Subdued markets await pick up in month-end volatility and key US data releases

Yesterday’s US session was a very tedious one, with major US equity indices for the most part moving sideways within recent ranges. The S&P 500 closed 0.2% lower at around 4190 having failed to move back above the 4200 level and rangebound conditions have continued into Thursday pre-market trade, with the index ebbing a little lower but with price action remaining constrained in the 4180s. News that talks between high level US and Chinese officials overnight were reportedly “candid and constructive” and the two sides agreed to maintain communications has done little to boost risk appetite, which remains largely neutral as traders await key data US data releases on Friday and anticipate a potential pick-up in month-end related volatility. US bond yields have been picking up a little; 10-year nominal yields are currently back to just under 1.60% from prior weekly lows in the 1.55s% and 10-year real yields are close to -0.83%, up from yesterday’s lows close to -0.9%. Mild underperformance in US and European tech stocks is being seen and this could be exacerbated if yields continue to rise into month-end. 

In terms of commodities, crude oil prices are a little lower on the day, with WTI and Brent both down a little over 50 cents (close to 1.0%) to the mid-$65.00s and close to $68.00, respectively. But recent ranges are being respected, with WTI still stuck within the last three day’s $65.50-$66.50ish range, taking its cue from rangebound equity market conditions. There have not been much by way of any important fundamental updates. The main focus remains on 1) US/Iran talks and whether the two sides can clinch a deal on the return to the 2015 nuclear deal and easing of Iranian crude oil export restrictions and 2) on the global demand narrative (weak demand in Asia amid Covid-19 lockdowns and strengthening demand in western countries amid rapid vaccine rollouts).

Turning to industrial metals; Chinese iron ore futures rebounded strongly from six-week lows overnight, with market participants engaging in dip buying as concerns over recent action taken by Chinese authorities to dampen “speculation” and “unreasonable” increases in prices, eased. A number of analysts have argued in recent days that actions by Chinese authorities do not do much to change the long-term outlook for these commodity prices; “while the government’s actions look to have taken a bit of the froth out of the iron ore market in the near term, history suggests that they won’t have much of an influence in the longer term” argue Capital Economics, before citing previous times when China has tightened regulation in response to rising commodity prices, such as in December when trading curbs were imposed on iron ore futures, cooling a price rally but only for a few weeks. Meanwhile, London copper futures continue to move higher, with LME copper now back above the $10K per tonne mark, up about 0.5% on the day, with ongoing supply concerns in Chile continuing to support price action. Note that traders have also been citing soft overnight Chinese industrial profit data as bullish for industrial metal prices, given that it puts pressure on Chinese authorities not to tight economic policy too much (in terms of fiscal and monetary policy). Reports this morning suggest that the PBoC has raised the cross-border financial leverage ratio at some commercial banks which have a capital base of less than CNY 100B ($15.7B) to 2 from 0.8, a move designed to loosen financial conditions in the country (i.e. increase lending) and boost growth (which is good for commodities).

Finally in commodities, spot gold prices have ebbed back below the $1900 level amid some profit taking following the recent run higher but seem to be finding some buying interest ahead of support in the form of the prior monthly high at $1890. Higher yields might also be weighing on the precious metal, something to watch as month-end approaches. For now, gold traders will be focused on key incoming US data in the form of April Core PCE (the Fed’s favoured inflation gauge), as well as April Personal Income & Spending, both of which will be released on Friday.

Turning now to FX markets; the US dollar is giving back some yesterday’s modest gains and the DXY has slipped back under 90.00 again. Traders remain on the lookout for what a few banks have touted could be some month-end demand for the US dollar; this seemed to come into play yesterday, particularly around the time of the 4pm London Fix. USD traders also have to contend with quiet a hefty dose of US data out at 1330BST today, including an updated estimate of Q1 2021 GDP growth, April Durable Goods Orders and the weekly jobless claims report. None of this data seems particularly likely to shift the dial too much for the buck, with the more important data coming tomorrow in the form of the aforementioned Core PCE and Income and Spending numbers.

GBP has seen some strength in recent trade amid what the market deemed to be uncharacteristically hawkish comments from BoE member Vlieghe, who said that should the transition out of the government’s furlough scheme happen more smoothly than projected (i.e. the unemployment rate does not rise as much as feared), somewhat earlier rate rise would be appropriate. Vlieghe had previously been a proponent of negative interest rates, so talking about rate hikes is a bit unusual from him. Note though that Vlieghe did reiterate that his central scenario is for the economy to evolve in line with the most recent BoE projections released in May. Nonetheless, GBPUSD saw some strength on the remarks, rising from the low 1.4100s to the upper 1.4100s in recent trade and is now up about 0.4% on the day, making it the best performing G10 USD major on the day.

NZD is the next best performing currency, up about 0.3% this morning and with NZDUSD back above the 0.7300 level having dipped as low as the 0.7270s overnight, as the currency continues to derive support from this week’s more hawkish than anticipated OCR forecast from the RBNZ that projected 150bps worth of hikes by mid-2024. AUD is somewhat lagging its NZD peer, up a more modest 0.1% on the day versus the buck, lifting AUDUSD modestly to the 0.7750 mark from overnight lows in the 0.7720s, on confirmation from Australia’s Victoria state Premier that the state will be going back into a snap seven-day lockdown given the recent small outbreak in Covid-19 cases. Indeed, CAD, SEK and NOK are all doing better than the Aussie, each up about 0.2% on the day versus the buck as FX market risk appetite remains constructive. Finally, the euro, yen and swissie are all relatively flat on the day versus the buck, in line with subdued conditions in other asset classes and inline with a lack of fresh fundamental drivers for each respective currency; EURUSD is currently swinging either side of 1.2200, USDJPY seems fairly well supported above 109.00, while USDCHF struggles to test the 0.9000 level.

The Day Ahead

As noted, updated US Q1 2021 GDP growth, April Durable Goods Orders and the latest weekly jobless claims report (including weekly initial jobless claims in the week ending on the 17^th of May) will garner some attention at 1330BST. Further US data in the form of April Pending Home Sales at 1500BST will also be watched after weakness in alternative US housing numbers (demand is being hit by higher prices). Bond market traders will have their eyes on a US 7-year bond auction at 1800BST and central bank speakers (ECB; s Schnabel at 1400BST and 1600BST and Fed’s Kaplan at 2000BST) will also be watched, with BoE’s Vlieghe having already moved FX markets this morning. Otherwise, markets will be focused on any potential pick up in month-end flow related volatility.