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Ahead of the return of US market participants to the market after a long-weekend (US markets were shut on Monday for Memorial Day), US equity index futures are trading with a positive bias; E-mini S&P 500 futures have remained well supported above the 4200 mark and current trade around 4220 (+0.4%), not far from last month’s all-time high levels around 4240. Trade seems to reflect a mood of cautious optimism ahead of key catalysts later this week, the most important of which include the May US Labour Market Report and May ISM Manufacturing and Services PMI surveys, as well as perhaps some ongoing support from the ongoing reopening/accommodative central bank narrative. Meanwhile, US government bond markets remain subdued; yields are a little higher (10-year +2bps to 1.62%) but remain well within recent ranges. As with stocks, the hope is that this week’s US data could inject some direction back into bond markets; this Friday’s NFP data will help desks refine their expectations as to the timeline that the US economy is able to return back towards full employment. Some desks have argued that even a strong number (perhaps above 1M) would have little bearing on the Fed’s policy normalisation, given that full employment would still remain many more months away, hence there may be limited upside risk for bond yields.
Turning to commodities; this morning has seen new cycle highs for US crude oil, with front-month WTI futures contracts breaking above the $68.00 level for the first time since October 2018. Long-term crude bulls will continue to target the 2018 peaks at just under $77.00. By contrast, front-month Brent futures have not managed to surpass their March peaks but has managed to break back convincingly to the north of the $70.00 level after struggling with this level over the course of the last few weeks. Both contracts are up more than 2.0% on the session. Crude oil markets are deriving ongoing support from the ongoing narrative of improving crude oil demand in major economies such as the US, UK and EU as the summer driving season approaches and vaccine rollouts appear to have ruled out the prospect of tight lockdowns going forward. According to ING, “while there are concerns over tighter COVID-19 related restrictions across parts of Asia, the market appears to be more focused on the positive demand story from the U.S. and parts of Europe”. Meanwhile, energy officials from OPEC+ nations meet today and according to recent sources, are likely to stick to their plans (announced back in April) to gradually ease output restrictions in June and July. According to analysts at SEB, “there are no signs of division within the group, and we expect it to hold on to a steady course with very good control of the market”. The group is likely to remain patient as it observes the path of the pandemic in major Asia economies such as India, as well as US/Iran nuclear deal negotiations and the prospect of Iranian supply returning to the market.
Turning to metals; it was a third consecutive session of gains in Chinese iron ore markets, with the most traded Dalian futures contract rising over 7.0% on Tuesday, boosted by recent reports that steel production cut requirements in Tangshan may be eased (which could boost demand for steel making ingredients such as iron ore). Meanwhile, copper prices also rose, with LME futures up 0.5% this morning, helped by recovering global demand, supply threats from a labour dispute in Chile and a weaker dollar, said analysts at Reuters. Bloomberg’s Industrial Metal Index (BCOMIN) currently sits just to the north of the 160 level, holding onto recent gains in wake of last week’s sharp rebound from a drop into the low 150s. Turning to precious metals; gold has recovered back to the north of the $1900 level this week and currently trades around $1907. Nominal yields may be a little higher this morning, but real yields remain subdued; 10-year TIPS yields are down this morning and back below -0.85%, remaining close to the middle of recent -0.8% to -0.95% ranges. Subdued real yields and ongoing soft USD conditions look set to keep gold supported. Any more inflationary hints from this week’s ISM surveys (eyes will be on the prices paid sub-indices) may also help gold given its status as an inflation hedge.
Turning now to FX markets and starting with the US dollar; DXY remains subdued under 90.00, having lost its grip on this level amid this trading conditions on Monday, and as traders eye key events later in the week. A dovish Fed and subdued real yields continue to weigh on the buck, but events abroad are also posing problems for the dollar. In particular as of late, one key weight on the buck has been the Chinese yuan; USDCNY dropped more than 1.0% last week to below the key 6.40 level amid talk of the PBoC allowing greater appreciation in the currency to curb the impact of rising international commodity prices and to improve the currencies appeal for use as a reserve currency. The PBoC does seem keen to restrain the pace of appreciation, however, hence an increase to the bank’s reserve ratio requirement for financial institutions FX holdings to 7.0% from 5.0% (i.e. making it more costly to short USDCNY or USDCNH). Nonetheless, if the market wants to keep pushing USDCNH lower, it ultimately will and this will be bearish for the buck.
