US equity markets enjoyed a strong rebound on Thursday in wake of another decline in US initial weekly jobless to new post-pandemic lows of 444K. Tech stocks spear-headed the rally, with the Nasdaq 100 rising 1.8%, further aided by a pullback in US government bond yields from the around the 1.67% mark to current levels around 1.63%. Note that big tech stocks, much of whose outsized valuations are based upon expectations for future earnings growth rather than current earnings, are vulnerable to an increase in long-term interest rates, hence why they perform well when long-term rates drop. As to why US bond yields were under pressure yesterday, an easing of inflation concerns seems to be the main driver; oil and industrial/base metal prices continue to pullback from recent highs (more on that below), which is easing inflation fears, whilst there is also increasing chatter about how a waning credit impulse in China (a leading indicator of slower Chinese growth ahead) might prove deflationary for the US economy. Back to stock markets, the S&P 500 gained just over 1.0% yesterday and the Dow just over half a percent, the former climbing back to the north of the 4150 mark. Major US equity index futures retain their upbeat bias in pre-market trade, with modest gains of between 0.2%-0.3% on the session. A close at these levels puts the S&P 500 on course to end the week flat, with the index having swung all the way to the mid-4000s from the upper-4100s and back again amid choppy trading conditions.
Looking at equity markets elsewhere; in European markets, the tone is positive, mirroring the optimism being seen state-side. On aggregate, Eurozone preliminary PMI surveys for the month of May were better than expected this morning, amid upbeat business sentiment as lockdowns on the continent are eased. However, evidence of price pressures and the impact of supply shortages were present and contributed to slightly softer than expected German numbers – this does not seem to have weighed much on European equity markets though; concern about inflation this side of the Atlantic seems much lower (ECB speakers have been talking down the prospect for a sustained rise in inflation in the Eurozone and markets seem to believe them) and a number of banks have been upgrading their outlook for the European equity market sector as of late.
Meanwhile, the tone of the Asia Pac session was a little more mixed; Chinese shares faded early gains (Shanghai Comp closed down 0.5%) amid ongoing concerns over EU/China relations, after the former froze its investment deal with China until the latter lifts sanctions on EU officials (though this was expected). Australian shares (ASX 200 +0.2%) saw gains capped as a continued sharp pullback in base metal prices weighed on mining stocks. Japanese equities (Nikkei 225 +0.8%) rose despite reports that state of emergency declarations in Tokyo and Osaka could be extended beyond the end of the month, perhaps due to some positive rhetoric from the PM about falling virus cases ahead of the Olympics, as well as approval for the Moderna and AstraZeneca jabs from Japan’s health regulators. Other regional bourses were lower or subdued amid ongoing concerns about the accelerating spread of Covid-19 in the likes of Malaysia, Indonesia and Thailand.
Moving on to commodities; crude oil prices are a little higher this morning, but while front-month WTI futures have managed to recover from lows under $62.00, they have failed to reclaim the $63.00 level, pointing to week losses of over 4.0%. Officials have signalled that the US and Iran have reached a deal that would see both nations return to the JCPOA nuclear agreement and the unwinding of sanctions on Iranian crude oil exports – this has been the main factor weighing on crude oil this week. Many analysts remain upbeat on the prospect for crude oil to move higher in the medium-term, however, amid rapid vaccine rollouts in North America and Europe and the prospect for a bumper summer of travel in these regions. Analysts at JPM forecast that Brent (currently at just under $66.00) will hit $74 by the end of the year. However, other analysts suspect that continued concerns about rising Covid-19 infection rates in emerging-Asian economies and the ongoing risk of another spike of infections in Latin America amid both regions comparatively sluggish vaccine rollouts may continue to act as a drag to the crude complex.
Turning to industrial metals, the pullback from recent highs continues. LME copper future prices are set for their biggest one week drop since September 2020 (a more than 3.0% drop), having fallen another 1.3% on Friday to under $10K per tonne, while the most-traded future contract for Chinese iron ore (for September delivery) saw an overnight drop of 3.4%, meaning it is on course for losses of about 5.4% on the week so far, in tandem with losses seen across steel markets in China. Analysts continue to cite the recent announcement from Chinese officials of their plans to curb prices and excessive speculation as the main driver of the recent correction. However, some have argued that unless China actually takes concrete steps to limit the consumption of industrial commodities, jawboning on prices may ultimately prove futile; “have these (Chinese government agencies) achieved any fundamental or structural industry changes aside from creating unnecessary speculation and market volatility?… The answer is no”, said Atilla Widnell, managing director at Singapore-based Navigate Commodities. China may be reluctant to limit consumption in industrial commodities given that it already faces growth deceleration.
Finally, turning to FX markets; the US dollar continues to unwind its earlier weekly gains, much of which came in wake of a more hawkish than anticipated tone to the minutes of the last FOMC meeting. Indeed, the Dollar Index (DXY), which hit mid-week highs of close to the 90.30 mark, continues to languish to the south of the 90.00 handle and has actually in recent trade just set a fresh weekly low in the 89.60s, above this it is currently consolidating. Falling US nominal yields and inflation expectations seem to be weighing on the currency, perhaps as this contributes to a reduction of inflation fears that (some worry) might scare the Fed into bringing forward policy tightening. USD sits at the bottom of the G10 performance table on the day, also weighed by a positive risk appetite being seen in stock markets, alongside the euro, which did not see much reaction to Eurozone PMIs this morning. EURUSD currently trades just to the north of the 1.2200 level.
GBP is one of the best performers on the morning in wake of a healthy dose of strong data; preliminary May PMIs were very strong and the Retail Sales report for the month of April was even more of a blockbuster than expected, together suggesting that the UK economy is currently in the midst of a bumper recovery as lockdown restrictions are eased and virus fears recede with nearly three-quarters of adults in the country now having had at least one dose of Covid-19 vaccine. GBPUSD managed to volt above the 1.4200 level again this morning to take it back to fresh highs on the week. The pair is now eyeing a test of the February highs at around 1.4240, a break above which would see the pair hit its highest levels since 2018. Upbeat risk appetite being seen in European and US equity markets, meanwhile, is lending a hand to the likes of SEK, CAD and NZD, all of whom, alongside sterling, trade modestly higher on the day versus the US dollar by just under 0.2%. The Aussie is fairing less well amid the aforementioned pullback in the prices of its some of its key exports (iron ore and copper), and is flat on the day versus the dollar, as are the likes of JPY and CHF, both weighed amid the slightly more risk on bias to trade today.
The Day Ahead
CAD traders will be eyeing the release of the March Retail Sales report at 1330BST. USD traders will then be on notice for a batch of US data, including preliminary May PMIs at 1445BST and April Existing Home Sales at 1500BST. 1500BST also sees the release of May Consumer Confidence figures in the Eurozone, numbers which will be eyed closely in lieu of this morning’s broadly strong business sentiment survey numbers over the same time period from Markit. A few Fed speakers are also speaking: Kaplan at 1415BST, then again at 1715BST at a roundtable discussion alongside his FOMC colleagues Barkin and Bostic, before making his third appearance of the day at 2155BST. Meanwhile, Daly will be on the wires at 1830BST.