Europe trades mixed, commodities rally

After a stronger start out of the blocks, European markets are trading in a mixed fashion, with the FTSE outperforming its peers. 

Heavyweight miners and oil majors are helping keep the FTSE afloat while the Dax trades in the red. Commodities are powering higher on Monday, supported not only by the weaker US dollar but also by reopening optimism and hope of large-scale infrastructure spending in both US and China. 

The reopening trade continues to show itself in the commodities space, with base metals on the rise. China’s benchmark iron ore rallied 10% to a record high, and copper also reached a fresh record high. Strength in the commodity market inevitably feeds back down into the materials and cyclical sectors, including the miners. Rio Tinto trades at an all-time high while Anglo American and BHP Billiton trade at the highest level since before the pandemic. 

The boom in commodity prices supports the rotation in value that has been very much in focus over the past few months.

Looking ahead to the US open, the Dow Jones is pointing to a firmer start while the tech-heavy Nasdaq is on the back foot – further evidence of the rotation out of growth and into value. 

There is little on the US economic calendar today. Investors will continue to digest Friday’s shocking US jobs numbers while looking ahead to US inflation data, which is due later this week.

Concerns the Fed could move sooner to start scaling back monetary support have been in focus over the past few months as the US economic reopening gathers pace. While Friday’s non-farm payroll report justifies the Fed’s dovish stance, a sharp rise in inflation could unnerve investors quickly. On the other hand, a weaker-than-expected read coupled with a weak jobs report could be the signal that bulls need to charge to fresh all-time highs.

FX - GBP outperforms on ULK election results, weak US NFP

The US dollar edged lower after last Friday’s steep sell-off and continues to trade around two-and-a-half-month lows following the shock non-farm payroll report. The US created 266k jobs versus expectations of almost one million. The data highlighted the erratic recovery in the labour market and validated the Fed’s dovish position, sending the US dollar tanking.

Today a slight pick-up in US treasury yields is offering some support to the greenback.

The pound is outperforming its G10 peers, soaring towards 1.41 following local UK elections and the weak US jobs report. The Scottish Nationalist Party won the regional elections north of the border but failed to secure an absolute majority. While the SNP will continue pushing for another independence referendum, the lack of an absolute majority means the pound is breathing a sigh of relief.

Reopening optimism is also supporting sterling. Prime Minister Boris Johnson is set to announce the next step in easing lockdown restrictions.

Oil supported by a cyberattack on key pipeline

Oil is trading higher, extending gains from the previous week amid continued efforts to restore production following a cyberattack on a top US pipeline. The attack happened on Friday, and efforts to get operations back up and running as quickly as possible are in full swing. 

The pipeline in question provides nearly half of the East Coast supply, so the attack has understandably rattled the markets. The quicker operations can be restored, the less impact this event will have. However, with no solid timeline in place as to how long it will take to normalise operations, the price of oil is likely to remain well supported.

The disruption comes as the US continues to reopen its economy, boosting the demand outlook. However, a Covid outbreak in Australia has led to new restrictions being imposed. Elsewhere, Indian Prime Minister Narendra Modi is under mounting pressure to impose a nationwide lockdown as Covid cases remain elevated in India, the world’s third-largest importer of oil.

Gold extends gains

Gold is building on last week’s impressive gains and hovers around a three-month top. The yellow metal surged 3.5% across the previous week in its best weekly performance in five months after sharply below-consensus jobs data. The shockingly weak non-farm payroll report validates the Fed’s dovish stance, and fears they will taper support earlier now appear unfounded in light of the weak jobs report.

The data offered just the confirmation gold bulls were looking for, cementing the idea that interest rates will stay low for longer, which is good news for non-yielding gold. Lower interest rates reduce the opportunity cost of holding the non-yielding precious metal.