Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Sentiment soured badly in the US yesterday and in Japan overnight, aggravated by a broadly stronger JPY there. Japan may be on the verge of declaring a new state of emergency in Tokyo and Osaka, just a few months before the Summer Olympics are supposedly to be held. Elsewhere, Netflix dropped badly after hours on disappointing subscriber growth, the USD joined the JPY in strengthening, and Gold rose again as yields dropped.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities sold off for a second day in a row yesterday, as the Nasdaq 100 Index reversed below the prior major high near 13,900. The 21-day moving average there is perhaps the next focus lower if the consolidation continues, and the recent rally only faces an existential test down in the 13,300 area. The S&P 500 has far more room to fall without negative consequences for the trend, starting with the 21-day moving average (currently 4,055, or about 1.5% lower) and then the 3975-4,000 area.
STOXX 50 (EU.I) - European equities hit a speed bump yesterday erasing two weeks of gains falling 2.1% below the previous support level at 3,900. It seems the initial catalyst was the news out of Japan that Tokyo and Osaka are asking the government to roll out new lockdown as the situation worsens extending on recent weeks of bad news with also a new variant in India being a concern. Short-term sentiment has rebounded a bit with STOXX 50 futures above 3,900 this morning, but yesterday’s low at 3,889 is today’s key support to avoid a follow-through sell-off.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin has so far failed to follow through lower after the traumatic weekend sell-off but hasn’t rallied sufficiently to allay concern that new downside momentum could mean another sell-off wave. Technical levels look to be the big round levels 50k and then the 42k-40k area that was the focus on the way up, starting early this year. Ethereum has tried to pull back higher, but found resistance at a key 61.8% Fibo retracement at 2,360. Structurally speak, Ethereum likely needs to hold 2,000 to avoid more significant damage.
EURUSD and AUDUSD – the break above 1.2000 in EURUSD is suddenly looking a bit more tenuous, although the pair has largely avoided the more significant corrections in other USD pairs more sensitive to risk sentiment. But EU yields reversed sharply yesterday, so that particular leg of support was suddenly taken away from the euro, and perhaps worth noting that the daily close was right on the 61.8% Fibo retracement of the most recent sell-off wave at 1.2037. If the pair consolidates further, besides 1.2000, we can focus on the 200-day moving average (currently 1.1923) and key Fibo levels (1.1936 and the existential 1.1848. AUDUSD sold off badly yesterday from the intraday highs, showing traditional sensitivity to risk sentiment. The sell-off has partially neutralized recent bullish developments and any close south of 0.7650 could be a warning that a more profound retrenchment is in order, perhaps toward 0.7400, while a rally and close above 0.7800 would erase the bulls’ concerns here.
JPY crosses – the USD and JPY are both stronger after yesterday’s one-two combo of weak risk sentiment and lower bond yields, making the JPY crosses more interesting to observe separately from USDJPY. And EURJPY and AUDJPY offer two examples of bearish developments, as both saw sharp rallies that were quickly rejected, boosting bearish reversal formations that set up bearish technical interest for follow-through lower – albeit likely requiring a run of further strength in sovereign bonds (lower yields) and more pain in equities to drive significant further JPY strength. Technically, the 82.50 area in AUDJPY is worth watching as it resembles the neckline of a head-and-shoulders formation, while the EURJPY “double top” set-up was confirmed with yesterday’s shooting star reversal.
Crude oil futures (OILUKJUN21 & OILUSMAY21) trade lower amid the risk of another coronavirus flare-up in Asia once again hurting demand forecasts, thereby putting into doubt the ability of OPEC+ to proceed with their announced production increase. Adding to the unease was an industry report showing a rise in US crude stocks while EIA surveys point to a drop of +3 million barrels. Prices are back on the defensive following last week's breakout with focus on the 21-day moving averages at $64.25 in Brent and $60.80 in WTI.
Gold (XAUUSD) once again managed to bounce from the key $1760-65 area, supported by softer yields and dollar as well as geopolitical developments and companies starting to pass on higher input costs to consumers. With sell stops from recently established longs building below $1755, gold needs to move higher soon. While ETF redemptions has grinded to halt, large scale short covering in the futures market has yet to be seen, especially from longer term trend funds, which in aggregate have the biggest percentage of gold shorts. For that to happen the metal as a minimum needs to break above $1810.
Netflix (NFLX:xnas) shares were down 9% in extended trading on disappointing subscriber growth numbers for Q1 and muted expectations for Q2. The closing price in the extended trading will put Netflix shares right at the support levels around 500 observed three times back in March.
Ten-year Bund and twenty-year US Treasury auctions will set the tone ahead of the ECB meeting (IS0L, TLT, IEF). European sovereign's sentiment improved yesterday, and today it remains supportive of European sovereigns following a miss in CPI (Consumer Price Index) number in the United Kingdom. However, sentiment could quicky change during today’s 10-year Bund and 20-year US Treasury auction.
What is going on?
Japan may have to declare emergency in Tokyo and Osaka, ex-minister says Olympics should be cancelled or postponed - this, together with a sharply stronger JPY heavily impacted risk sentiment in Japan overnight. Domestic polls show broad resistance to holding the games, with 70% against.
New poll in Germany shows Greens leading CDU by wide margin, 28% for the Greens and 21% for the CDU/CSU bloc. This comes just after the CDU chose Armin Laschet as its new leader and likely Chancellor candidate, although sister party CSU has yet to weigh in with its approval of his candidacy and their more popular leader Markus Söder has yet to accept Laschet’s candidacy.
Nomination hearing today for Lina Khan, who Biden nominated as an FTC commissioner. The rising star law professor has strong views on novel antitrust approaches against the internet giants that dominate US equity market cap, based on a more than the “consumer harm” principle of the past many decades. A profile of the nominee.
ASML announces blistering growth. The world leader in machines used for manufacturing semiconductors is riding the wave of extraordinary demand for computer chips which have spurred new construction of semiconductor manufacturing plants around the world. ASML expects 30% growth this year compared to 16% expected by analysts.
What are we watching next?
ECB meeting tomorrow – looks suddenly less critical for the ECB as yields retreated sharply yesterday in the wake of an ugly shift in risk sentiment. This could largely render the meeting a non-event, though we should watch for any comments on recent rises in, for example, the Portuguese yield spread. More pivotal for the longer cycle is likely the German political situation as we looked at yesterday, where Green involvement in a new government after the late September election could transform Europe to a new era.
Earnings reports this week. Johnson & Johnson reported strong Q1 results yesterday lifting 2021 guidance while getting the EU drug regulator’s approval on its Covid-19 vaccine saying there is a link between the vaccine and rare blood clots, but that benefit-risk remains positive. Good FY21 Q3 earnings (ending 31 March) from Procter & Gamble delivering a bit higher organic growth than expected, but more importantly the consumer staples company said that it will start raising prices on certain consumer products such as diapers starting in September as input costs are rising. Netflix was the big negative surprise yesterday with shares down 9% in extended trading as net change in subscribers in Q1 missed a lot and Q2 outlook for subscriber growth is muted. Today’s most important earnings release has already been announced from ASML seeing huge growth in 2021 up 30% compared to 16% consensus expectations.
Economic Calendar Highlights for today (times GMT)
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