Market highlights 

• US stock futures take a breather after the latest surge to another set of highs
• Despite a slightly weaker US dollar, oil and energy sectors are having trouble shaking Monday's brutal move lower
• The foremost opportunity in G10 FX markets could be positioning for European activity's likely recovery
• Gold jumps as USD and yields fall, with room for further price climbs

Markets

US stock futures are taking a breather after the latest surge to another set of highs supported by a recent run of exceptional US economic data.  Still, there are many more economic data boxes to be checked off to confirm what markets have been pricing up until now. With the SPX closing in on some significant interim targets, investors could be exhausted from chasing strength and have instead started to trim some of the higher beta parts of the markets while possibly looking to add into weakness. 

And while equity and risk markets can remain at highly elevated levels provided the macro data support, at such lofty levels investors 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 is finding a base around 1.65.

Europe and the rest of Asia are back from the Easter holiday and were generally playing catch-up yesterday. There's a cyclical tilt to the tape in Europe; however, that too could pause in concert with US markets where lower US yields amid more robust US economic data was the accelerant that stoked markets higher. With yields basing, so too could the chase higher in stocks.

And Asia investors will continue to digest the softer credit impulse from the People's Bank of China which has asked banks to temper lending activities while simultaneously bumping capital requirements on systemically important banks. In the face of recent risks to global financial markets from the Archegos incident, the PBoC might believe it’s prudent to fortify their own house of cards against similar incidents in China. A softer China credit impulse is not great for risk, especially through the commodity channels.

Oil Markets

The oil market has had trouble finding its feet, let alone an equilibrium, but the range trade may beckon.

Oil prices nudged lower this morning after the American Petroleum Institute on Tuesday reported a larger expected build in gasoline inventories but was somewhat offset by a modest draw in crude oil inventories of 2.618 million barrels the week ending April 2. But the rise in gasoline inventories is coming at an inopportune time as the market frets about more barrels coming back to market be rebranded Iranian oil via the China supply chain or OPEC + revisiting a tapering strategy.

Despite a slightly weaker US dollar, oil and energy sectors are having trouble shaking Monday's brutal move lower. There are many reasons for the changing sentiment, be it OPEC+ revisiting their taper strategy, US/Iran talks hanging ominously over the supply side of the markets, rising US rig count, or even China's softer credit impulse.

The reality could be that investors are turning face on thoughts of riding a glorious oil supercycle and are now backpedaling on a very bumpy road to recovery while mounting a wobbly unicycle. There was so much optimism repriced in the reopening narrative. But with Covid-19 continuing to raise its ugly head globally, thoughts of a summer travel boom could be but a pipe dream as governments worldwide will continue to impost strict quarantine protocols. And without jet fuel picking up the slack, oil prices could remain on the revolving carousel of headline risk.

The start of Q2 has not been kind to oil prices. Getting little impetus from the gnarly news flow and still struggling for the profit-taking hangover as sellers drift down from $70 was accelerated as prices dropped down through $67/bbl on February 18, triggering a cascade of profit-taking after the year-long rally.

Indeed, the physical market showed fewer signs of tightness. Still, investors focused on momentum strategies changing direction into Q2. That move was doubtlessly exaggerated as large producers hedged the highest prices for the cal-22 strip (March 25) seen since November 2018. And this is bearing out in the recent CFTC data which suggests producer hedging strategies could limit topside ambitions.

Oil traders may find comfort buying dips knowing OPEC+ will closely monitor macro conditions via monthly meetings on the flip side of the coin. There should be little doubt the group will step in to put a floor on the oil price macro conditions deteriorate.

Dare I say the range trade beckons?

Currency Markets

The dollar seems to have turned a small corner on the Euro with month-end demand and rebalancing in stocks out of the way. Europe's delays on vaccination and renewed lockdowns are priced by now, and eventually, there should be more positive headlines to support the EUR. Indeed, the Euro's relative resilience may reflect headlines that suggested better days ahead for the EU's stuttering vaccination programme.

The foremost opportunity in G10 FX markets could be positioning for European activity's likely recovery. Vaccinations look set to accelerate significantly in April and May, and experience suggests current lockdowns will lower Covid case numbers relatively soon. Indeed, this should be positive for the EUR.

The Malayisian Ringgit

The ringgit remains mired between the competing forces of softer US yields and lower oil prices as energy sectors struggle to shake Monday's sneaky but ferocious sell-off. And with US yields basing the fuel that drove the MYR higher, that could be evaporating. With higher oil prices and lower US yields, stars don't both align and the ringgit could struggle to break higher ground. And just as worrisome for commodity exporters like Malaysia is China telling banks to rein in lending, which softens China’s credit impulse – and not favorably for the MYR as Malaysia has strong export ties with China.

The US Dollar

USD seems more influenced by risk-on risk-off than under the "US exceptionalism" theme. This partially explains why the USD didn’t rally despite excellent unemployment data last Friday, followed by a sizzling ISM. And with US rates not following through higher, it suggests the market is reducing long USD positions by not entertaining Fed policy normalization "exceptionalism" from the FOMC statement at this stage of the recovery. Even though the data was stellar, the market knows Chair Powell has witnessed enough mistakes at the central bank to see that he needs to be patient with policy. 

All of which is good for shiny things like gold!

Gold Markets

Gold jumps as USD and yields fall, and with USD not responding to "US exceptionalism", it still leaves room for further price climbs.

Gold prices firmed in volatile Asian and European trading as the Easter holidays ended and full trading got back underway. Gold received support from the FX markets as EURUS retained Monday's gains, putting gold on a firm footing. And as we all know, gold in a dollar-weaker environment tends to remain tethered at the hip to the Euro.

But, ultimately, it was USD weakness and an easing in yields during US trading that effectively provided the accelerant to rally gold and silver.