The USD is mixed alongside cautious risk sentiment to start the week as markets look ahead to tomorrow’s CPI print. Equities in China closed 3% down on the day with Shanghai reporting a fresh record high in daily contagions yesterday, and the weakness in Chinese stocks as well as higher US yields is carrying into 0.3% and 0.7% drop in S&P500 and Nasdaq futures, respectively. France’s CAC 40 is up 0.7% from Friday’s close, leading all the major equity markets (and versus an unchanged Euro Stoxx 50) after Macron outperformed polls in yesterday’s first-round presidential election in France. French and periphery debt is broadly outperforming, showing signs of relief upon a diminished—but still elevated—threat of a Le Pen presidency that could fracture the European Union. The yield on 10-yr USTs is up 6bps (compared to +8bps in Germany and the UK and +1bp in France) as markets await tomorrow’s US Mar CPI print, with the continued widening of rate differentials seeing the JPY trade at a new cycle high above 125. Crude oil prices are down 3.5%—despite Iran saying the nuclear deal is in the “emergency room”—with a 2.5% decline in iron ore, while gold is up about 0.5%. The EUR is outperforming thanks to easing political risks while high-beta currencies strengthened against the dollar since the European open with CAD, AUD, and NZD trading practically unchanged at writing as equity futures recover some ground lost on limited developments. It is a quiet session ahead with no major data releases, although there’s a handful of Fed speakers on tap.
The GBP is marginally stronger to start the week as it follows broad dollar price action that saw the greenback weaken in recent trading. Cable may strengthen further this week on the back of jobs and inflation data out on Tuesday and Wednesday, respectively, that will invigorate market expectations for BoE hikes through the remainder of the year. As we’ve repeatedly noted, we believe markets are pricing in too many hikes from the BoE and the more tightening bets are placed the more GBP downside opens. Currently, the 125-150bps in additional rate increases reflected in OIS pricing is about 50-75bps than where BoE guidance suggests the bank rate will sit by year-end.
