Sentiment towards risk remains positive. European markets were higher this morning, albeit off their best levels when this report was written, while US futures were very close to their all-time highs after a sharp rebound in the past couple of days. With the VIX near the lows, bond yields and crude oil near their recent highs, the so-called reflationary trade remains the dominant theme – at least for now.
Source: ThinkMarkets and TradingView.com
Investors are thus continuing to ignore virus mutations and the resulting growth-chocking lockdowns. Instead, the focus remains on economic recovery that hopefully lies ahead, with the COVID-19 vaccines rollouts continuing with relative success in some parts of the world like the U.K., although delays in other parts of the world has caused some concerns.
In the US, investors are even more optimistic about the economic outlook due to expectations over more U.S. fiscal stimulus with President Joe Biden's proposed $1.9 trillion virus aid bill inching closer to being signed, after the Senate yesterday voted 50-49 to open a debate on budget resolution for the 2021 fiscal year. It will still be a couple of months until this is potentially signed into law given the Republican opposition. But with the Dems controlling the Senate, investors believe it will just be a matter of time.
Also boosting risk appetite is the publication of stronger-than-expected corporate earnings results from the likes of Amazon, Alphabet and Vodafone.
Gold struggles but there is still hope for the bulls
Thanks to the reflation trade, safe haven gold continues to struggle - especially with both the dollar and US 10-year bond yields rising and the VIX dropping. It will be interesting to see if the metal does actually break down because over the past few years it has been correlating positively with the stock markets. In truth, a lot depends on the yields now. Yes they are higher, but with central banks repeatedly re-iterating the need to keep policy extraordinary loose for a while yet, this could keep a lid on yields and floor under gold prices.
ADP and ISM PMI key focus for FX investors
FX investors will be looking forward to the ADP non-farm private sector payrolls report, due for publication at 13:15 GMT. ADP is expected to report that job have rebounded by 48,000 following last month’s 123,000 drop. Later in the afternoon, at 15:00 GMT, the latest ISM services PMI will come in. This is expected to print 56.7 vs. 57.2 last. Watch out for the employment component of the ISM as it will provide you strong clues about the Friday’s official nonfarm payrolls report.
Data and earnings calendar highlights for the rest of the week