Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: Yesterday saw German bund and EU sovereign yields suddenly lurching higher, in part in sympathy with a move higher in US treasuries ahead of a speech tomorrow from US Federal Reserve Chair Powell. The US equity session was quiet, even as new all-time highs were posted before sentiment rolled over in Asian hours, as South Korea surprised with a rate hike and China tech companies in particular reversed back lower after a recent sharp rally.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures had its most uninspiring session yesterday with a small trading range and little action to drive US technology stocks higher. In early European trading, Nasdaq 100 futures are turning lower with the 15,235 level as the first support level. We expect market activity to be slow today as the market is positioning itself for the Jackson Hole event.
EURUSD and EURJPY – yesterday saw EURJPY fully reversing its latest sell-off wave and poking back above the 200-day moving average near 129.25, likely on the pop in EU sovereign yields (see ECB comments below). Whether the move sticks in EURJPY will likely have to do with the direction from here for global safe-haven bond yields, particularly US treasuries. That leads us to EURUSD and the US treasury yields over tomorrow’s speech from Fed Chair Jerome Powell and whether this triggers and reaction in US yields and the USD, as EURUSD trades in limbo between the recent lows below the formerly pivotal 1.1700 and 1.1800. If EURUSD can close back above the latter for this week, bulls have solid evidence that the lows are in for the recent cycle.
AUDUSD – the recent Aussie rally has still fallen short of the key 0.7304 level (61.8% Fibo) in its late sharp rally attempt off the 0.7106 lows as extended gains yesterday to 0.7280 before easing back overnight on a softening of sentiment in Asia. AUDUSD needs to achieve a rally back above 0.7300-50 to indicate a neutralization of the downside threat. A renewed focus on the recovery driving commodity prices is a first key for an Aussie recovery, with secondary factors like the direction in risk sentiment and Australia finally getting ahead of its Covid outbreak also in the mix.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - cryptocurrencies lurched lower in the Asian session, with Bitcoin poking at the lowest levels in more than a week near 47k as of this writing, while Ethereum is also under pressure, if still trading above its sub-3,100 lows of yesterday.
Gold (XAUUSD) trades lower for a third day with risk appetite fading ahead of Jackson Hole. After getting rejected at $1810, the 200-day moving average, gold has drifted lower despite seeing both Treasury yields and the dollar trade steady. A sign the traders are cautious about gold negative surprise but also one that could spark a recovery should Powell fail to deliver a hawkish speech. The July dislocation between falling Treasury yields and stable gold prices may indicate current gold prices are already pricing in a potential 0.25% rise in the 10-year real yield. Support in the $1775-80 area. In silver (XAGUSD), total ETF holdings has now reversed all the 3,500 tons that was added back in early February when the Reddit army tried to trigger an unsupported price squeeze.
Crude oil (OILUSOCT21 & OILUKOCT21) trades lower after rising almost 10% during the past three trading sessions. Yesterday’s gain was supported by a bullish EIA storage report, but the prospect for rising crude stocks as refinery demand slows and the US government prepares to sell 20 million barrels from its strategic reserves, has driven WTI’s discount to Brent to a four-month high. While the virus has been contained in China, the persistent spreading of the delta variant, especially in Asia may curb further short-term gains. Ahead of the September 1 OPEC+ meeting to discuss production levels, the focus now turns to Jackson Hole and the (limited) risk of Fed chair Powell delivering a speech that could impact the dollar and the general level of market risk appetite.
Today’s 7-year US Treasury notes auction might spur volatility (IEF:xnas, TLT:xnas). Yesterday’s 5-year note auction received good demand, but the bid-to-cover ratio was below the five-year average even following stellar demand at the 2-year notes the day before. It looks like the longer the maturity, the less the market appetite. Thus, today's 7-year auction may spur volatility as it is one of the least-loved maturities, besides being dangerously close to the Jackson Hole Symposium.
