A remarkable breakout rally continues on equities, however it is interesting to see slightly more of a cautious outlook beginning to develop across other areas of major markets.
Concerns are beginning to mount over relations between the US and China. Moves by the White House and Congress to sanction China over its imposition of security laws in Hong Kong are set to put the world’s two major economies on a collision course once more. Markets are beginning to show the strain. The weakening of the Chinese yuan versus the dollar has tended to be seen as a warning signal for markets during the trade tensions of the past couple of years and once more USD/CNY is breaking higher.
It comes as the oil price is also beginning to lose its recovery momentum (with questions over the recovery in demand being posed). Treasury yields also ticked lower yesterday as demand to buy US debt came even as equities closed strongly higher. For now, these are just warning signals, and there is still positive sentiment which is broadly dominant on major markets this morning. Equity futures are again higher today, whilst Treasury yields are also ticking slightly higher.
Commodity currencies are performing well and the euro is looking to breakout (after further information on the EU Recovery Fund). However, if tensions between the US and China escalate, then there could be an excuse for some profit-taking. How far that profit-taking may could would then be the next question. For now, broad outlook remains positive, but perhaps the need for a little more caution is coming.
Wall Street staged a strong rally into the close last night with the S&P 500 +1.5% (at 3036) and a close above 3000 for the first time since 5th March. Futures are also positive again today with the E-mini S&Ps +0.4%. Asian markets were strong overnight with the Nikkei +2.3% and Shanghai Composite +0.3%. In Europe, markets are playing catch up on the late Wall Street run higher into the close, with FTSE futures and DAX futures both +1.2%.
Forex majors, have regained their positive risk bias today, albeit only marginal. JPY is underperforming again, whilst EUR and GBP are positive against the dollar. The one concern is a mild weakness on AUD, with a nod to concerns over China perhaps.
In commodities, there has been a decent rebound on gold, up around +$10, but oil is lower again by around -2%.
There is not too much on the economic calendar through the European morning, although German HICP inflation is released at 1300BST and is expected to fall to +0.5% year on year in May (from +0.8% in April). The US data begins at 1330BST with a number of data points. Prelim US Q1 GDP (the second reading) is expected to show no revision from the Advance reading, with -4.8% annualised. US Weekly Jobless Claims are expected to show another hefty number with 2.100m (although down from last week’s 2.438m). There is also core US Durable Goods Orders (ex-transport) at 1330BST which is expected to show a month on month decline of -14.0% in April. Finally later in the session, there are the US Pending Home Sales at 1500BST which are expected to show a decline of -15.0% in April.
The FOMC’s John Williams (centrist, voter) speaks at 1600BST today.
GBPJPY pulled back and held support today. I’m bullish against today’s low. There is nothing else to address regarding this clean setup.