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Stocks stumble as commodities and Treasury yields rip

Vantage Updated Updated Tue, 2024 April 2 09:08
Stocks stumble as commodities and Treasury yields rip


* US Dollar hits five-month high while jawboning supports the yen

* Dow drops near 400 points as Wall Street starts Q2 on sour note

* Treasury 10-year yield posts five-month top as bets on June rate cut cools

* Gold shatters new records as Mideast tensions add to bullish mix

FX: USD pushed higher to a new peak at 105.10 before pulling back. Job openings held firm, while quits – a measure of workers seeking higher wages – stayed level. A long-term Fib retracement level of the Q4 sell-off sits at 104.77. Treasury yields continued higher with the 10-year advancing to a four-month high at 4.40% and next resistance. However, it retraced closer to the important long-term level around 4.33%.

EUR dropped to 1.0724 before rebounding. German CPI was softer than expected but the chances of an ECB rate cut before June are very remote. There is just a few bps priced in for next week’s meeting. The two-year EUR/USD swap rate differentials were at their widest in over two years at the start of yesterday. Inflation data for the region is published today. 

GBP is the second worst performing major on the week, just ahead of the CHF. Gilts were hit hard after catching up from the Easter break in the UK. Cable is still trading below the 200-day SMA at 1.2588.

USD/JPY was little changed, remaining just off the 152 barrier with the intraday peak at 151.80. The longer prices trade sideways in narrow ranges, the bigger the range expansion will be.

AUD was the top major on the day as it made its way above 0.65. The RBA minutes had little impact on price action. USD/CAD traded in a narrow range and printed an “inside day”. The BoC’s Business Survey pointed to little need for policymakers to rush policy easing.

Stocks: US equities closed in the red as higher bond yields and falling rate cut expectations might be starting to impact. The broad-based benchmark S&P 500 finished 0.72% lower at 5205. The tech-heavy Nasdaq 100 lost 0.94% to close at 18,121. The index was down as much as 1.58% intraday. The Dow Jones settled 1.00% down at 39,170. Healthcare was the biggest losing sector as insurers suffered a setback with a US government ruling keeping health plans unchanged. Energy was the outperformer as oil hit multi-month highs amid crude supply pressures and potentially stronger demand. Tesla lost 4.90% after very poor first quarter EV delivery figures. (386k vs 449k expected)

Asian Stocks: APAC futures are in the red. Markets were mixed on Wednesday after a weaker Wall Street. The Hang Seng played catch up after its holiday while the mainland was mixed. The ASX 200 printed a new record high with commodity-related strength contrasting with consumer stocks.

Gold: Prices broke to more new highs at $2279. Higher gold prices are usually associated with a softer tone in the USD and bond yields so gold strength and firm USD and yields seem odd. ETF buying has also fallen this year in contrast to gold’s 9%+ appreciation.

Day Ahead – Eurozone CPI, US ISM Services

The latest EZ inflation figures are due today. Flash data for March is set to show headline CPI slowing to 2.5% y/y, from 2.6%. The core metric should nudge one-tenth lower to 3.0% y/y. The prior report saw base effects do most of the heavy lifting. This time around, an early Easter should boost tourism-related services more than usual in March. Additionally, services components other than tourism are expected to remain relatively sticky. Once again, it’s all about services inflation momentum which has been picking up lately, and the strength seems to be broad-based.

After the much stronger than expected ISM manufacturing on Monday, focus turns to ISM Services. Expectations are for the headline gauge to rise to 52.7 in March from 52.6. As a comparison, PMI services eased to a 3-month low in March as ongoing cost of living pressures and rising fuel prices were evident. That said, confidence hit a 22-month high with wage growth still solid. Another big beat and higher prices paid will hit June rate cut bets further. These are currently around 60/40 in favour of a move.

Chart of the Day – EUR/USD struggling to get back above 1.08

A hawkish outturn in the inflation data could see a pullback in some of the recent conviction in an ECB June rate cut. This is now priced at around 90%. It could also see the market scale back expectation of easing later in the year which has three cuts fully priced in and a roughly 45% chance of a fourth. On the flip side, figures in line with, or cooler than forecast should further cement the case for a June cut. EURUSD’s year-to-date February low is 1.0694. The bear trend is realtively entrenched after three straight weeks of losses, while last week saw prices fall decisively through 200-day SMA, now at 1.0832. The ISM data could also cause volatility with the market centred on bets around near-term Fed rate cuts.