Turn-around Tuesday sees risk assets rally, dollar drop

In true turn-around-Tuesday fashion, Monday’s losses have already been more than erased across the majority of global risk assets amid a risk on start to Tuesday trade. For the most part, global equities are moving higher; major US equity index futures are up between about 0.3-0.7% per day, with S&P 500 E-mini futures back above their 21DMA (which resides at 4170) having bounced from yesterday’s 4140 lows, European equities are firmer across the board (Stoxx 600 +0.4%) and Asia stocks were also mostly a positive picture. Localised pandemic concerns in Asia (worsening Covid-19 outbreaks in Singapore and Taiwan), which arguably weighed on global equities yesterday, are taking a back seat as focus turns to the improving outlook for economic activity in Europe and North America, where pandemic-related restrictions continue to be rolled back as vaccine rollouts progress rapidly.

The UK eased lockdown restrictions again on Monday (the main change is that indoor hospitality is now allowed), Italy is to phase out its curfew and the Netherlands is set to ease restrictions from Wednesday. In the US, mask mandates are being dropped for the vaccinated and states continue to gradually roll back restrictions. Elsewhere, India reported under 300K new Covid-19 infections for a second day running, further raising hopes there that the pandemic might have peaked (although the positivity ratio of tests is still alarmingly high and implies massive undertesting). This theme of improvements in the state of the global Covid-19 outbreak seems to be one factor weighing on the US dollar this morning, which has now erased all of its post-CPI gains made last week and some. The DXY is now convincingly under the 90.00 handle for the first time since February, with bears eyeing a test of the late-February lows in the 89.60s. Another factor weighing on the buck is the continued dovish stance of the Fed, despite rising inflation fears; officials continue to insist that high inflation is going to be transitory and imply that they are more focused on employment, which remains a long way from the Fed’s goal. As inflation expectations rise as a result of the Fed’s dovish stance, this puts downwards pressure on US real yields, which is weighing on the buck; for reference, US 10-year TIPS yields are currently trading around -0.92%, not far from recent lows just above -1.0%. Nominal 10-year yields, meanwhile, trade close to 1.65%; subdued bond and USD conditions are conducive to upside in stocks and other risk assets.

Turning to commodities; a weaker dollar, positive risk appetite and reopening optimism in Europe are helping to keep crude oil markets afloat this morning, with Brent crossing back above $70.00 per barrel for the first time since March. WTI is also at its highest levels since March, though has failed to get back above the $67.00 level. Both are up by around 0.75% on the session. Traders continue to suspect that concerns about a potential easing of US sanctions on Iranian oil exports is holding prices back from further gains, however, as well as continued concerns about the state of the Covid-19 outbreak in Asia. According to Reuters, gasoline sales by state refiners in India were down by over one fifth in the first half of May versus the same time period in April. But other market commentators expressed optimism that the vaccine rollouts in the region, although behind their European and North American peers, which combat the pandemic within a matter of time. Final point for oil; a new report from the International Energy Agency pushing for tough restrictions on new investment in fossil fuels in developed economies in a bid to keep global warming to just 1.5 degrees Celsius is being cited as oil positive, though is unlikely to ultimately have much sway. Meanwhile, the UK is reportedly close to achieving its goal of getting the G7 to agree to end fossil fuel subsidies. In terms of industrial metals, a weaker USD is having a positive impact, helping Chinese copper futures to a 1.9% gain and Chinese iron ore futures to a more than 4% gain on Tuesday, though the latter is also being aided by “strong profit margins at mills” and “record high crude steel output suggesting resilient demand for the steelmaking ingredient”, according to Reuters. In terms of precious metals, gold continues to trade with a positive bias, though is broadly flat on the day, and is currently stabilising at three-month highs in the $1860s, having been boosted to the north of the $1850 mark yesterday amid inflation concerns in wake of a record high prices paid subindex in the May US NY Fed Manufacturing survey.

Returning to FX markets and taking a look at the rest of the G10 currencies; risk sensitive NOK and NZD are the two best performers on the day, up about 0.7% each versus the buck. That is enough to see NZDUSD more than erase yesterday’s losses that saw it drop as low as 0.7180 and reclaim the 0.7250 handle. A dovish tone to last night’s RBA minutes, which emphasised that the bank does not see any rate hikes until at least 2024, given that it will not be hiking until inflation is back in its 2-3% target band (which it said would take the rate of annual wage growth to get back to about 3% from its current 1.4% levels), is arguably weighing on the Aussie, or at least relative to its antipodean counterpart the kiwi. AUD is up 0.4% on the day versus the dollar, with AUDUSD gains having petered out at the 0.7800 mark. EUR, CHF and GBP are both up on the day by a similar margin to the Aussie and DXY dropping under 90.00 has enabled each to surpass or reach a new key level; EURUSD has gone above 1.2200, GBPUSD is at 1.4200 and USDCHF has dropped under 0.9000. GBP is seemingly unfazed for now by increasing concerns that the final stage of the UK’s reopening drive (scheduled for 21^st June) may be delayed/cancelled/postponed amid an acceleration in the spread of the highly transmissible Indian B.1.617 Covid-19 variant in some parts of the country (its prevalence is doubling each week) – the rate of spread remains very low amongst those who have been vaccinated, which is easing concerns for the time being. Strong jobs data this morning, which has analysts revising down their forecasts for how high UK unemployment will peak after the government’s furlough scheme is withdrawn later this year, is likely aiding sterling. SEK, CAD and JPY are the “underperformers”, each up by closer to 0.2% on the session versus the buck.  

The Day Ahead

The only data of note for the rest of the day will be US Building Permits and Housing Starts data for the month of April. ECB President Lagarde is on the wires at 1500BST, at which time a group of BoE policy makers (Governor Bailey, Broadbent and Ramsden) are also scheduled to begin a testimony before the UK House of Lords Economic Affairs Committee. It is then the turn of Fed members Bostic and Kaplan to speak at 1530BST and 1605BST respectively (both are hawkish). Things will then be quiet ahead of API weekly energy inventories at 2130BST.