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Yesterday was somewhat of a risk off session, with US equities for the most part dropping (S&P 500 down 0.2%, Dow down 0.6%), though these two indices are still closet to recent record high levels. Softer than expected US ISM Services survey data, lower oil prices amid OPEC+ stability concerns, concerns about the ongoing China crackdown on foreign listed tech companies (Didi) and the ongoing resurgence of the Covid-19 virus (driven by a surge in the Delta variant across Europe and other parts of the world) have all been cited as reasons for caution. The strongest indicator of caution came from the rally in bond markets, more aptly seen in the drop in longer-term US bond yields; 10-year yields are now under 1.35% and at multi-month lows and 30-year yields have fallen under 2.0% again. This actually seems to have come to the aid of equity markets, particularly the Nasdaq 100, which gained 0.6% on the session yesterday and is up (or at least E-mini Nasdaq 100 futures are up) a further 0.6% in pre-market trade this morning. Major European equity bourses are also looking perky today (Stoxx 600 +0.5%), despite soft German Industrial Order data this morning, perhaps aided a little by an upgrade to the EU Commission’s economic forecasts and positive news on the potential for the UK easing travel restrictions to the EU for those who are fully vaccinated. European government bond yields, meanwhile, are lower across the board, taking their cue from their US counterparts.
Turning now to commodities; as noted above, crude oil prices were hammered yesterday, with WTI dropping from fresh cycle highs just under $77.00 to hit lows at $73.00; initially concerns about OPEC+’s failure to reach a deal seemed to spur prices higher given there is no deal on a short-term increase to output, but it appears that markets have become concerned that the failure to reach a deal at yesterday’s meeting might evolve into a broader failure of the cartel’s current deal to hold up, which could translate into worse compliance to cuts and more supply than expected coming online. This morning, oil prices have stabilised and are up from yesterday’s lows, with front-month WTI futures currently trading in the upper $74.00s. “Markets will likely need to hear more encouraging signs that OPEC+ members are indeed moving towards a reconciliation to see a stabilization in prices” says ING. In the meantime, weekly API crude oil inventory data is out later in the day (coming a day late due to the US holiday on Monday) and will be closely watched. Another big draw ought to emphasise to OPEC+ that they need to get their act together and reach a deal on an output increase to feed ever hungrier global oil demand. Elsewhere, amid the drop in global yields and the increased demand for safe haven assets, gold and precious metals more broadly are well supported. Spot gold (XAUUSD) is this morning up about 0.8% or about $14 and has managed to reclaim the $1800 level after a few weeks of failure to do so. Was it not for the stronger US dollar, which has also seen gains amid the recent safe haven bid, gold would likely be considerably higher right now. If hawkish FOMC vibes keep the dollar strong, then this is likely to continue to weigh on gold, though as long as yields keep falling, it should be able to stay above $1800.
Finishing up with FX markets this morning, the US dollar was boosted amid safe haven demand yesterday and DXY continues to remain relatively well supported in the 92.50 region, close to recent highs just above 92.70. If markets continue to trade with a cautious bias and crude struggles to continue its recovery back to recent highs, the dollar may remain supported, as was the case yesterday, with any hawkish vibes from tonight’s FOMC minutes release also likely to help the dollar’s cause. But the dollar is mainly higher this morning at the expense of EUR and JPY (EURUSD continues to languish around just above 1.1800). Indeed, as risk appetite sees a recovery/stabilisation this morning, the risk sensitive currencies are also recovering. NZD is leading the charge in the G10, up about 0.4% this morning having bounced strongly at the 0.7000 level, though is still some way off yesterday’s pre-risk off highs around 0.7100. In recent days, there have been a fresh round of hawkish calls for RBNZ policy, with a number of NZ banks (ANZ, BNZ, ABS and Westpac) all updating their predictions for the RBNZ to begin hiking interest rates from November. With the RBNZ now at the front of the G10 monetary policy tightening cue alongside the Norges Bank, we might see NZD perform better than peers in the coming months. AUD and GBP are also doing well, with both up about 0.3% on the day taking GBPUSD above 1.3800 and AUDUSD above 0.7500. The Aussie has also been supported by central bank vibes; while there were dovish aspects to yesterday’s RBA rate decision (like the reiteration of guidance for no rate hikes until 2024), there were also more hawkish undertones (more optimistic on the economy, while the monthly pace of asset purchases was reduced). CAD, meanwhile, is struggling a little and is only up about 0.1% on the session, with eyes firmly on oil prices ahead of this Friday’s Canadian labour market report.
The Day Ahead
US JOLTs data is out at 1500BST and will be closely watched. Market participants expect the latest report to show a further rise 9.388M (to a fresh record high) in US job openings in the month of May. The data should re-emphasise that there is strong demand for labour in the US economy and that the US labour market is actually quite tight, despite the fact that the unemployment rate and total number of unemployed persons remains well above pre-pandemic levels. Markets are unlikely to see too much of a reaction as long as there is not a big miss or beat on expectations. Canadian Ivey PMI data for the month of June will also be released at 1500BST, something Loonie traders ought to keep an eye on. Attention will then turn to tonight’s FOMC minutes release at 1900BST and the rationale behind the bank’s recent hawkish shift. The minutes should show a consensus behind the notion that talks about when the bank should begin tapering its asset purchase programme should begin over the coming meetings.
