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US equities rose to fresh record highs overnight, continuing their strong performance from last week on the back of better-than-expected payrolls print. Additional fuel came Monday with a record high read on the US services ISM in March.
I suppose investors were looking for any confirmation that the US reflation trade is on full bore. In that case, they might have just received that sweet tasting “proof 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) confirmed 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 is only one place for stocks to go, and that is higher. Provided the data counties to support, equities and risk-on can remain at elevated levels for some time or at least until the next unexpected downside shocker hit.
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 slides further
Oil prices continued 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 investors thoughts of an oil supercycle down do a very wobbly monocycle on this bumpy road to recovery.
After a wave of possible stop losses getting triggered below Brent US$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 continues to buy Iran 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-19 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 of its one million barrel per day of cuts, upping the potential return of more barrels.
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.
US dollar weakens
The US dollar is weaker through the global risk-on channel as FX traders sell the greenback anticipating investors putting more money to work outside of the US.
I don’t believe there is 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 case numbers relatively soon. Indeed, this should be positive for the EURO.
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 US Fed normalisation 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 unit.
Gold gains a little shine
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 $1750 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 is a more significant reason for them to move higher rather than lower, XAUUSD could lower. While bullion found strong hands in the $1680s, the March lows, and has been relatively bullish, it is still far too early to determine that the trend has reversed higher.
