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Market Update
US and European equity markets are buoyant at the start of the new trading week, with E-mini S&P 500 futures trading higher by about 0.2% in the 4710s, just a few points below record intra-day levels, and the Stoxx 600 up about 0.1% around 486.50, not too far beneath recent record highs printed above 490 in recent weeks. The resilience in European equities to the recent run of negative news about Europe’s worsening Covid-19 outbreak and the return of lockdowns is impressive. The Chancellor of Germany Angela Merkel this morning called for tighter restrictions amid the outbreak there being worse than ever. Some are citing those expectations for ongoing ECB policy support is keeping a floor under prices, while ongoing strength in Europe’s stateside counterparts will also be helping. US stocks have benefitted from a very strong Q3 earnings season which is now over. Hawkish commentary from Fed members Clarida and Waller last Friday, the latter overtly calling to accelerate the pace of QE tapering and the latter indicating that a discussion on this might be appropriate, has not impacted US equity sentiment and it seems that stocks remain comfortable with the notion of gradual policy normalisation over the coming years as long as the underlying economic fundamentals (and earnings) remain sound.
In terms of the coming week, its Thanksgiving in the US on Thursday, meaning liquidity conditions after Wednesday are set to be very thin. So much of the week’s action will be packed between today and Wednesday. US President Biden’s choice as to who he is going to nominate as Chair of the Fed may come today, according to the latest reports. Powell remains the favourite for the renomination. While markets might view a Brainard as dovish, desks would not view her appointment as constituting a large change in the Fed’s policy stance. In other words, continuity is expected. FOMC minutes of the last meeting are out on Wednesday, but are a little stale given the hawkish shift seen in the stances of many Fed members in wake of the hot October CPI report that was released after the meeting. Outside of the US, markets will be keeping an eye on Flash European and US PMIs, the RBNZ’s rate decision and central banks speak (most interestingly from various BoE members).
Looking back at markets this morning; yields are higher in the US and in Europe, the latter despite worse European Covid-19 (fears of Germany entering a lockdown, basically). Higher yields in the US are leading the dance after hawkish Fed speak last Friday. One of the Fed Board of Governors members Waller overtly called for the QE taper to be accelerated in January, heeding the call from 2022 FOMC voter Bullard for the QE taper pace to be doubled to $30B per month from Q1 next year to make way for rate hikes as soon as Q1. This is lifting US yields, with the 10-year closing back in on 1.60%, up over 4bps on the day, and the 2-year moving towards 0.55%, up around 3.5bps on the day. German 10-year yields, meanwhile, are up 3bps, though, according to ING, “covid fears should cap euro bond yields already depressed by collateral scarcity issues. This means Bund yields struggling to rise much above -0.3%, and outperforming Treasuries”.
Elsewhere, oil is flat as trader mull potential oil reserve releases from the US and major Asia importers (Japan is said to be thinking about a release). Some analysts have called the recent drop in prices excessive, so some dip buying action is likely propping things up for now. In terms of FX, the DXY is broadly flat, but back above 96.00 with it having reclaimed the level last Friday in wake of hawkish Fed commentary. More broadly, the bad pandemic situation in Europe, where the bloc’s most important economy (Germany) is teetering on the edge of lockdowns, keeps things tilted to the upside for the buck. According to Rodrigo Catril, strategist at NAB, “there are question marks over the resilience of Europe and the European economy… It’s hard to see the US dollar coming to any harm against that backdrop”.
EURUSD is trading with a modestly downside bias just to the south of 1.1300, GBPUSD is rangebound and flat just under 1.3450, despite somewhat dovish remarks from BoE’s Bailey over the weekend and with plenty more BoE speak scheduled for this week. Both pairs will also be watching the release of flash PMIs on Tuesday. AUDUSD is doing well amid higher iron ore prices and this morning reclaimed 0.7250, with this also helping out NZDUSD up a little and to reclaim 0.7000. Other G10 majors are mostly flat, with USDJPY just above 114.00 and USDCAD just under 1.2650.
Day Ahead
Latest reports suggest the Fed Chair announcement may come today. US bond markets will be closely watching a $58B 2-year auction at 1630GMT and then a $59B 5-year auction at 1800GMT. Otherwise, there is just US Existing Home Sales data and the preliminary release of the November Eurozone consumer confidence report at 1500GMT.
