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It was a mixed close for US equity markets on Monday evening; the S&P 500 gained a modest 0.2% but failed to recover back above the 4200 level, the Dow saw a decent 0.7% gain and managed to reclaim the 34K handle, but the Nasdaq 100 dropped 0.4%. While the former two are flat (according to equity index futures in pre-market trade), losses in the latter have continued overnight, with the E-mini Nasdaq 100 future down a further 0.4%. A softer than expected ISM Manufacturing PMI survey for the month of April did not have a lasting impact on stocks; broadly speaking the survey was still pretty strong, although the most notable aspect of the survey was further evidence of extreme supply chain disruptions, which are in part being exacerbated by the ongoing chip shortage.
Rather, the “reopening” narrative seemed at play as Florida and the Tri-state area eased Covid-19 related restrictions, which helped stocks that benefit from an open economy (like in the Dow) but hurt stocks that like lockdowns and people spending more time on the internet at home (many of the Tech names in the Nasdaq 100). Equity analysts suspect this trade has some room to run yet. But first, focus this week is likely to return to the US economy with the key April ISM services survey out on Wednesday and the April jobs report out on Friday.
Sticking with stocks, while global equities are a little softer on the day (FTSE World -0.1%), European equities are mostly higher this morning (Stoxx 600 +0.3%), with the region (particularly Spanish stocks with the IBEX 35 +1.2%) taking some impetus from news that France, Greece and Spain are among the nations that could be added to the UK government’s “green list” by the end of June (by which time lockdown restrictions remain on track to be nearly completely removed in the UK).
Turning to commodity markets; crude oil markets are on the front foot for a second day running, with WTI closing in on the $66.00 per barrel mark, its highest levels since mid-March and not too far from annual highs of just shy of the $68.00 level. Over the weekend and at the start of the week there was a lot of focus on the US/Iran moving towards a new nuclear deal that would lift sanctions on Iranian crude oil exports – this seems not to have knocked crude oil risk appetite too badly, which seems instead to be focused on the improving demand outlook in Europe and continual bullishness about demand in the US. Meanwhile, gold and silver are both subdued, with the former down about 0.5% on the day but still above $1780 per troy ounce and the latter flat in the $26.80s per troy ounce, with precious metals for now not feeling too much of a strain from a stronger US dollar.
On which note, the Dollar Index (DXY) is higher by about 0.4% on Tuesday and has managed to climb back into the 91.30s, where it is currently testing highs of the week. Yesterday’s weakness in wake of the softer than anticipated ISM manufacturing survey for the month of April was short-lived and only saw the index dip very briefly under the 91.00 level. To the upside, the DXY’s 21DMA sits at 91.50 and 200DMA at 92.00. ING thinks that dollar rallies are likely to prove short-lived going forward; “money market rates on the floor at 0.01% mean that for Japanese investors in the US bond markets, FX hedging costs are the cheapest they’ve been since 2014 – thus any fresh inflows to US fixed income markets are more likely to be hedged” the bank notes, before adding that “today sees the release of the March US trade data…. (which) is expected to push out to a record monthly deficit of US$74bn – a deficit that looks likely to widen further over the coming months… A debt-financed consumer boom driving a wider deficit does not look particularly positive for a currency”.
Needless to say, buck strength remains the main story in FX markets on Tuesday and is the main driver for most other G10 currencies; GBP, CAD and JPY are down about 0.3% on the day versus the buck and are the next best performing currencies in the G10 rankings. That means GBPUSD has dropped back under 1.3900, that USDCAD has pushed back to the north of 1.2300 and USDJPY has rallied back from under 109.00 to close to 109.50. Sterling and the Loonie both have big weeks ahead; Scottish (and local) elections in the UK will garner a lot of attention, as will Thursday’s BoE meeting, while the April jobs report out of Canada on Friday will be key for CAD. By contrast, JPY trading volumes are likely to be lighter than usual until the end of the week with Japanese market participants mostly on holiday for Golden Week.
EUR, CHF and NOK are each down between 0.4 and 0.5% on the day versus the dollar, meaning EURUSD has slipped back towards 1.2000 and that USDCHF has bounced from 0.9100 and is testing 0.9150 – fundamental news flow pertaining to these three currencies has been light thus far and focus is likely to remain on USD dynamics. The same cannot be said for the antipodes; NZD is the weakest currency in the G10 this morning (down nearly 1.0%) ahead of the release of the RBNZ’s bi-annual Financial Stability Report tonight, which will then be followed by a press conference with Governor Orr, who then appears before the Parliament select committee. The main focus in New Zealand tonight will be on the Q1 2021 jobs report, however.
AUD, meanwhile, is also weaker (down just over 0.5% versus the buck) in wake of last night’s RBA rate decision; the bank left policy setting unchanged as expected, but analysts note that the statement had “hawkish” undertones. The statement said that the RBA Board is committed to highly supportive monetary conditions to “support a return to full employment in AU and inflation consistent with the target”. Previously it was a commitment “until it goals are achieved”, which according to RBC, suggests that progress toward its dual goals may be enough, rather than actual achievement. However, this hawkishness appears to have been outweighed by a promise to review its QE policy at the July meeting – when many other analysts suspect that the RBA will extend its QE programme to stay in the slipstream of major global central banks like the Fed and ECB. Separately, the Aussie was arguably weighed by a smaller than expected trade surplus in the month of March.
The Day Ahead
US and Canadian trade numbers for the month of March will be out at 1330BST and could result in some choppiness in both the buck and Loonie. US factory orders, also for the month of March, are next in focus and will be released at 1500BST. The Kiwi might be choppy in wake of the release of bi-weekly GDT data at 1630BST, as will crude oil prices in wake of the release of weekly Private API crude oil inventory data at 2130BST. In terms of the start of the Wednesday APac session, kiwi focus will be on the release of the Financial Stability Report at 2200BST and then the Q1 2021 employment report at 2345BST.
