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Trading on Friday was volatile, as is usually the case with Non-Farm Payrolls. Initially, the stronger data played into the recovery theme, sending yields higher. But profit taking on bonds late into the session brought yields back down, and allowed for a massive recovery in risk assets. The US Dollar remained strong however, especially against CHF, JPY, EUR.
This week might start on a different note as President Biden’s $1.9 Trl package was passed on Saturday and will most likely be passed by the House this week. There was also strong China trade data over the weekend which might stabilise risk appetite…as long as yields don’t start climbing again.
Beyond the US fiscal package, focus will be on the Bank of Canada and ECB this week. US CPI might attract more attention as a stronger print might play into the recovery narrative and weigh on equities.
Themes for the Week
- Yields: yields remain the key driver of asset prices. Follow the US economic recovery narrative to understand the market’s reaction.
- Fiscal Stimulus: Analysts are uncertain what the effect will be, especially because it was mostly priced in already.
- ECB: the market is expecting some kind of verbal intervention to curb the rise in yields, as well as a possible expansion of the PEPP programme.
- BOC: analysts are expecting no change, but the improvement in GDP, rates, vaccines and housing suggests less stimulus is now required and a slight hawkish tweak to policy is required.
Data in the Week Ahead:
Correlation Report:
Comment: The rise in yields has been the main driver of asset prices recently as highlighted by the high correlation between bond movements, commodities, JPY and to a lesser extent, global equities.
On the Radar:
Risk assets might be harder to read this week. On the one hand there have been bearish divergences at the weekly level on Dow, SP500 and Nasdaq, but Friday’s recovery suggests a short-term bullish correction. On balance, we prefer selling into rallies unless new highs are posted.
Instead, Crude Oil and the USD remain undoubtedly bullish into this week. Strength is also seen in CAD, while the laggards in FX space are EUR, CHF, JPY.