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Stocks & bonds
Global equities are subdued on Monday ahead of a barrage of risk events later in the week, including an FOMC meeting, more detail on Biden’s American Jobs plan and preliminary estimates of Q1 GDP growth out of key economies (plus plenty more, see the end of the morning brief). There is a positive bias to trade, however, following the afterglow of last week’s very strong US (and European) economic data. For reference, US preliminary April Markit PMIs and Initial Jobless Claims (for the week ending 16th April) were very strong, as were European April PMIs (and UK retail sales). Expectations for a dovish Fed meeting on Wednesday are also being cited as supportive for stocks.
Asian equities saw marginal overnight gains as the region shrugged off concern in Japan about the implementation of a new state of emergency for four of the country’s foremost prefectures (including Tokyo) and despite a continued surge in Covid-19 infections in India. European equities are broadly flat though some outperformance is being seen in Spain and Italy; bourses of the tourism dependant countries are getting a boost on reports that the EU and US are close to an agreement on vaccine passports that could kickstart trans-Atlantic tourism. A slightly worse than expected German Ifo survey has not had much of an impact.
US equity index futures point to a flat open, with the e-mini S&P 500 futures trading in the 4170s, just below all-time high levels set last Friday of just shy of the 4200 mark. The aforementioned strength in last week’s economic data helped stocks recovery from a brief mid-week slip up on Biden taxation policy concerns; stocks didn’t like talk of the capital gains tax being doubles on those earning over $1M per year, though such tax hikes are: 1) unlikely to be able to pass the Senate in their current form given opposition from Republicans and moderate Democrats and 2) only affect a small number of Americans anyway (0.3%), so will likely not have much of a broader economic impact. On the former point, Democrat Senator Manchin said that he does not favour the passing of the Biden administration’s infrastructure bill via budget reconciliation, a process that allows legislation to pass with a simple majority (51 votes) rather than the usual 60 votes (which would require 9 Republicans to vote in favour). That means if the Biden admin does go down the road of budget reconciliation, it may not have the 51 votes it needs.
With US equities hanging out close to all-time high levels, there are growing calls at major institutions for stocks to start facing headwinds going forward; Goldman Sachs said on Wednesday that expected second-quarter peak in the pace of US growth could be tied to weaker stock returns. Morgan Stanley has warned that stocks would soon face headwinds. Deutsche Bank called for a pullback of as much as 10% in the S&P 500 earlier in month as growth decelerates. BofA Global Research backed its year-end target for the index about 8% below current levels. The fact that stocks have gone so long without undergoing a serious drop is concerning some market participants; “S&P 500 has declined at least 5% every 177 calendar days” noted chief investment strategist at CFRA Sam Stovall. It has now been 211 days without such a drop. “I wouldn’t be surprised to see some kind of pullback for no particular reason other than people start to think maybe this is a little bit ahead of itself” said senior portfolio manager at Dakota Wealth Robert Pavlik.
Turning to bond markets; US bond yields have been on the front foot in recent trade with traders selling ahead of today’s 2 and 5-year bond auctions and ahead of tomorrow’s 7-year auction, during which time $183B of debt will be sold. US 10-year yields are now looking to test the 1.60% mark. European government bond markets have also seen yields push a little higher ahead of the release of ECB asset purchase data at 1445BST.
Commodities
Crude oil prices have been under pressure to start the week. The Covid-19 situation in India, the world’s third largest crude oil consuming nation, is becoming more desperate, with hospitals having been overwhelmed in a number of major cities and the impact of recently imposed lockdowns (as well as general “fear” of the virus) now seemingly exerting a negative impact on mobility and economic activity in the country, according to high-frequency indicators. According to analysts at Bloomberg, combined consumption of diesel and gasoline in India this month is poised to plunge by as much as 20% from March. Meanwhile, countries are restricting air travel to and from the world’s second most populous nation, hitting fuel demand. Further adding to concerns is the fact that the Indian outbreak is being driven by a so-called “double-mutant” strain of Covid-19 (the B.1.617 strain) against which vaccines are feared to be significantly less effective. Japan also recently announced a new state of emergency in four of its prefectures (including Tokyo), as the country seeks to dampen mobility ahead of the Golden Week holidays. Supply side dynamics are also in focus, as US/Iran talks continue in Vienna and the OPEC+ Joint Ministerial Monitoring Committee get together on Wednesday followed by the high-level OPEC+ meeting later in the week. Expectations are for no tweaks to the bloc’s output cut easing guidance at present, though some members are likely to be alarmed by recent Covid-19 developments.
In terms of metals, gold is choppy around the $1780 mark having failed to bust above the $1800 level last week. If USD downside continues and US bond yields continue to drop (perhaps the Fed surprises with its dovishness later in the week) then gold (and other precious metals like silver, will be in for more upside). Meanwhile, copper hit 10-year highs amid supply concerns (Chilean workers threatening to strike – the country produces one quarter of global supply) and iron ore prices have been boosted amid further concerns about clampdown on steel production in China.
FX
The Dollar Index (DXY) continues to languish close to recent lows under the 91.00 mark, despite recent optimism about the pace of the US economic recovery (Q1 GDP data set for release later in the week is likely to be blockbuster) and increased chatter about Fed QE tapering. That will be the main focus at this week’s FOMC meeting, though most analysts expect the Fed to stick to its guns with regards to wanting to see “substantial further progress” towards its employment (and inflation) goals before tightening rates, implying no warning from Powell of incoming QE tapering until much later this. In a Bloomberg survey, about 45% of the economists expect the FOMC to announce tapering in Q4 2021, with 14% seeing that happening in Q3. This combination of strong US growth (and high and rising inflation) but a steadfast dovish Fed (for now) is likely to keep US real rates low, which could act as a drag for the dollar.
