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US equity markets saw a pretty decent recovery yesterday, with the S&P 500 index managing to climb from lows around 4040 to back above the 4100 level. A larger than expected drop in US weekly initial jobless claims shows that the US labour market has been gaining momentum into the first weeks of May and will stoke hopes that the next jobs report (which will be released at the start of June) will be much stronger than the last report. That still leaves the index down about 100 points from its recent all-time high levels around 4240 set at the start of the week, after all inflation fears are still elevated in wake of Wednesday’s hot CPI and yesterday’s hot PPI reports and this is stoking fears of the Fed bringing forward its tightening schedule. E-mini S&P 500 futures are currently trading just under the 4140 mark, just below the midpoint of this week’s range ahead of what should be a very strong US April Retail Sales report this afternoon. If the retail sales report does disappoint, however, the market reaction could be adverse, just as was the case with last week’s NFP data. Global equities are taking their recovery in US stocks, with the FTSE World index up about 0.4% on the day and bourses higher across the board in European trade this morning.
Another factor that has helped US equities recover from yesterday’s lows and back to around the midpoint of this week’s range is a pullback in US government bond yields from yesterday’s highs; 10-year yields went above 1.70% on Wednesday and Thursday but are now back under 1.65% and at lows of the session right now. 10-year TIPS yields (the inflation expectation-controlled yield on the 10-year bond) has pulled back to -0.90% from yesterday’s highs around -0.85%. As is the case with equities, there will be a lot of focus on the incoming US retail sales report; a strong number is expected and it unlikely to give yields a material boosts right now, unless expectations are completely blown out of the water. A big miss on expectations may put further downwards pressure on yields.
Given that the US dollar has largely been trading as a function of movement in US real yields over the past few sessions (the DXY is weaker by about 0.3% this morning and has fallen back to around 90.50 from yesterday’s highs close to 91.00 as real yields pull back), the dollar’s reaction to the incoming US data is likely to mirror that of real yields; i.e. a strong report (expected) may not give much of a boost to the buck but a weak report could push the dollar lower in tandem with a drop in real yields, with the DXY perhaps dropping back towards 90.00.
Crude oil prices are up in pre-US market open trade, lifted by the recovery in stocks and weakness in USD. WTI is up about 80 cents and trading above $64.50 again. Fundamentally, the picture is not much changed for crude oil; India’s Covid-19 pandemic continues to rage and the spread is picking up in other nearby countries (Singapore, Thailand, Taiwan to name a few), which is an ongoing concern for crude traders. In terms of geopolitics, the spill over from the ongoing Israel/Palestine conflict seems unlikely to impact Middle Eastern crude oil production and distribution channels, so chatter than a ceasefire might be in the offing is unlikely to have too much impact. Meanwhile, news flow with regards to the ongoing US/Iran talks on returning to the JCPOA agreement is light, with nothing new to report for now. For the rest of the day, expect crude oil to mirror wider risk appetite.
Returning to FX markets and taking a look at the rest of the G10 currencies this morning; in tandem with the recovery in the market’s broad appetite for risk (as seen in higher stock and crude oil prices), risk sensitive currencies are performing the best. NOK sits at the top of the G10 performance table, up over 1.0% on the session versus the buck, as the currency pairs sharp losses sustained on Thursday. NZD and SEK are the next best performers, both up about 0.5% on the day versus the buck, with NZDUSD managing to reclaim 0.7200 status despite a slowdown in domestic Business PMI for the month of April. SEK has largely shrugged off this morning’s Riksbank minutes release, despite the minutes showing rising concerns about heating housing market conditions.
AUD is not enjoying quite as sharp a recovery as its kiwi peer on the day, with AUDUSD only up about 0.1% and failing to reclaim the 0.7750 level, perhaps weighed by the continued retracement in copper and iron ore prices after what seems to have been quite an animal spirits driven recent run to the upside. EUR, GBP, CAD and CHF are all up versus the buck by a similar amount to the Aussie; EURUSD has climbed above 1.2100 again, GBPUSD is consolidating comfortably above 1.4050 and USDCAD has fallen back below 1.2350 after touching 1.2400 yesterday, with all benefitting from the soft USD environment amid lower yields ahead of key the key US retail sales release. Note that comments from BoC Governor Macklem yesterday, in which he expressed concerns about the prospect for further CAD appreciation appear not to have too much impact on the Loonie for the time being. Finally, JPY sits in second from bottom place in the G10 performance table, just above USD, as a lack of safe haven demand weighs on both currencies and as traders mull the economic implications of the latest Covid-19 lockdown news out of Japan (three more prefectures were placed in a state of emergency to contain the spread of the virus).
