Overnight Headlines

* Fed’s Powell: Economy poised for stronger growth, virus a risk

* Alibaba shares up 5% in Hong Kong as China ends antitrust probe

* Australia abandons vaccine rollout target amid blood clot fears

US equities hit new record closes on Friday with the S&P500 and Dow both recording fresh highs. Cyclicals beat defensives with technology weaker, while healthcare led the market. With Asian stocks faltering, US futures point to a muted start to the week.

USD is broadly stronger against its major peers this morning as it battles with the widely watched 200-day moving average on the DXY. It is all about US bond yields at the moment…

US bond yields pulled back last week, which hurt the dollar but are edging higher at the start of a big week for issuance. The key debate for markets is how high rates might go before they become a problem; if volatility is contained, equities can continue on their merry way.

Market Thoughts

US Treasury yields have dipped this month, reversing some of the dramatic rise in February and March. This eased concerns that higher borrowing costs will hurt stocks, especially in growth sectors like tech, the darling of the mega rally over the last year. Debt auctions resume this week and could send bond prices lower and yields higher, which may hurt the stock market bulls.

Fed Chair Powell was on the wires over the weekend, striking an upbeat tone and pointing to fiscal stimulus and vaccinations as key drivers. “We feel like we’re at a place where the economy is about to start growing much more quickly” – sounds distinctly bullish to us, though he said that the coronavirus remained a threat.

Have we reached peak reopening and peak reflation? We will get a picture of this from the hugely anticipated US earnings season which kicks off this week. The bulge-bracket banks lead the way with Goldman Sachs, JP Morgan and Wells Fargo scheduled to report on Wednesday.

Currency Majors

EUR had its strongest week since December and was well supported by its 50-week moving average. A rebound above 1.19 should see EUR/USD aim for the 1.20, although last week’s high at 1.1927 will offer resistance. Prices need to pick up some bullish momentum, currently trading around the 200-day moving average.

GBP is toying with strong support at 1.3670 which has done a good job on four occasions so far. A clear break of this level is still possible, but sellers may struggle below next support at 1.3640.

JPY is starting the week on the back foot though it has enjoyed the month so far. USD/JPY goes the way of US bond yields and has enjoyed a stellar rise this year. Prices have sold off more recently, with the March highs around 109.36 offering strong support. A long-term trendline from 2016 is currently capping the upside but watch any move in US yields.

Key Events

Not too much on the calendar today, though the week gets busier from Tuesday.

In the euro area, the German business survey (ZEW) expectations have risen quite a lot in recent months, so a pause won’t be surprise (also in light of the new restrictions). 

In the US, all eyes are on inflation and retail sales. Inflation is set to rise significantly, mainly due to base effects. Retail sales were likely boosted by the third stimulus check. There are also several Fed speakers scheduled and markets expect them to remain reluctant to turn more hawkish until normalisation is underway.