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Trading on Friday was dominated by strong risk appetite and record highs in Dow and SP500 despite stronger inflationary pressures which pushed the US10YR Yield back up to 1.68%. GBP was the weakest performer in FX, while EUR and CHF were the top performers.
Going into the week, yields and inflation will remain top of mind. Also, while analysts are expecting strong earnings figures for Q1, there is also the question of how long the recovery can continue before another correction. If US inflation sparks another strong rally in yields, it will likely put pressure on stocks.
Themes for the Week
- Earnings: Q1 earnings releases commence this week, with JPM, GS, MS, Citigroup, BofA, Wells Fargo, Blackrock, Delta and PepsiCo reporting. Analysts are upbeat on earnings.
- Inflation: FED’s Powell will be on the wires twice in the coming week, so traders will be alert to any shift from his usual dovish stance. In this light, US CPI and any guidance from companies on price pressures may start to impact the FED’s outlook.
- EU’s Covid Issues: the EU is seriously lagging behind the US and the UK in terms of vaccine deployment and also COVID containment. This has been a drag on the Euro and traders will continue to monitor the evolving situation.
Data in the Week Ahead:
• FED Chair Powell Speech (Mon)
• BOC Business Outlook Speech (Mon)
• US10YR Bond Auction (Mon)
• GER ZEW (Tue) might come in lower due to new restrictions.
• US CPI (Tue) should come in strong after a big beat on PPI.
• RBNZ Decision (Wed) no change expected.
• ECB Lagarde’s Speech (Wed)
• FED’s Powell Speech (Wed)
• AU Employment Change (Thur) could come in stronger.
• US Retail Sales (Thur) should come in stronger on stimulus support.
• CNY GDP (Fri)
Correlation Report:
Comment: Yields continue to be the main driver of asset prices as highlighted by the high correlation between bond movements, commodities, risk FX, global equities.
On the Radar:
As it often happens, there are events this week that could very well shift the current risk-on trend. But until that happens, Dow and SP500 longs remain top picks.
Instead, in FX space, we need to take stock of the recent GBP weakness as well as strength in CHF and CAD. EUR strength has been more a function of USD weakness (via yields) so we are more cautious on EUR longs for the time being.