Market movers today
- A quiet start to the week on the data front leaves markets to digest the outcomes of the G7 summit over the weekend.
- The UK government will decide whether the grand re-opening on 21 June still goes ahead as planned (amid a rise in corona cases of the Delta variant) or whether it will be postponed by 2-4 weeks.
- Wednesday this week the Fed meeting will be the key focal point for markets.
The 60 second overview
Inflation: Last week US inflation jumped to 5.0% y/y. However, it seems that both market expectations (break-evens) and inflation expectations measured by surveys are edging lower despite the higher headline CPI. On Friday, University of Michigan 5 to 10-year inflation expectations among households dropped from 3.0% in May to 2.8% in June. In the market 10Y break-even rates have dropped from 2.45 two weeks ago to currently 2.34%. See also Research US: Higher inflation but not spinning out of control due to still well-behaved expectations that we published this morning.
US consumer confidence: University of Michigan consumer confidence rose from 82.9 in May to 86.4 in June though still below the high 90ties level before the pandemic as especially Republican voters remain less optimistic.
Carry environment: Lower inflation expectations as the global economy reopens and as the US consumer is increasingly optimistic create a positive carry environment. This will particularly be the case if the FOMC meeting on Wednesday – just as the ECB meeting last week – as expected does not rock the boat. Hence, the tendency to lower longer-dated yields/flatter curves, higher equity prices fuelled by growth stocks especially yield-sensitive tech-stocks and tighter credit spreads could have more potential this week. The lower inflation expectations have also supported the USD and EUR/USD is this morning trading below 1.21after trading above 121.9 Friday morning.
G7: At this weekend’s G7 meeting, unity and harmony was in focus after the chaotic gatherings during the Trump years. Notably, Biden said that the G7 meeting was the time when the West toughened its stance on China and developed a democratic and green alternative to China’s Belt and Road Initiative. Biden believes the latter is spreading Beijing’s influence across the world. The G7 also donated 613m vaccines to developing countries falling short of the 1bn pledge. The G7 also backed Japan’s plan to go ahead with the Olympics despite virus concerns.
Equities: The week ended on a positive note, helped by growth stocks. Investors continue to become more convinced that inflation is transitory which kept yields at week-lows. In turn, this resulted in new record closes in several equity indices. US markets closed higher for a third consecutive week, with S&P up 0.2% for the day, Nasdaq 0.4% and Dow unchanged. Friday also saw some revenge for small caps, with Russell 2000 outperforming, up 1.1%. The classic growth sectors, tech and consumer discretionary, led the gains together with financials (diversified financials, so not the value part). Meanwhile, some of the sector winners for the week sold off slightly, including health care and real estate. Still, this concluded to a rather marked rotation last week, with the winning sectors – health care and real estate – both up over 2% for the week, in sharp contrast to financials, which has been the most sold, down -2.5%. Positive sentiment continuing in Asia this morning, though most markets are closed for holiday. US futures point to smaller gains.
FI: Markets continue to digest ECB’s decision to keep its ‘significant’ PEPP buying guidance into Q3. The flatter curves and tighter intra-euro area yield spreads, driven by the long end, indicate a more flow driven sentiment on Friday. Today is a slow start to the week with no tier1 data releases. Later in the week, the key event for markets will be the FOMC meeting on Wednesday and the US retail sales. On Thursday, we will also get the June TLTRO allotment number. With ECB giving the best attempt to keep easy financing conditions and volatility low, an attractive carry trade environment opens up, notably if we have a ‘business as usual’ message from the FOMC later this week.
FX: Summary. If FOMC comes out hawkish and US data strong, then we could see EUR/USD at 1.20 by end of the week. Wednesday’s FOMC meeting is far more important for where EUR/NOK closes on 17 June than the NB meeting itself. We see SEK-crosses in general forming a trough around current levels. The PLN lost significant ground on Friday with EUR/PLN moving up to 4.49 as the central bank governor sent a dovish signal.
Credit: In line with European equities, credit had another good run on Friday with iTraxx Xover tightening 4½bp (to 231bp) and Main tightening almost 1bp (to 47bp). HY bonds tightened 2bp and IG ½bp.
