lockdown). GBPUSD has cratered to the low 1.3600s, its lowest level since early February and is now below its 200DMA which sits just under 1.3700. Low yielding/safe haven currencies like JPY, CHF, EUR and SEK continue to perform well given the environment. The Loonie is a surprise strong performer on the day, likely just in a technical correction after taking a beating on Monday that saw USDCAD surge as high as 1.2800 for the first time since early February (profit taking has seen the pair this morning drops back under 1.2750).
The Day Ahead
It’s another quite day on the data front. US Housing Starts and Building Permits data, both out at 1330BST, will not garner too much attention. NZD traders will be watching for the result of the GlobalDairyTrade auction in the afternoon and crude oil traders will be watching Weekly Private API crude oil inventory data out at 2130BST. Risk appetite will continue to largely be driven by Covid-19 pandemic news.