Taking the lead from a weaker close on Wall Street and Asia overnight, European bourses are trending lower, with tobacco companies heading the charge southward.
The Biden administration wants tobacco companies to slash the amount of nicotine in cigarettes to non-addictive levels, which could massively undermine the long-term sales prospects of the large caps. These changes come at a time when tobacco companies are already facing demand headwinds. A 6% drop in British American Tobacco and a 5% decline in Imperial Brands is dragging on the FTSE, despite oil majors and miners advancing on firmer commodity prices.
On the data front, the UK jobs report was a mixed bag. The headline unemployment number unexpectedly dipped lower to 4.9% in the three months to February, down from 5% in January and defying expectations of a move higher to 5.1%. However, the unemployment rate decline is more likely due to a rise in the number of people who had exited the job market altogether because the inactivity rate rose by 0.2%.
Furthermore, the more timely payroll data fell back slightly in March. Yet delving further into the numbers, a more encouraging picture is emerging as payrolls outside the hard-hit consumer service sector are starting to turn a corner. Furthermore, job vacancies were also on the rise in March, so it was certainly not an all doom and gloom report, but there is still plenty of room for improvement.
US futures are pointing to a softer start, extending losses from the previous session. Yet even with this pullback, US stocks remain near record highs. The CBOE volatility index, often referred to as the fear gauge, is ticking higher again, suggesting risk-off sentiment is creeping up. Attention is firmly on US earnings season, with investors looking for confirmation of the private sector recovery. Coca-Cola impressed in the previous session, but the big question is how tech will perform? Netflix kicks off big-tech earnings after the US close today.
FX – US dollar declines despite rising yields
The US dollar is extending its sell-off and has slumped to a 6–1/2 week low versus its major peers, despite yields rising and in a very different reaction to recent weeks. Previously, the US dollar has gained ground as yields rose, but not this week.
Now, as yields are rising, the greenback is grinding lower, which could be a catch-up play from a sharp sell-off in US treasury yields over the last two weeks. Yields on the benchmark 10-year treasury yields tumbled over 7% across the past fortnight as the Fed calmed nerves that any rise in inflation is likely to be temporary. While the US dollar also fell, we could be witnessing some follow-through selling this week.
The euro is putting in a solid performance, holding comfortably above 1.2050 thanks in part to the weaker US dollar and brightening outlook for the region’s vaccine rollout. Reports that the EU has secured an additional 100 million Pfizer BioTech Covid jabs could well be a game-changer. After a sluggish start, the vaccine rollout is accelerating. This extra boost to supplies could well mean the region’s ambitious target of 70% of adults vaccinated by the end of June may not be far off.
Gold caught between rising yields and weaker USD
The yellow metal is treading water as investors weigh up rising treasury yields against a weaker US dollar and risk-off sentiment in the equities market. Gold is consolidating losses from yesterday, when a rebound in treasury yields triggered a correction in the precious metal. Further efforts by the Biden administration to progress the USD2.5 trillion infrastructure stimulus plan lifted yields. Higher yields are likely to remain a weight on gold. With a light US economic calendar, investors will be looking towards updates on Biden’s infrastructure plan and sentiment surrounding earnings, which are starting to ramp up for fresh impetus.
Oil extends rally ahead of API data
Oil prices are on the rise again on Tuesday. After rallying more than 6% across the previous week, oil prices are already up an additional 1.4% so far this week as signs of the global recovery appear to be playing out in the commodity space, particularly through oil and base metals.
The weaker greenback is helping to underpin the commodity, in addition to rising expectations that US crude inventories will decline again this week, as the world’s largest consumer of oil reopens its economy.
However, risks remain. With the resurgence of Covid in India – the world’s third-largest importer of oil – tighter lockdown restrictions could dent the near-term demand outlook for oil.
