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US equities are a tad softer in pre-market trade this morning, with E-mini S&P 500 futures down about 0.3% just to the north of 4150 and other major US bourses down by a similar margin. European bourses are also mostly lower, with equities on both sides of the Atlantic conforming to a downbeat handover from the Asia session; Asian equities were mixed, but the tone was mostly negative amid concerns about 1) rising Covid-19 cases in Singapore and Taiwan and new state of emergency declarations in three Japanese prefectures, plus 2) mixed Chinese data, which showed Industrial Production expanding as expected in April but Retail Sales unexpectedly slowing, triggering some concerns about whether the Chinese economy will be able to grow as rapidly as many expect it to in 2021 (consensus forecasts are for GDP growth of over 8.0%).
US equity traders must now weigh whether the indices are headed back towards all-time high levels in the coming weeks, or whether last week’s drop will be repeated; inflation concerns triggered last week’s drop, but Fed officials have largely stuck to the script in playing down fears of early Fed tightening by labelling high inflation as transitory and emphasising their focus on the still weak US labour market. Indeed, a number of analysts have been expressing bullish sentiment towards US stocks, which are likely to remain supported going forward against the backdrop of exceptional earnings (so far this earnings season, US companies have reported earnings growth of +45% YoY versus street expectations for earnings growth of +21% YoY) and economic reopening amid the fast US vaccine rollout. Aside from a barrage of what is most likely to be dovish Fed speak this week, the economic calendar is fairly light (just Friday PMIs and Wednesday FOMC minutes to look out for), so equity traders may use the opportunity to put some risk back on the table.
Elsewhere, US bond yields are flat ahead of the US open, with 10-year yields around the 1.63% mark, having pulled back quite sharply from last week’s highs around 1.70% mark. European bond yields, meanwhile, are a little higher this morning and this seems to be contributing to some weakness in USD versus its euro counterpart; concerns are growing in European bond markets that the ECB will find it increasingly hard to justify an extension to the accelerated pace of bond purchases that it announced back in March for another quarter when it next meets in June, amid an acceleration in the bloc’s vaccine rollout that sets the stage for reopening over summer and an aggressive economic rebound. This is driving Italian yields higher, in particular. While higher yields are helping EUR versus USD for now, if the rise in Italian yields gets excessive, this could start to hurt EUR and help the dollar. In the meantime, one of the main drivers of the US dollar’s fortunes will remain what happens to US government bond yields. A sustained rise in bond yields, which many expect to come eventually, would potentially be bullish for the buck and would most certainly not be taken too well by US equities, especially high P/E ratio names (like Big Tech).
In terms of commodities, crude oil prices are a tad softer this morning, in line with the slightly downbeat tone to risk appetite amid mixed Chinese data and concerns about the worsening state of the pandemic in Asia, but WTI is for the most part holding onto the impressive gains its saw last Friday. Geopolitics is worth watching, as ever; no deal yet on the US and Iran returning to the JCPOA nuclear deal and a lifting of oil export sanctions, but the mood remains constructive, though the ongoing Israel/Hamas conflict represents a potential wild card for the picture in the Middle East. At present, front-month WTI futures trade just under $65.50, having sharply from the mid-$63.00s last Friday. Recent highs in the mid-$66.00s will be eyes as long as risk appetite does not deteriorate too sharply, and USD remains broadly subdued. In terms of other commodities, gold prices are higher this morning by about 0.6%, with the precious metal now testing its 200DMA at close to $1850 for the first time since early February as it looks at potentially breaking to the north of a long-term downtrend linking the August 2020 and January 2021 highs that could herald a move back towards the next key area of resistance in the mid-$1900s. In the short-term, subdued US yields, a soft dollar and a general pick-up in inflation concerns (which is perhaps prompting investors to look for inflation hedges such as gold) may support the yellow metal, as well as other precious metals. Finally, in terms of industrial metals, LME Copper futures are a little higher this morning amid concerns over potential strike action at Chile’s Spence and Escondida mines (union workers rejected a labour contract offer) and iron ore prices in China were a little higher, but still well below recent highs after China last week took action to cool surging prices.
In terms of G10 FX this morning, risk-sensitive currencies are underperforming amid the downbeat tone to trade. NZD is the worst performer, down about 0.8% on the session versus the buck, with NZDUSD probing 0.7200 having dropped from earlier session highs around 0.7220. NOK is the next worst performer on the session, down about 0.5% on the day versus USD, while AUD is down about 0.2%, with losses having seemingly been stemmed at the 0.7750 mark for the time being. Meanwhile, GBP, CAD, CHF and SEK are all broadly flat versus the dollar, with GBPUSD swinging either side of the 1.4100 mark as optimism about the UK’s ongoing reopening progress (as of today, the country enters stage three of its reopening) keeps the pair supported, while USDCAD holds above 1.2100 for now and USDCHF sits just above the key 0.9000 level. The outperformers this morning is JPY (on increased safe-haven demand amid the modestly risk off tone to markets) and EUR (amid higher Eurozone yields), with USDJPY dropping back towards 109.00 from overnight levels of close to 109.50 and EURUSD recently surpassing 1.2150 having bounced at 1.2120 overnight.
The Day Ahead
Bank of England speakers are out in force today, with Governor Bailey supposedly peaking right now, Tenreyro scheduled to speak at 1515BST, Vlieghe at 1630BST and outgoing Chief Economist Haldane at 1730BST. Fed speakers are also out in numbers, though most weight will be placed on remarks from FOMC Vice Chair Richard Clarida who speaks at 1505BST then again at 1525BST. Otherwise, things will be fairly quiet, though the result of the US New York Fed Manufacturing survey for May is out at 1330BST and is one of the earliest reads on the health of US manufacturing this month. US housing market data at 1500BST will also be watched. CAD traders will keep an eye on Canadian House Starts data at 1330BST.
