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Market Update
The arrival of US market participants to the market from 1100GMT/0600EDT onwards has injected a dose of volatility into markets that had been very much subdued during the overnight and early European session; US players have been selling US government bond and, as such, yields have spiked higher over the last few hours. 10-year yields, which started the day around 1.62%, have jumped more than 5bps to above 1.67%. The 2s10s spread (the difference between 2- and 10-year government bond yields, a proxy for treasury curve steepness) has surged back above 150bps, fresh cycle highs.
The move higher in US yields/steepening of the treasury yield curve has triggered some selling in US equities in the pre-market, with S&P 500 futures now down 0.4%. As is typically seen when long-term yields rise, Big Tech stocks are underperforming and the Nasdaq 100 is the worst performing major index in pre-market trade, with futures down 1.2%. In terms of the impact on other asset classes, starting with FX; higher yields have lifted the DXY from session lows in the 91.80s, though the DXY has so far been unable to rally above 92.00. Meanwhile, downside in stocks is weighing on crude oil markets (WTI -1.0% to the low $64.00s). Surprisingly, precious metals are only modestly lower despite yields being higher and the dollar being a little stronger.
No specific news or fundamental theme can be attributed as triggering the move. As noted above, the change in market tone coincided with the arrival of US participants in the market and is likely down to some position adjustment ahead of today’s FOMC meeting – the questions of if, when and how the Fed might respond to an “excessive” rise in long-term US government borrowing rates is the key theme of today’s meeting and recent price action suggests markets might be increasingly betting on the Fed signalling more of a hands off approach when it comes to bond markets than an the more activist stance that say the ECB has adopted.
Elsewhere, another theme worth keeping an eye on today and for the rest of the week is US/China relations; high level officials from both sides are set to meet in Alaska on Thursday for the first face-to-face meeting between high level US and Chinese government officials since the Biden administration took office. US rhetoric ahead of the meeting has been punchy; Secretary of State Blinken yesterday accused China of acting more aggressively and repressively (referring to its actions in the East and South China Seas). Meanwhile, a US official yesterday that the US thinks it is heading into this week’s talks with an increasingly strong hand given the unification in the Biden administration regarding its approach to China and said that the US will outline specific areas to China where they think China needs to “change course”, including recent malicious cyber activity. The official added that he does not expect a joint statement following the meeting (some analysts had suggested that this might be a positive sign that steps were made in the right direction).
G10 FX
As noted, recent weakness in US government bond markets (which has pushed yields higher) is benefitting the US dollar and has helped the DXY recover back to the 92.00 level. Recent strength has seen USD move to the top of the G10 performance table of the day, where it currently sits level with GBP and the euro. Indeed, each of these three currencies (which are the best performing three in the G10 so far on the day) are flat versus each other on the day, with EURUSD back from morning highs around 1.1915 but still trading close to 1.1900, GBPUSD having just poked under 1.3900 again having hit highs in the upper 1.3920s this morning and EURGBP flat just above 0.8550.
There have not been much relevant news flow/fundamentals for USD, GBP and EUR and it is perhaps unsurprising to see the three-trading flat and subdued versus each other ahead of key risk events; the FOMC release their latest monetary policy decision and economic forecasts this evening, the BoE releases theirs tomorrow morning and Thursday will also be punctuated by speeches from ECB officials including President Lagarde.
Turning to the rest of the G10, CHF is the worst performer, down about 0.5% on the day versus the buck. Meanwhile, JPY, CAD, NZD and AUD are each down between 0.2-0.3%. The yen is suffering as a result of higher US government bond yields and the upwards pressure that puts on the US/Japanese rate differential, the loonie is weighed by lower crude oil prices and the recently released softer than expected Canadian February CPI report, the Aussie is having to contend with more dovish RBA speak (RBA Assistant Governor Kent was on the wires last night reiterating the bank dovish policy guidance) and the kiwi has shrugged off largely as expected Q4 2020 Current Account data released overnight, with traders looking ahead to the release of official New Zealand Q4 2020 GDP data tonight.
Day Ahead
Weekly US EIA crude oil inventory data is set for release at 1430GMT/1030EDT and could trigger some further volatility in crude oil markets, with expectations for a bullish report following the 1M crude oil stock draw reported in the Weekly Private API report last night.
Thereafter things will be quiet ahead of the FOMC monetary policy decision; the Fed’s updated statement, updated dot-plots and new economic forecasts will be released at 1800GMT/1400EDT, followed by Fed Chair Jerome Powell’s comments to the press at 1830GMT/1430EDT.
The Fed is unanimously expected to hold policy setting steady and stick to its usual dovish script with regards to policy guidance. As noted above, the main focus will be on the questions of if, when and how the Fed might respond to an “excessive” rise in long-term US government borrowing rates.
Kiwi traders will then be on notice for the release of Q4 2020 GDP growth data, set for release at 2145GMT/1745EDT.