Turning to other G10 currencies; GBP has now handed back most of its earlier European session gains. Positive commentary from BoE Deputy Governor Broadbent on the prospects for the UK’s recovery in the coming months (get ready for a “very rapid” recovery, he said) were cited as sterling positive. Goldman Sachs thinks the UK’s recovery in 2021 will outpace that of the US, with GDP rising 7.8%. There were also reports that an easing of tension with the EU over the Irish border could be near if the UK aligns more closely to the EU’s food standards. GBPUSD went as high as the 1.3920s but has since dropped back under the big figure. Amid a lack of domestic economic events this week, sterling will likely focus on global affairs.
EUR, meanwhile, is flat, with EURUSD pivoting either side of the 1.2100 level. There are a few potentially positive idiosyncratic EU news stories of note; in Germany, the greens are gaining some momentum in the polls ahead of the September election (if Green Party leader Baerbock takes the top spot as German Chancellor, talk is more expansionary German fiscal policy). Meanwhile, Italian PM Draghi is presenting his EUR 222B recovery plan (which utilises the EU recovery fund money) to the Italian parliament for approval. The German Ifo survey for the month of April was a little softer than expected, with Business Climate coming in at 96.8 versus expectations for 97.7, though still a little higher than March’s 96.6 reading.
CAD, meanwhile, is up by about 0.3% versus the buck, despite lower crude oil prices, as the currency continues to benefit amid the afterglow of last week’s hawkish BoC meeting (the bank effectively brought forward its timeline to lift-off with regards to rate hikes). USDCAD is currently probing monthly lows in the mid-1.2400s. JPY is subdued, with USDJPY around 107.80 and within last Friday’s ranges ahead of Tuesday’s BoJ rate decision (no policy change expected, meaning a subdued market reaction is likely).
Finally, despite ANZAC day holiday’s in Australia and New Zealand overnight, both AUD and NZD are looking perky, both beneficiaries of the broadly upbeat tone to risk appetite and the former also deriving a boost from positive price action in metals (particularly iron ore and copper). AUDUSD is now flirting with the 0.7800 mark, not far from highs set earlier in the month just under 0.7820. NZDUSD, meanwhile, found support at the 0.7200 level overnight and is back in the 0.7220s, on just below earlier month highs of 0.7230. Aussie traders will be focused on Q1 CPI data set for release at 0130BST on Wednesday, while Kiwi traders will be focused on March Trade numbers at 2245BST on Wednesday and the April ANZ Business Confidence survey set for release later that very same night. However, for the most part, the two currencies are likely to take their cue from risk appetite.
Turning to EM currencies; TRY has attempted to regain some composure after being crushed at the end of last week. The USDTRY 8.50 mark has been well defended for now, perhaps by the CBRT. The economic situation in Turkey remains precarious; US/Turkey tensions flared recently as the US acknowledged the 1915 Armenian genocide, the country continues to struggle with a rising Covid-19 infection wave and the CBRT’s credibility remains in the doldrums with the recently appointed Governor talking about how rate hikes hurt the economy over the weekend (despite the clear need for them to get inflation back under wraps – the YoY rate of inflation is expected to sour to 18% later in the week).
INR, meanwhile, is seemingly returning to its usual ways, i.e. trading with low volatility. USDINR is holding under the 75.00 mark after shooting higher from under 73.50 earlier this month to highs last week above 75.50 amid the dire Covid-19 situation in the country. Note that the situation is yet to show signs of significant improvement, meaning the risk of further INR depreciation versus the buck remain. Chatter about downgrades to India’s 2021 economic outlook at various institutions is going to do little to help the rand. What it really needs is likely some evidence of a slowing infection rate; this remains elusive following five consecutive days of record infection and death rates.
Day Ahead
Compared to the density of risk events later in the week, Monday is set to be comparatively quiet and, as such, markets moves are likely to remain contained. Data worth watching today is the US Durable Goods report for March, released at 1330BST and then the Dallas Fed Manufacturing Index for the month of April at 1530BST. Both are likely to be strong in tandem with other recently released US data points for the months of March and April. US bond market traders will also be watching a 2yr note auction at 1630BST followed by a 5yr note auction at 1800BST. Outside of the US, the ECB’s Chief Economist Phillip Lane will be on the wires at 1400BST ahead of the release of weekly ECB asset purchase data at 1445BST. Any central bank commentary forms a joint Bank of International Settlements, Bank of England and ECB conference on post-pandemic economic spill over effects would be worth watching. Finally, Tesla results are out after US markets close; given the stocks volatility and more than 1.5% weighing in the S&P 500, these will be worth watching for any macro-read across.
Things get juicier later in the week; The BoJ, Riksbank and Central Bank of Hungary each set monetary policy, South Korea reports Q1 GDP and there is a US 7-year note action on Tuesday. Biden speaks on stimulus, the FOMC set monetary policy, the OPEC+ Joint Ministerial Monitoring Committee meet, Australia releases Q1 CPI and Canada releases February retail sales on Wednesday. Germany & Spain released preliminary April CPI data and the US releases preliminary Q1 GDP data on Thursday. Friday sees the releases of official Chinese PMIs for April, Japanese Unemployment for March, preliminary German Q1 GDP, preliminary Eurozone CPI for April, and GDP for Q1, Canadian February GDP and US Core PCE for March. Meanwhile, US stock market participants will need to watch all of the above plus earnings from Google and Microsoft on Tuesday, Apple and Boeing (important for the Dow) on Wednesday, Amazon, Twitter, McDonalds and Caterpillar (seen as a global economic lead indicator) on Thursday and Berkshire Hathaway, Chevron and Exxon on Friday, plus MANY more S&P 500 companies (180 of the 505 report this week).