Meanwhile, AUD is broadly flat this morning, with AUDUSD consolidating just under the 0.7750 mark and well still comfortably within the 0.7700-0.7800 ranges of the past few weeks. Last night’s RBA Rate Decision yielded few surprises as expected and has not shifted the dial for the Aussie at all; the bank held rates at 0.1%, the 3-year Australian Government Bond yield target at 0.1% and left the size of its QE programme unchanged (all as expected), whilst reiterating its guidance that it will not be raising interest rates until inflation is sustainably back within the 2-3% target range and reemphasising its expectations that the labour market will not tighten sufficiently to generate these levels of inflationary pressures until at least 2024. The RBA noted the Australian economy is doing better than previously forecast, but they did caveat that the risk of another serious Covid-19 outbreak and any associated lockdowns remain a key source of uncertainty. Indeed, the latest reports suggest that the recent lockdown in Victoria amid a small, localised Covid-19 outbreak there, is set to be extended. Lockdowns and Covid-19 outbreaks are set to remain a risk into 2022, with the Aussie vaccine rollout lagging that of its international western peers such as the US, UK and Europe. Looking ahead for the Aussie, GDP data on Wednesday will be in focus and is expected to show a moderating pace of growth in Q1 2021 to 1.1% QoQ from 3.1% in Q4 2021.
Likewise, the euro is also flat this morning, with EURUSD remaining well supported to the north of the 1.2200 level, despite a positive tone to the news out of the Eurozone this morning; reports this week out of Germany suggest the country is moving towards a further easing of lockdowns, which could include a near eradication of all restriction by the end of June when the countries current emergency rules expire. Meanwhile, German employment figures for the month of May were decent, with a slightly larger than expected drop in unemployment. As ECB members have emphasised in recent week, the Eurozone economy appears to have turned a corner as its vaccine rollout has caught up with that of the US and UK and helped the continent get its third wave of infections under control, setting the stage for a strong economic rebound in the months ahead as the pandemic subsides. Elsewhere, according to the latest flash estimate, Eurozone inflation in May was a little higher than expected, but with Core CPI still at just 0.9% YoY, inflation concerns in the Eurozone are not really on anyone’s radar right now.
In terms of the rest of the major G10 currencies; NOK is the best performer, aided by strength in crude oil prices and is up about 0.8% on the session versus the dollar. SEK and CAD are the next best performers, up 0.6% and 0.2% respectively, also deriving some boost from crude prices, though the Loonie is a little more subdued ahead of key data releases this week culminating in the May jobs report on Friday and in wake of strong performance relative to most of the rest of its G10 peers in recent weeks. USDCAD currently trades in the low 1.2000s, just above recent multi-year lows as bears gear up for a potential push to the south of the key 1.2000 level. CHF, JPY and NZD are all flat versus the buck, meanwhile, with USDCHF consolidating just under 0.9000, USDJPY hanging out around 109.50 and NZUDSD remaining supported above 0.7250. GBP is a modest underperformer, with GBPUSD down about 0.2% and back under the 1.4200 level, despite somewhat hawkish commentary from BoE member Ramsden, who talked about how the bank will be on alert for the risk of a sustained increase in price pressures amid a rapid Covid-19 recovery and that he is carefully monitoring the country’s house price boom.
The Day Ahead
Eyes will be on the OPEC+ meeting, which is slated to start from 1330BST. Also at 1330BST, Canadian GDP for the month of March (as well as for all of Q1) is set for release. The main event of the day as far as the macro tone is concerned is the release of the latest US ISM manufacturing PMI survey at 1500BST. Otherwise, we have BoE Governor Bailey speaking at 1600BST (on Climate Change, so probably nothing interesting on monetary policy) and then Fed member Brainard speaking at 1900BST.
