Equity markets were mixed today, although mixed China trade data helped lift Asia off earlier lows. Elsewhere, the USD and yields are a touch higher. Treasury auctions will be a huge market focus, with the US set to sell a record $343 bn over the next three weeks.
Investors are looking ahead to starting the Q1 US earnings season with banks among the first reporters. Previews have flagged a higher bar with the S&P 500 up about 10% this year, and bottom-up S&P 500 EPS estimate up a record 6%
Conference call commentary should focus on supply chain issues, input cost pressure, margin cushion from pricing power and the potential impact on tax reform earnings.
The fact that stocks remain perched near record highs suggests investors still believe the economic acceleration should be a powerful tailwind for stocks this quarter and ensure earnings growth. Indeed, earnings tailwinds look set to outweigh concerns around supply chain shortages and rising commodity prices. Importantly, positive earnings and sales revisions have been broad across sectors and industries.
And frankly, I have never in my years seen a Central Banker like Jay Powell display so much passion about recognising the enormous redistributive power of a booming economy—one that generates both plentiful jobs and healthy wage growth—for low-income and minority groups. Suggesting there are 8.4 million reasons (US total Unemployment), the market could remain in "don't fight the FED mode." Indeed, most market participants are not expecting these strong data points will push the Fed in a more hawkish direction,
Although rates will rise as economic activity moves higher, the global equity markets reaction to this week's data docket will be a keen litmus test for equity investors who appear happy with growth driving higher yields.
Oil Markets
Crude oil prices have drifted higher reacting to decent China trade data but still capped by continuing lockdown effects awaiting clear evidence of rising global demand.
Also providing a bit of a rally capper, the EIA's DPR signalled US shale production bottoming in April/May, consistent with the higher rig count and the pick-up in well completions getting reoprted.
Bonds
The bid to cover at last night's US 10y auction was 2.36, below the recent average of 2.43. The indirect bid picked up to 59.6% from 56.8% previously, which offset the direct bid drop, which fell from 17.8% to 16.2%. So far, the market's fears over another poor UST auction have been adverted for now. Obviously, with a 30y auction to come tonight, there is still plenty of time for concern to build again.
However, before we get there, the market will have to get through another supply heavy day in Europe and negotiate the first of the higher base effect CPI prints. It is difficult to see how fixed income can perform in the face of all of this, and I suspect anyone looking to buy any dip in fixed income will at least want to wait until the US 30y auction is done.
Still, there is bound to be some nervousness in markets over financial stability in the aftermath of the fallout from Archegos. The concern is now growing over Huarong Asset Management, China's largest manager of distressed debt. Shares of the firm, majority-owned by China's finance ministry, listed in Hong Kong, have been suspended at the group's request since April while the prices of its bonds have tumbled. This has led to other high yield Chinese dollar notes also suffering while Asian investment-grade dollar debt spreads widened as much as 3bp. That marks the seventh straight day of widening, the longest since 2018
Forex
As talks pick up between the UK and the EU concerning the implementation of the Northern Ireland protocol, there's growing optimism that progress could lead to an outline plan that may restore trust and ease tensions that have escalated into violence in recent days. Against this backdrop, last week's persistent GBP supply, particularly in the crosses, seems to have abated that has triggered a bit of reversal on EUR/GBP and softened the EUR/USD as GBP/USD is talking on a bit of a relief rally of sorts.
Still, As the EU vaccination program builds positive momentum, some of the negativity that has weighed on the euro is perhaps dissipating. With the US economic optimism already well-priced, there is scope for a bit of catchup in EUR/USD. So FX traders are still dabbling in buy the dip mode with USD upside momentum fading.