Before the Bell: Europe set for positive start despite softness in Asia markets
No one can complain about a lack of volatility in financial markets at the moment. The tug-of-war between economic recovery and inflation risks continued on Wall Street on Friday and spilt out onto the street in Asia.
Friday’s outsized 379,000 gain in Non-Farm Payrolls caused US yields to spike initially. Still, equity markets just couldn’t keep saying no to the recovery story, and unwound all their ugly intra-day losses to post strong finishes, commented Jeffrey Halley, senior market analyst at OANDA, this morning.
“US 10-year yields peeped their head over 1.60 per cent, before helpfully retreating to 1.55 per cent, aiding the equity recovery story,” he told City PM this morning.
The weekend had plenty of interest as well. China’s Balance of Trade exploded higher in Dollar terms to $103.25 billion for JAN-FEB yesterday, Halley pointed out.
“For all the noise about its comparison to Jan-Feb 2020, it flatters to deceive. The same period last year being the start of the Covid-19 economic implosion. Still, given that the number encompasses Lunar New Year, the data is impressive,” he said.
The US Senate passed the Biden $1.9 trillion stimulus package over the weekend, which has continued the market sugar rush this morning after equities closed positively on Friday.
“Apart from ditching the minimum wage and tweaking whom is entitled to the fiscal goodies, the bill is relatively intact. It will now pass back to the House tomorrow in its amended form, and then onto President Biden’s desk for signing,” Halley said.
An attempted drone attack on a giant Saudi Arabia oil refinery and transport hub in the Kingdom this morning by the Yemeni Houthis has seen oil prices spike higher once again. No damage was caused, but Brent crude and WTI are 2.5% higher. Brent crude is now well above the $70.00 a barrel mark at $71.30 a barrel.
US payrolls on Friday
Meanwhile, Michael Hewson, chief market analyst at CMC Markets UK, zoomed in on Friday’s payrolls report this morning, as it saw US 10-year yields post a new one year high before slipping back from their peaks, but still closing higher on the day.
“All in all, there was little to find wrong with Friday’s report, the headline number was a huge beat at 379k, while the upward revision in January to 166k, was also very welcome while the unemployment rate also declined to 6.2 per cent,” Hewson shared with City PM this morning.
The rebound in the US labour market, since the negative number in December appears to suggest that the slowdown in December was just a blip, and when you dig a little deeper into Friday’s report there is plenty of optimism that the current rebound in hiring could well continue into March, he continued.
“This is because the bulk of the rebound in February was driven by the leisure and hospitality sector as businesses started to reopen with a gain of 355k. As the weather warms up and the vaccination program gets rolled out there is plenty of scope for further gains in the coming months,” Hewson noted.
With the Senate also approving the latest $1.9trn stimulus program, the gateway to a successful ratification in Congress, and Presidential approval later this week paves the way for an enormous fiscal boost starting from Q2, and over the rest of the year. The lack of market reaction to this suggests that for the most part this is already priced in.
“The most striking part of the package is a means tested direct payment to most US individuals worth $1,400 per person, along with much more generous unemployment provisions,” Hewson remarked.
While he called all of this “welcome news” for the prospects for a strong economic rebound, it also raises questions about how much further US long term yields can go, in terms of their current move higher.
“One thing seems certain, US long term yields look set to continue to rise with the 1.8 per cent level on the US 10 year the next target, though we could see a pullback to 1.4 per cent first,” Hewson noted.
“US equity markets, even though they managed to undergo a big turnaround on Friday, finishing the day higher, still finished lower for the third week in succession, raising some important questions as to whether we’ve seen a short-term peak, along with the prospect of further downside,” he added.
The US Federal Reserve certainly doesn’t appear to be expressing any undue concern at the current moves in US bond markets, and why should they, given US 2-year yields remain stubbornly well anchored.
The biggest concern appears to be around inflationary pressures, Hewson continued, which have shown signs of accelerating quite sharply, with Brent crude prices closing the week back above $70 a barrel its highest level in 13 months, and prices paid data at multi year highs.
Look ahead
As we look ahead to the next few days it’s been notable that despite the falls seen in US markets over the last three weeks, European markets have held up fairly well, Hewson observed, with the DAX hitting a record high last week, and UK markets also doing well in the aftermath of last week’s budget.
“This upbeat tone looks set to continue this week with a positive open expected, even though Asia markets have experienced a somewhat more mixed start, despite some fairly decent China trade data for January and February, which showed a big rebound in exports as global demand continues to show resilience,” he said.
“Exports surged over 60 per cent from a year ago, and while you can argue that the number is flattered due to the China lockdown a year ago, which shut factories down, the direction of travel still looks impressive,” Hewson pointed out.
Imports also beat expectations, rising over 22 per cent in a sign that domestic demand is also recovering which should bode well for the upcoming retail sales numbers which are due in a week’s time.
ECB this week
The main focus this week is set to be on the latest meeting of the European Central Bank, and while central bank officials will welcome the recent fall in the value of the euro, “what they won’t welcome is the rise in borrowing costs that has come about as a result of the recent surge higher in global bond yields,” Hewson said.
This has prompted a concern about a tightening of financial conditions which the weaker members of the EU can ill afford. The rise in the US dollar and higher yields could also have consequences for some emerging market countries as well given that some of their liabilities are sensitive to US interest rate fluctuations, he noted.
“What is also troubling some overseas investors is the nature of the EU’s vaccination program, which is well behind its peers, and as such has prompted a net outflow from various European equity funds for three weeks in a row, over concerns that any economic recovery will come too late to rescue the summer season for the likes of the weaker members of the union,” Hewson said.
Losing another summer tourist season is now a real risk for the likes of Italy, Spain and Greece and could see even more vulnerable businesses founder on the back of the pandemic, he concluded.