European sovereigns had their worst day in six months (VGEA:xetr, BTP10:xmil, IS0L:xetr). Italians and German government bond yields rose the most since February as investors were reducing risk ahead of the Jackson Hole meeting. To add to the selloff, Guindos said that the ECB could revise upward its economic projections spurring reflation trade fears across the market. It is critical to accept that Bund yields are now closely correlated to those of the United States, and as yields rise in the US, we expect yields in the old continent to follow.
What is going on?
South Korea hikes interest rates - in a surprise move that made it the first Asian central bank to take rates higher with at 25-bp hike to 0.75% as it maintained its growth forecast for this year, but raised its CPI outlook to 2.1%, just above the 2.0% target and cited financial risks as a larger threat to the recovery than the course of the virus outbreak.
Salesforce, Snowflake, and Delivery Hero earnings take. Both Salesforce and Snowflake reported better than expected revenue and EPS figures for the previous quarter and both technology companies lifted guidance for the current quarter and the current fiscal year. Snowflake shares rallied in extended trading. Delivery Hero is reporting a wider than expected loss as the food delivery business is aggressively expanding its business.
Chinese technology stocks headed lower despite strong earnings. The Hang Seng Tech Index is down 5.8% from yesterday’s high despite a string of strong earnings this week from JD.com, Kuaishou Technology, Pinduoduo, and Xiaomi. But the common thread is the lack of guidance from many of the Chinese companies indicating that the near-term future is uncertain and that these companies do not know how their businesses’ profitability will be hit from the ongoing regulation.
Canada PM Trudeau wants surtax on Canada bank profits, and end to house speculation - in the election campaign ahead of the September 20 snap election, Canadian Prime Minister Justin Trudeau announced he would implement a 3% surtax on bank profits above CAD 1 billion and seek a two-year ban on foreign purchases of Canadian houses.
ECB speakers were in the front line. ECB Vice President Luis de Guindos warned that the ECB might revise up its macroeconomic projections at its upcoming meeting of 9 September given the recent solid activity indicators and little impact from the Delta variant on the eurozone economy. ECB chief economist Philip Lane was optimistic about the economic outlook too. However, he dismissed calls to discuss the end of PEPP in September. He rather advocated to focus on the pace of bond purchases during the coming quarter, especially if the Fed taper creates spill overs.
Mixed Germany August IFO index. Companies' assessments of the current situation jumped to the highest level since May 2019 (at 101.4). But their expectations plummeted to the lowest level since February 2021 (at 97.5). What was perhaps the most important is that two thirds of companies, in both manufacturing and retail sectors, want higher prices to cover rising costs. This is something to monitor very closely. It could have negative consequences on consumption.
U.S. July durable goods were better than expected. It was out at minus 0.1% against expected minus 0.5%. Demand mostly strengthened for motor vehicles and parts, defence aircraft and parts, machinery and primary metals.
What are we watching next?
Speech from Fed Chair Powell at Jackson Hole tomorrow - the expectations heading into the meeting tomorrow appear quite muted as the annual Fed symposium is not the platform for indicating anything too specific, for example, on the timing of the coming Fed asset purchase taper. Rather, any sense from Powell’s speech about the desired pace of an eventual taper or where the Fed focus is from here, or even any new realizations it has made over the course of the response to the pandemic, whether explicit or between the lines, could grab the market’s attention. In any case, for investors intent on taking a position in markets, this event risk is one to “get out of the way” before committing capital to trades and can spark volatility irrespective of outcomes.
US 7-year Treasury Auction today – this is one of the less liked maturities at auctions and comes the day before the Fed Chair Powell speech after a 5-year auction yesterday that saw demand a bit feeble as US treasury yields rose.
Earnings to watch today. In the US focus will be on Workday and Peloton Interactive with the former being a darling for many years and that seen massive tailwind during the pandemic. Peloton restarted selling its treads for exercising following the pause due to several accidents. Analysts expect Peloton to deliver FY21 Q4 (ending 30 June) revenue growth of 53% y/y. The Chinese EV-maker XPeng is the key focus among the Chinese stocks today.
Economic calendar highlights for today (times GMT)
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