Markets Remain On Fragile Footing As The Week Wraps Up

N.B. – No note on Monday due to the UK bank holiday, back to normal from Tues 27^th May

WHERE WE STAND – I guess ‘more of the same’ aptly sums up the market action yesterday.

Treasuries continued to sell-off across a steeper curve for much of the day, though the move pared as trade progressed, after the House passed a revised version of President Trump’s ‘One Big, Beautiful Bill’, sending it on to the Senate. While various committee stages must now be dealt with in the upper house, the aim is still to have the Bill on Trump’s desk in time for Independence Day. Still, the passing of the Bill wasn’t exactly a surprise, hence I was somewhat surprised to see markets receive the news as poorly as they did, with benchmark 30-year yields briefly trading to 5.15%, and fresh highs since October 2023, even if this was a ‘blink and you’ll miss it’ kind of move.

I suppose this speaks to the ongoing degree of nervousness around the fiscal backdrop in the US, but also on a global level, where deficit concerns continue to play on the minds of market participants everywhere. Justifiably so, frankly, given that there seems little-to-no desire among governments to get a grip of the situation.

That’s patently clear here in the UK too, where data yesterday pointed to a £20.2bln budget deficit in April, the 2^nd highest on record for the month, excluding the pandemic. This, of course, despite revenues having risen by almost £6bln YoY amid a chunky rise in employer National Insurance contributions. More tax hikes, and more spending cuts, are likely on the way in the Autumn Budget, which reminds me of the famous adage that ‘insanity is doing the same thing over and over again and expecting different results’.

Back to the US, it’s too early to say for sure, but I wonder whether we could be getting close to the beginning of a classic ‘bonds break stocks, until stocks break so much that they fix bonds again’ cycle. To be clear, that’s not my base case, and I remain in dip buying mode, but there has been a perhaps worryingly close correlation between higher yields and weaker equities over the last few days. We didn’t really see that dynamic yesterday, though, at least on a closing basis, with the S&P closing basically unchanged – 6k, then fresh highs, remain my targets for the time being.

Outside of the equity complex, yesterday was ‘flash’ PMI day across the globe. The eurozone metrics were a touch softer than expected, with the composite output gauge falling to a 6-month low, and the EUR subsequently surrendering the 1.13 figure as well. Here in the UK, though the services sector expanded once again in May, the composite output gauge remained beneath the 50 mark, implying contraction once more, and reinforcing the view that the 0.7% QoQ GDP growth seen in Q1 is probably as good as things will get this year.

Lastly, to wrap up with commodities, crude benchmarks barrelled lower on the day amid Bloomberg reports that OPEC+ are set to discuss, and likely approve, another jumbo 411k bbl per day output hike for July. This is very much in keeping with prior reporting, so shouldn’t be too surprising, though does serve to further reinforce my views that, firstly, what we see in the oil complex right now is a war for market share not a battle to prop up prices; and, secondly, that the OPEC+ ‘alliance’ will probably collapse entirely within the next year, amid dismal levels of compliance.

LOOK AHEAD – Finally, it’s Friday, and almost time for a cold beverage to wrap up the week.

A light-ish data docket lies ahead, with little by way of prints that are likely to be market-moving. We are, though, due to receive the latest retail sales prints from both the UK and from Canada, in addition to last month’s US new home sales report.

Besides that, a handful of central bank speakers are due, while the usual caveats around de-risking into the weekend, and gapping risk after it, must apply. On that note, both London and New York will be closed Monday for public holidays, so expect considerably thinner than usual trading conditions, in those markets that are open, as next week gets underway.