Markets
A fragile risk environment with all in all minor (US) equity losses eventually cracked in the final trading hour on Wall Street. Losses mounted from -0.56% for the Nasdaq to -0.78% for the Dow in technical trading. US yields fell up to 1.8 bps (5y) with the belly of the curve outperforming the wings. Inflation expectation gauges such as the US 2y breakeven rate remained near their more-than-a-decade high. The German bund underperformed Treasuries in an ongoing catch-up move as Europe braces for a reopen. A sudden drop in oil prices in post-European hours may have added to the UST outperformance. German yields rose 1.1 bp (2y) to 1.8 bps (30y). The 10y yield (+1.2bps to-0.103%) is nearing minor resistance at -0.093%. The dollar was again the weakest link on FX markets, losing against all G10 peers and the euro in particular. EUR/USD jumped beyond 1.22 resistance (76.4% Fibo recovery from the Q1 decline) with ease to close at the highest level since January (1.222 from 1.2152). Similarly, the trade-weighted greenback finished sub 90, at a level last seen early this year (89.75). USD/JPY lost the 109 once again. Sterling gave up the 0.86 marks despite consensus-beating UK labor data. EUR/GBP rose from an intraday low near 0.858 to 0.8615.
Asian stocks are having a rough morning in the wake of WS’s performance. Australia underperforms (-2%) amid lingering inflation uncertainty (see below). The dollar is trading mixed, the euro is better to bid against peers. Core bonds trade little changed, USTs marginally underperforming.
The FOMC meeting minutes are today’s focus. At the April Fed gathering, Powell was as dovish as one possibly could be. He fended off the tapering debate by saying the labor market was still fragile and inflation only temporary. The poor April payrolls later proved him right. Inflation in all its forms, however, –” CPI, PPI, expectations –”were already elevated at the time and markets will be looking for clues whether views within the board are starting to shift. Any such hint would be picked up immediately and is likely to cause risk-off. In the run-up to the minutes, we expect markets to continue this week’s trade of lower equities (a view supported by the technicals on eg. EuroStoxx 50 as well) and a weak dollar as yield-based inflation expectations stay elevated. April CPI numbers for the UK were spot on consensus. PPI surprised to the upside though but has no material impact on sterling. More economic updates are due later this week with retail sales and PMIs on Friday. They could map the short-term road for EUR/GBP.
News Headlines
Brent crude briefly touched $70/b yesterday for the first time since 2018, before sliding back to $68/b. Apart from technical resistance, oil prices took a hit after comments from Russian diplomat Ulyanov. The envoy to OPEC-capital Vienna said that significant progress has been made in efforts to broker an agreement between Iran and the US. Restoration of the JCPOA would remove US sanctions on the country’s crude exports and add to the global supply tally. Ulyanov later downplayed his comments by saying that more time and efforts are needed to finalize the deal.
The Chinese central bank (PBOC) further dented cryptocurrencies’ miserable form by warning that virtual currencies should not and cannot be used in the market because they’re not real currencies. The PBOC back in 2017 started a domestic witch hunt against crypto, forcing exchanges and investors overseas while simultaneously working on its own digital yuan. Bitcoin prices tumble below 40k this morning for the first time since February, giving away the neckline of a multiple top formations. The biggest crypto traded near 60k mid-May before the Tesla divestment announcement.
Inflation is again the talk of the town this morning. New Zealand producer input prices surged by 2.1% Q/Q in Q1 2021, which is the most since Q3 2013. They gradually seep through in PPI output prices as well, which rose by 1.2% Q/Q (highest since Q3 2018). Australian wages rose slightly more than forecast in Q1, by 0.6% Q/Q and 1.5% Y/Y. Both NZD/USD and AUD/USD aren’t affected by the numbers.
