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Market Update
Markets are beginning Friday on a much calmer note than they left things off on Thursday; as a recap of yesterday’s price action, global equities came under pressure (led by a sell-off on Wall Street) amid a surge higher in US government borrowing costs and a sharp drop in crude oil prices – the S&P 500 dropped back into the low 3900s, the US 10-year rallied at one point above the 1.75% level and WTI saw its largest drop since last Summer, dropping all the way from the $64.00s to current levels around $60. Whilst the risk off tone in stocks and crude oil markets was initially driven by higher bond yields, bad pandemic news out of Europe took over in the latter half of the US session, with France announcing a new four-week lockdown in 16 regions (covering 40% of its GDP) – this hit crude oil markets particularly hard at the time.
Back to the price action this morning, as noted, markets have stabilised somewhat; US equity index futures are off overnight lows and pointing to a modestly positive open and though European indices trade in the red (as they play catch up to losses incurred on Wall Street after yesterday 1630GMT European equity market close), they are also off lows. Crude oil markets are now seeing rangebound trade, with WTI swinging either side of the $60.00 level – despite yesterday’s European Covid-19 fears fuelled sell-off, desks remain bullish on oil, with Goldman still calling for WTI to hit $80 in the summer and UBS predicting Brent will hit $75 in the second half of the year (Brent is trading at just under $63.00 this morning).
Meanwhile, US government bond yields are seeing a sharp drop this morning, with 10-year yields down over 4bps on the session and now comfortably back below 1.70%; yesterday’s sell-off in risk assets might be spurring some safe-haven demand for US government debt. Lower yields are giving yield-sensitive assets such as Big Tech (Nasdaq 100 futures +0.6%) and precious metals (spot gold +0.3% and back in the $1740s) a boost.
A few fundamental developments worth keeping an eye on…
1) The European Covid-19 news continues to get worse; the German Health Minister was on the wires this morning talking about how there is not enough vaccine supply to stop a third wave in Europe these summer and predicted things could be as bad at Easter as it was over Christmas. He also revealed that AstraZeneca will be delivering less vaccines than expected in Q2. Meanwhile, despite the EMA’s review concluding that the benefits of the AstraZeneca vaccine far outweigh the risks, many European nations are not rushing to restart their rollouts of the vaccine, costing the bloc precious time in the race for herd immunity.
2) US/China talks in Alaska have not been going well so far; a senior US official told the press that the Chinese delegation in Alaska seems to have arrived intent on “grandstanding” and seem focused on “public theatrics” and “dramatics” instead of substance. Meanwhile, Chinese diplomats publicly criticised the US over its human rights record, accused the US of using its “military strength” and “financial supremacy” to pressure other countries, including to attack China. Chinese foreign ministry officials also commented that the discussion have thus far entailed a lot of confrontation.
One factor to note this Friday; we have quad witching – this refers to a date on which stock index futures, stock index options, stock options, and single stock futures expire simultaneously. While stock options contracts and index options expire on the third Friday of every month, all four asset classes expire simultaneously on the third Friday of March, June, September, and December. According to Investopedia, “quadruple witching days witness heavy trading volume, in part, due to the offsetting of existing futures and options contracts that are profitable” so there could be some choppy price action!
Rest of the G10
FX market price action this morning is narrow and mixed; the DXY, which had slipped as low as the 91.60s this morning, is back to just below 92.00 and trading comfortably in the 91.90s. That corresponds to EURUSD trading just above 1.1900, GBPUSD close to 1.3900 and USDJPY close to 108.90. The latter two pairs are very marginally softer on the day and USDJPY is flat, having shrugged off last night’s BoJ rate decision which saw the bank hold interest rates at -0.1% and maintain its 10-year JGB target at 0.0%, but did see the bank raise its target band to allow fluctuations of up to +/- 25bps. As rumoured, the bank also removed its annual ETF and REIT purchases targets.
Elsewhere, AUDUSD is also flat at close to 0.7750, as is USDCAD at just under 1.2500. The Aussie seems to have shrugged off last night’s softer than expected preliminary Retail Sales data release for February (came in at -1.1% MoM versus forecasts for +0.4%). Finally, NZD is this morning’s modest outperformer, up about 0.1% on the day versus the US dollar, with NZDUSD for now holding above 0.7150.
Day Ahead
Amid a near empty economic calendar, focus will be on US/China trade talks for the rest of the session, as well as further pandemic-related updates out of the US, Europe and elsewhere.
