Market highlights 

• US equities moved sideways again, firmly planted in wait-and-see mode ahead of earnings season
• After another whippy session for oil, traders are trying to hash out a near-term sweet spot
• EUR remains steady on good data; GBP gingerly bounced back from overnight weakness; Major corporate deal has potential weigh on the USDJPY
• Gold struggles to push back above the 1740 mark

Markets

US equities moved sideways again on Wednesday, firmly planted in wait-and-see mode ahead of earnings season. The S&P was up 0.1% and the only thing notable about that was that it was enough to set a fresh record high. US10Y yields were up 2bps to 1.67%. Oil up was 0.7%.

In an echo of yesterday's Asia Market note, it's not unusual for the market to pause at record highs, even more so as the S&P moves towards its upper reaches, hinting investors could be exhausted from chasing strength. 

But more poignantly, they likely need a little more confirmation at precisely what stage of the recovery we’re at, and more specifically for bond yield concerns, exactly where inflation sits as the technical correction lower in US 10y bond yields. Given that more prominent sectors (i.e. tech) continue to struggle in the face of higher US bond yields, the most significant risk is that inflation readings forces the Fed to modify their normalization plans.

Still, the recent shift lower in US bond yields indicates a market positioned for higher bond yields, where price action is likely to be of the "two steps up, one step back" variety. And, according to the latest trend, the S&P 500 should be expected to move in tandem, making headway when treasuries ease back and then consolidating or seeing small profit-taking as yields step up.

But it‘s been a hugely impressive run in US equities given the high US yields and the negative buzz around corporate tax hikes – especially when the quarter-end pension rebalancing kept a good chunk of investors on the sidelines. However, the Q1 earnings season is probably limiting appetite to add risk as the markets need corroborative evidence to justify lofty valuations.

But what is encouraging for investors is, according to the chatter around the Prime Broker markets, active equity manager positioning has been essentially unchanged for the past month (slightly underweight), indicating little participation in recent market moves. So, there could be a test of higher reaches and a solid attempt to break new ground, possibly above S&P 500 4100 if the active community kicks in a post-earnings season. 

There is still some room to the upside; however, on a cautionary note, the viewfinder points to some significant consolidation in stocks as the street soon begins to factor in growth peaking over the next three months, which would be historically consistent as the markets enter the window of maximal US data (April, May, June).

Outside of the FOMC minutes, it's been a pretty quiet start to the week in terms of news flows. Still, the short term momentum appears to remain in favour of the bulls as investors seem happy and willing to bet on an economic rebound over the coming months in light of the robust data in recent weeks. And, on top of all that, equity volatility continued to remain tepid around its lowest levels since the pandemic began, encouraging risk-taking. 

A minuet on the minutes

The March FOMC minutes indicated that the Federal Reserve's view of the economy continued to improve – but slowly – while containing little in the way of surprises while publicly stating that "now was not the time to talk about taper."

On inflation, most participants pointed out supply constraints could contribute to price increases for some goods in the coming months as the economy reopens. Still, that inflation reading would likely edge down next year. The US 10y yield's response to the release was muted by design.

With 8 million reasons (the number of unemployed Americans) and knowing full well the impact from past taper mistakes, and while the statement gives voice to the many, all in all, it’s consistent with the narrative that Federal Reserve Chair Jerome Powell has been pushing. It may be a little surprising that there was no controversy around new members forecasting a hike in 2020, which gives the minutes a dovish feel.

But the minutes read like a very unified Fed that’s fully aware there is NO real-life playbook to script the recovery. Hence the policy path would be based "primarily on observed outcomes rather than forecasts", and overall the market is relatively unchanged.

Oil Markets

After another whippy session where the market continues to digest the competing narrative of US growth and Europe's vaccine catch-up recovery versus the uncertain supply conditions, traders are trying to hash out a near-term sweet spot around Brent $63 to provide a springboard for the build-up to a pent-up summer travel boom in the US where gasoline demand should soar and a further pick up in the air travel could assuage jet fuel concerns.  

The third and fourth wave virus outbreaks in Europe and parts of Asia, notably India, have elevated lockdown concerns that continue to weigh in the market’s topside ambitions hitting the prompt demand outlooks. And at this stage of the oil market recovery, Covid-19 resurgence continues walking back investors’ thoughts of an oil supercycle down to a very ordinary rebound as the last few miles remain littered with supply and demand speed bumps.

Walking down memory lane, summer driving season is typically an absolute rocker for US gasoline sales. This year, demand should blow through the roof if we believe the max optimism forward-looking gauges around consumer confidence and the ISM. 

On the DOE inventory data, the crude supply excess is eroded by rising refining runs; distillate stocks 6.9mb (5%) above their five-year average. Refining runs also continue to improve as more robust gasoline demand is boosting US refining margins, and this should continue to improve. 

But, of course, traders would feel more comfortable pushing oil higher if the product supplies moved in the other direction.

Currency Markets

The EUR is steady this morning on good data, holding onto the decent gains posted over the last week. Upward revisions to the flash services PMIs for March have helped buoy the mood.

GBP has gingerly bounced back from some initial overnight weakness which preceded a downward revision to the March Services PMI. 

Most FX traders expect the dollar to drift off. There aren't any signs of big outright "dollar sellers" yet; instead, the street seems to feel that the dollar has reached its upper bounds, so it's more a case of not wanting to buy it further. 

EURUSD has probably bottomed, but there's only limited upside, and it’s the same for USDJPY – the call is more for it having topped than returning to the low 100s.

Although I'm not privy to the flow, the Toshiba-CVC deal could be weighing on the USDJPY. Private deals at this scale are unusual and almost unheard of in Japan. There’ll be considerable pressure for USDJPY to absorb if the deal goes through. 

The Malaysian Ringgit

Despite a positive vibe in the local bond market, the ringgit searches for fresh exogenous catalysts while getting ping-ponged between broader US dollar moves in G-10 and whipsawing oil prices. 

Gold Markets

Gold is struggling to push back above 1740, let alone test the 1750 pivot level as the Fed minutes were extremely balanced and perhaps didn't wax as dovish as some had expected. US yields eventually ticked higher post-FOMC minutes as the path of least resistance for the US recovery is higher into the summer and supporting a higher US yields outlook.