US equities rose to fresh record highs Monday, the S&P rising a further 1.4% after breaking through 4,000 on Friday following a better-than-expected payrolls print. Additional fuel came on Monday with a record high read on the US services ISM in March. US10Y yields were down 2bps to 1.70%, oil down 4.6% and energy stocks the only sector in the red as demand concerns still linger.
US stocks broke higher ground on Monday after a report showed that America's services sector accelerated last month at the fastest pace on record.
Suppose investors were looking for any confirmation that the US reflation trade is on full bore well. In that case, they might have just received that sweet tasting "poof is in the economic pudding" as US economic data is flying. The market just took another monumental stepping stone as both backwards-looking (payrolls) and forward-looking (ISM) is confirming what investors have been pricing in all along up until now: a post-Covid return to economic glory.
Both historical and forward-looking strategies have their place, but when both confirm a huge economic rebound, there’s only one place for stocks to go: higher. Provided the data continues to be supportive, equities and risk-on can remain at elevated levels for some time – or at least until the next unexpected downside shocker hits.
With month-end rebalancing and the Easter Holiday (Good Friday) out of the way, while taking cast back to last Friday's US payroll, investors wasted little time to make up for the lost time. And with the Vix shifting under 18, a more systematic type flow is back to the market. Indeed, this was among the best quarters for stocks relative to bonds in the past 60 years.
Altogether, the data shows the economy is rolling down the runway for substantial lift-off in Q2. And make no mistake, the flightpath continues to extend thanks to the US vaccine rollouts.
Oil prices contiued to slide overnight as third and fourth wave virus outbreaks in Europe and parts of Asia, notably India, have elevated lockdown concerns that continue to hit both spot and forward demand outlooks. And at this stage of the oil market recovery, Covid-19 resurgence is walking back investor thoughts of an oil supercycle down to a very wobbly monocycle on this bumpy road to recovery.
After a wave of possible stop losses getting triggered below Brent 62.50, oil has found some legs on the back of robust US economic data and oil prices self-correcting nature via a weaker US dollar.
Perhaps compounding matters overnight, China counties to buy Iranian oil, which is perhaps the most significant risk to rebalancing markets and pushing global inventories lower, especially as OPEC revisits their taper strategy.
In light of the Covid resurgence, markets could also be having a case of post-taper indigestion with Saudi Arabia. Instead of waiting for more tangible confirmation that demand has all but fully recovered, the Kingdom will gradually return its voluntary one mbd of cuts, upping the potential return of more barrels. Overall, the alliance will boost its production by 600 kbd in May, 700 kbd in June and 841 kbd in July.
When you factor in 1-1.5 mbd Iranian barrels and 700 kbd, you suddenly have the potential of 2.2 mbd looking for a home.
The United States will indirectly talk about the Iran nuclear deal with diplomats from Europe, Russia and China in Vienna this week. Although the discussion doesn't mean a sudden return to the so-called Iran nuclear deal, the US's odds of lifting the sanctions on Iranian oil exports may have risen compared to a few months ago.
Finally, and although not capturing many headlines, China's central bank has asked banks to rein in credit supply on concerns that the surge in loans may fuel asset bubbles. With the commodity markets getting long in the tooth, a softening in China credit impulse can't be suitable for the medium term viewfinder.
The US dollar is weaker through the global risk-on channel as FX traders sell the dollar, anticipating investors putting more money to work outside of the US.
I don't believe there’s a great deal of consensus out here other than a new quarter and green shoot of optimism abound with spring in the air. However, I still think the foremost opportunity in G10 FX markets will be positioning for European activity's likely recovery. Vaccinations are set to accelerate significantly in April and May, and experience suggests current lockdowns will lower Covid-19 case numbers relatively soon. Indeed, this should be positive for the EURO.
The Malaysian Ringgit
The broadly weaker US dollar should help, but significantly lower oil prices to start Q2 could cause concerns. However, more critical for the ringgit is how markets reprice expectations on the Fed and how US bond yields react. With the US 10-year treasury yield drifting lower on Monday as stocks hit record highs on the back of robust economic data, it could be a bit of an offsetting factor for the local units.
Gold is a bit stronger this morning due to a weaker US dollar and slightly easier US yields.
Gold has formed a short-term double bottom but needs to break above $1,750 before it can head higher. The metal could struggle to extend last week's recovery with the positive US NFP underpinning risk-on sentiment.
If yields start to spike again and there’s a more significant reason for them to move higher rather than lower, XAUUSD could lower. While bullion found strong hands in the $1,680s, the March lows and has been relatively bullish, it’s still far too early to determine that the trend has reversed higher.
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Most currency pairs are consolidating ahead of today´s NFP release, with the event likely to determine the short-term direction of the US Dollar.