Summary: A solid dose of risk-off hit the market yesterday even if it failed to stick, possibly as concerns on the Covid variants holding back the recovery reaching a critical threshold or merely as the recent rally was struggling to find further conviction as breadth was poor. US Retail Sales and the inflation expectations in the University of Michigan sentiment survey are the data highlights to close out this week.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – a bit of risk-off yesterday as the market suffered a broad-based sell-off with no distinct catalyst, save perhaps for Covid resurgence concerns reaching a critical threshold and the weak participation in this rally that we have noted in previous days. So far, the damage is limited, with the session closing off the lows and futures markets rallying overnight. The first sign of more profound weakness would be a break below 21-day moving averages for the major indices, coming in at around 14,560 for the Nasdaq 100 and 4,297 for the S&P 500.
Intel (INTC:xnas) announced that it is in talks to take over the privately held GlobalFoundries (an AMD spin-off owned by a UAE company that is owned by Abu Dhabi government but based in the US) for some $30 billion as it seeks to shift gears back toward expanding chip production. Potentially complicating the takeover is that Intel directly compete with AMD, whose chips are produced by GlobalFoundries.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Cryptocurrencies came under pressure yesterday in a possible sign of correlation with general risk sentiment. Bitcoin traded below 32k, still well ahead of the critical 30k area, while Ethereum only settled slightly lower, still below 2,000. Coindesk noted that Google searches for “Bitcoin price” reached a 7-month low.
EURUSD – the EURUSD is the USD benchmark for now as we watch whether the key 1.1775 area (and arguably down to 1.1705, the 2021 low) survives this latest sell-off. Yesterday’s action suggests that the USD will win out if the risk sentiment suffers a more profound setback here, with 1.1600 the next major level lower. Meanwhile, a next key step for the EUR side of the pair is next week’s ECB meeting, which is expected to bring new assurances that the ECB will not suddenly wind down QE upon reaching the end of its emergency PEPP purchases at the end of Q1 2022.
AUDUSD – AUDUSD once again approached the brink of the key 0.7400 level yesterday in obvious correlation with the weak risk sentiment elsewhere before rebounding overnight as USD traders continue to mull whether pivotal USD resistance levels will survive. Meanwhile, AUD traders are caught between the negative drag on Covid-linked lockdowns in Australia on the one side and the positive news from commodities, as China’s iron ore futures broke to a new two-month high overnight.
Crude Oil fell again yesterday, perhaps in part on growing concerns that the Covid 19 variant will hold back some energy-intensive energies like international travel, but also as OPEC reported that it pumped 590k more barrels per day in June than in May. Local support for August WTI comes in near 70.76 and for September Brent just above 72.00 per barrel.
Gold (XAUUSD) is still trying to decide whether it can hang in there after yesterday’s attempt through the 1,830 area and above the 200-day moving average is still in play and the stronger US dollar is providing a headwind, as did a slight bounce in real yields on inflation expectation easing yesterday. Technically, gold is in limbo, needing at least 1,850 plus (thus erasing the rest of the slide since the June 16 FOMC meeting) for the rally to establish more credibility.
US Treasuries (SHY:xnas, TLT:xnas, IEF:xnas) Long US treasuries rallied again yesterday, though with a chunky consolidation of the move overnight as the US 10-year Treasury benchmark yield matched its lowest daily close for the cycle near 1.30%. The drama increases for the treasury market into the new month of August on how much of the move is related to liquidity issues (a crush of liquidity in the financial system seeing banks snapping up treasuries to park, in part on the US Treasury’s shift of funds that is set to stop at the end of this month) and how much is linked with a global lack of conviction in the longer term growth outlook.
What’s going on?
A second day of Fed Chair Powell testimony brought little new to the table as US treasuries rallied on a risk off day yesterday, while shorter term euro-dollar futures pricing Fed expectations were little changed after yesterday saw the rest of the reaction to the June US CPI spike erased, suggesting that the market is buying into the Fed’s expectation that inflation will prove transitory.
New Zealand Q2 inflation comes in much hotter than expected at 1.3% QoQ and 3.3% YoY and vs. +1.5% YoY in Q1. While this is the quarter that captures the “basing effects” of last year’s pandemic-related weak inflation, the sequential quarter-on-quarter inflation level will clearly be a concern and prompt the RBNZ to fulfill market expectations with a rate hike later this year.
China has launched a carbon trading scheme – an interesting first step that will initially only focus on 2,200 companies in the power sector before possibly spreading to other high-emissions industries. The scheme has been criticized internationally for over-generous emissions allowances and the starting price of carbon is some CNY 48 per ton (just under $7.50, compared with the current EU price of EUR 58.6 (nearly $70 per ton.)
The Bank of Japan to offer green loan incentives – stating after its meeting overnight that it will offer interest-free loans for climate-related loans or investments and exempting more of bank’s reserves held at the BoJ from the negative -0.1% BoJ policy rate. The BoJ also said that it would buy green bonds denominated in foreign currencies.
Positive UK unemployment data. The headline 3-month average unemployment rate held steady at 4.8% in May, while single-month estimate dropped back from 4.9% to 4.8%. Even with the end of the furlough scheme, it appears increasingly likely that unemployment will remain quite low in the months to come as UK is set to more fully open up from next week, although in the background, the fresh spike in Covid cases in the UK is a concern.
New lockdown in Australia’s two largest cities. As of today, Sydney and Melbourne will be both in lockdown to contain a new surge of COVID cases. Yesterday, 75 new cases were reported in their states. This is the fifth time that Melbourne is going through a lockdown since the outbreak in March 2020 and adding to the risk of ongoing impact is that Australia is far behind other developed countries in vaccinating its population.
What are we watching next?
US Jul. Flash. University of Michigan inflation expectations up later today. Survey-based inflation expectation measures are no exact science, but we will still watch the release of the preliminary University of Michigan survey today, which includes year-ahead and five-to-ten year inflation expectations. The latter have shown a determined upward rise in recent months to reach the highest level in nearly ten years at 3.0% in May before dropping back to 2.8% in June.
US Jun. Retail Sales out today: the fading stimulus vs. reopening boost – the last huge round of stimulus checks went out in March. This month sees the start of direct monthly child tax credit payments through December, although the magnitude of these is far lower, at $250-300 per child, than the $1,400 checks sent out in March. US Retail Sales have shown a clear response to the prior rounds of stimulus checks and since March US Retail Sales are slightly lower, with flat sequential growth expected for the June data release today (-0.3% month-on-month for the headline and +0.5% ex Autos and Gas), with strong surprises in either direction suggesting that consumers are spending some of their pent-up savings from the pandemic or showing signs of caution.
Earnings for the rest of this week. The last earnings reports of note this week include Charles Schwab and State Street, two financial services companies with more of a trading and investment management focus that may have struggled a bit this quarter on lower trading activity – certainly in the case of Charles Schwab and its more small-investor focus, while State Street’s clientele is institutional and its revenue has declined the last three quarters, with expectations for unchanged revenue year-on-year in its Q2 report.
Economic Calendar Highlights for today (times are GMT)
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