Subdued start to another very busy week

Global equity markets are seeing a subdued start to the new week. US bourses posted an impressive recovery last Friday, with the S&P 500 more than making up for the losses sustained on Thursday and hitting fresh record levels again above the 4350 marks. While Asia equities saw strong gains on Monday amid catch up to the gains seen on Wall Street at the end of last week, European equity markets have been much quieter (the Stoxx 600 is broadly flat) and US equity index futures are seeing similarly subdued price action; E-mini S&P 500 futures are a little lower but still above 4350 amid modest profit taking, while E-mini Nasdaq 100 futures are a little higher amid a drop in global yields; European government bond yields are down across the board and US yields also have a negative bias with 10-year yields down about 1bps and remaining capped to the south of the 1.35% mark. Subdued sentiment in these markets is not too surprising given the plethora of key risk events coming later this week, which include 1) US June CPI on Tuesday and US June Retail Sales on Friday, 2) FOMC Chair Powell’s two-day semi-annual testimony before Congress on Wednesday and Thursday, 3) key Chinese Q2 GDP and June Retail Sales and Industrial Production data out on Thursday, as well as central bank monetary policy decision from the RBNZ, BoC, BoJ and a plethora of CPI updates from across the world. Markets still seem to be buying the narrative that the spike in inflation in the US and other developed markets is transitory, so unless US CPI data this week changes this (by coming in way higher than expected), not much of a market reaction is likely. Meanwhile, FOMC’s Powell is unlikely to say much different from what he said at the FOMC Press Conference just under a month ago, though traders will of course be listening for any clues as to the timeline to asset purchase tapering. Chinese data might arguably prove the strongest driver of sentiment, given analysts/market commentators are talking about how China might serve as a leading indicator as to how the rest of the world’s economies might perform as they emerge from the pandemic. Poor Chinese data could lead to further negative revision to global growth and inflation expectations over the coming years, which could put global yields under further pressure.

FX markets are this morning are telling a slightly more risk averse story than equity and bond markets, with analysts citing concerns about 1) the global spread of the Covid-19 delta variant (a global tally of new infections by the variant being kept by Reuters continues to rise in, with the hotspots Asia and Europe) and 2) concerns about slowing Chinese growth, worsened by the PBoC’s move to cut the RRR by 50bps at the end of last week. The US dollar is the best performing G10 currency this morning with safe-haven yen not far behind it. EUR and CHF fill the third and fourth spots in terms of performance on the day, implying that FX markets continue to see an unwind of carry trades, which benefits the lowest yielding G10 currencies JPY, EUR and CHF. The euro does not seem to have paid much attention to comments from ECB President Lagarde over the weekend who said she sees a July policy change and a forward guidance review at the meeting. The worst performing G10 currencies unsurprisingly include NOK, SEK, NZD, AUD and CAD given their higher sensitivity to risk appetite and the Aussie is for now not showing too much concern about the escalating risk of a more widespread Covid-19 outbreak (driven by the Delta variant) in Australia.

Turning to commodities; crude oil prices are on the back foot this morning, with WTI prices down more than $1.0 on the session to the low $73.00s. Analysts are citing 1) this morning’s stronger US dollar, 2) concerns about the spread of the Delta Covid-19 variants spread in Asia and Europe and 3) ongoing OPEC+ breakdown concerns (reports over the weekend hinted the UAE could embark upon a unilateral increase in output) as negatives for oil prices. For now, WTI is receiving support from its 21DMA at the $73.00 handle, but still trades close to 5.0% below recent highs around $77.00. A move back to retest these recent highs seems unlikely as long as OPEC+ issues remain unresolved and Delta variant concerns continue to rise. Industrial metal prices, meanwhile, are also lower (LME copper -1.0%), also weighed by the stronger dollar. Analysts are also citing ongoing concerns about the state of Chinese economic growth in wake of last Friday’s PBoC RRR cut as having unnerved markets. Turning to precious metals; gold is a tad lower on the morning but is currently holding above the $1800 level, with precious metal traders likely to keep their powder dry this Monday ahead of key macro events later in the week that could help to shape expectations with regards to the Fed’s monetary policy tightening timeline.

The Day Ahead

NY Fed President and important FOMC member John Williams is scheduled to speak at 1430BST and traders would do well to listen to his comments for any hints regarding the Fed’s monetary policy tightening timeline. But he likely won’t give anything important away ahead of FOMC Chairman Powell’s testimony to Congress later in the week. Otherwise, the only key event of the day will be a US 10-year Note auction at 1800BST, which will be eyed as a gauge of demand with yields now at much lower levels that at the last auction.