Summary: The S&P 500 set another record yesterday with no change seen overnight despite some weakness in Asia driven China's regulatory curbs, the delta variant hampering the region's economic reopening together with a slump in semiconductor shares on chip outlook worries. Treasury yields trade softer, but near a one-month high following tepid demand at yesterday's 30-year auction. The dollar meanwhile remains close to key resistance which it so far has failed to break. In commodities, a production downgrade supports wheat, gold has found a small bid following a bumpy week while virus fears keep oil prices capped.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - rising US yields have already lost momentum and combined with good earnings yesterday, especially among technology companies, Nasdaq 100 futures have bounced back above the 15,000 level and trading around the average price since late July. S&P 500 futures on the other hand blasted higher yesterday to a new all-time-high and are trading above the 4,450 level in early European trading. With a quiet session and no major macro releases we expect a low volatility session with an attempt to set new highs in the S&P 500 or retreat mildly into the weekend.
EURUSD – bouncing off the local lows from early April as US interest rates have stopped their advance. We still see the USD could strengthen more from current levels with economic growth slowing in China, uncertainty over the delta variant, and potential more hawkish tone at Jackson Hole reflecting the positive momentum in the US economy. €1.1700 is the key support level to the downside while the upside is capped at €1.1755 before €1.1838 which is the natural gravitational point should it attempts to move higher.
Chicago wheat (WHEATDEC21) hit the highest levels in three months after the monthly supply and demand report from the US Department of Agriculture cut the outlook for production in multiple regions, led by Russia, the world’s biggest exporter. Corn surged the most since June and soybeans touched an almost two-week high before gains got trimmed ahead of the close. The downgrades all triggered by challenging weather developments across the world these past few months, and the report now leaves the outlook for these key crops increasingly tight ahead of the northern hemisphere winter, and the coming growing season in South America.
Gold (XAUUSD) is trying to consolidate following Monday’s flash crash that was triggered by the threat of rising yields and dollar. In addition, the slump on Monday was strengthened by the slump below an area of support-turned-resistance between $1750 and $1765. A break above would send a supportive signal to a market still dizzy following the latest rollercoaster ride. However, in order to look for a recovery silver needs to join in, and so far, it is struggling with the XAUXAG ratio trading above 75, its highest level and silver’s weakest against gold since December.
Crude oil (OILUKOCT21 & OILUSSEP21) trade lower again after managing a midweek bounce. The latest weakness in response to ongoing Covid-19 concerns and its short-term impact on demand. A development which yesterday led the IEA to reduce its demand forecast for the rest of the year. The biggest concern is the flare-up in China, where aggressive steps to contain the outbreak has led to reduce mobility.
What is going on?
Copper’s (COPPERSEP21) recent, and price supportive focus on potential supply disruptions in Chile is easing after BHP workers at Escondida, representing 5% of global output, voted to accept a final wage proposal. In recent weeks, the threats of supply disruptions have offset surging Covid-19 cases and worries about a Chinese slowdown hitting demand. With the risk of disruptions fading the market could, just like oil, see a period of sideways trading while the current virus outbreak is being brought under control. While resistance has been established above $4.4/lb, support has been equally strong below $4.20/lb.
South Korea export prices in Jul hits 16.9% y/y. South Korean manufacturers have raised prices the most since late 2008 consistent with inflationary pressures building in the global economy. The export price index m/m was whopping 3.5%.
Semiconductors stocks under pressure. The group was down 1.3% yesterday and among the worst segments in equities. The outlook for Chinese demand is worrying as soaring semiconductor prices are beginning to have an impact on demand. This could despite ASML reported highest ever demand in mid-July. The TWD and KRW were trading lower in Asian session. Tesla CEO Elon Musk also lashed out Renesas and Bosch on their failure to deliver semiconductors to the car industry.
Walt Disney shares up 4% on strong Disney+ numbers. Disney+ subscribers hit 116mn vs est. 113mn in FY21 Q3 (ending July 3) and group revenue hit $17bn vs est. $16.8bn with EPS jumping to $0.80 vs $0.55. Disney is also bullish on theme park demand which already running higher in the current quarter than the previous despite the surging Covid-19 cases in the US.
Airbnb and travel are back with bumpy ride still ahead. Airbnb is back on a strong growth trajectory despite various Covid-19 variants such as delta adding uncertainty over travel activity across many countries. Airbnb Q2 gross bookings were $13.4bn vs $11.2bn and EBITDA $217mn vs est. $50.4mn on $1.34bn in revenue showing that Airbnb is back at revenue level where economics of scale kicks in big time. Q3 revenue guidance is well above Q3 2019 and thus will be a record quarter for the company showing that Airbnb is out of the crisis despite the near-term visibility issues. Airbnb says in a statement: “In the last few weeks, we had our biggest night ever in the U.S. and our biggest night globally since the pandemic began, with more than 4 million guests staying at an Airbnb listing”. Despite the strong comeback Airbnb acknowledged that the delta variant will hit gross bookings and near-term outlook is uncertain. That was enough for investors to send the shares down 4% in extended trading.
What are we watching next?
Earnings to watch this week. Today the key earnings focus is on NetEase, one of China’s largest gaming companies, which has seen its share price decline by 18% as the Chinese is cracking down on the technology sector including gaming which is seen as toxic for kids. Analysts are looking for revenue of CNY 20.5bn up 13% y/y but EPS to decline both q/q and y/y. Trip.com Group is one of China’s largest travel-booking companies and has seen its share price decline by 43% taking the share price back to around the lows from 2020 when the world experienced its first wave of Covid-19 cases.
Economic calendar highlights for today (times GMT)
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2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
