Market Quick Take - July 19, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the broad-based sell-off deepened on Friday and has taken the major indices closer to their first key support, the 21-day moving average, which is still some ways off for the Nasdaq 100 (near 14,575) but already in play for the S&P 500 index at 4,300. Concerns for the market seem centered on the rapid spread of the delta variant of Covid, although so far, the current scale of consolidation looks rather run-of-the-mill, given the scale of the prior run-up before the recent softness set in. Earnings reports are unlikely to act as a negative driver this week.

Nikkei 225 (JP225.i) – the Nikkei 225 has plunged again overnight, in part in response to the weak close to the week in Wall Street last week, but also as the JPY has firmed notably and as Japan deals with its own idiosyncratic risks like the Tokyo Olympics starting this week and whether these are set for disruption from Covid concerns. Technically, very pivotal levels in play here for the index, as it has traded slightly below the 200-day moving average, which was tested on July 9^th without breaking, and the 27,385 level was the low in May, and for the year and somewhat resembles a head-and-shoulders neckline.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Cryptocurrencies are trading heavily with little dynamism in the price action ahead of major support levels, especially 30k in Bitcoin and the 1,700 area in Ethereum.

EURUSD – the most important of FX pairs saw indeterminate price action last week right around very pivotal levels below 1.1800, ahead of this week’s ECB meeting, which is widely expected to see ECB extending dovish guidance, but with widening dissent on the course of action from here, as discussed in the ECB preview below. So far, the pair has held up well, given that the USD tends to do better when general risk sentiment is week. If 1.1775 falls, the next areas of note to the downside are the 2021 low at 1.1704 and then perhaps the 1.1600 area.

AUDJPY and AUDUSD – the Aussie and other currencies are trading as heavily against the JPY as the USD, as the former is thriving on the combination of falling safe-haven bond yields and weak risk sentiment. AUDUSD has broken below the major 0.7400 area, which marked a major peak on the way up in late 2020, and this opens the door back all the way to 0.7000 if global risk sentiment suffers a major setback. Meanwhile, AUDJPY is now flirting with the 200-day moving average at 81.15, the first time it has traded at this MA in over a year. The next major level of note there is the 78.50 area that was a major peak last August as the general post-Covid reflation trade seems under pressure here. On the economic calendar, note that the Australian RBA releases its latest meeting minutes tonight and June Australia Retail Sales are up on Wednesday.

Crude Oil ended last week near major support in Brent at just above 72.00/bbl while WTI actually dipped slightly below the 70.76/bbl pivot on Friday without closing below. At the weekend, OPEC+ saw Saudi and the UAE meeting half-way in a dispute over production quotas, with a new target of a 400k bbl/day increase starting next month. The meeting also saw increases in “baselines” for production quotas for the UAE, Saudi Arabia and Russia beginning next May. Fresh Covid concerns could keep a lid on demand projections and provide headwinds this week.

Gold (XAUUSD) toyed with key resistance last week – the 200-day moving average around 1,830 but never really threatened the big drop post-June FOMC meeting, which would have required the recent rally vault clear of 1.850. Last week’s highs just above 1,830 mark an important technical pivot for the action from here, while any decline back below 1,800 is a risk if inflation expectations dip and/or the USD continues to firm, with 1,750 the major pivot low from June.

US Treasuries (SHY:xnas, TLT:xnas, IEF:xnas) Long US treasuries rallied again to close the week, taking the US 10-year Treasury benchmark yield back below 1.30% and near the lows for the cycle since February as risk sentiment close last week on a sour note. The US Treasury will auction 20-year T-notes on Wednesday and 10-year TIPS on Thursday.

What’s going on?

Covid concerns continue to provide a concerning backdrop, with the UK’s “Freedom Day” coming at a particularly bad time amidst a spike in UK cases and Prime Minister Boris Johnson himself isolating after meeting with a Covid-positive Health Secretary Sajid Javid. In Japan, the Tokyo Olympics are a focus, with a US tennis player and South African athletes testing positive. Case counts are spiking in many geographies, with the US case count rising 68% from the week before.

US Treasury Secretary Yellen casts doubt on Trump trade deal with China. Yellen said that tariffs assessed “were not put in place on China in a way that was very thoughtful” and that these represented a tax on US consumers and “the type of deal that the prior administration negotiated really didn’t address in many ways the fundamental problems we have with China.” There is no clarity on what would replace the existing deal, however, as US-Chinese tensions are as bad as they have ever been recently.

What are we watching next?

ECB meeting on Thursday – Expect the ECB to give more insights on the implications on monetary policy of its new strategy and to adjust its forward guidance. We could see the ECB bring some clarity to its definition of the end of the Covid-19 crisis and to link more explicitly the APP to the new inflation target set at « 2% » from « below, but close to 2% ». With uncertainty prevailing regarding the macroeconomic impact of the delta variant in Europe, we see ECB president Christine Lagarde leaning dovish. But behind the scenes, expect a very heated debate between the doves and the hawks about the future of bond purchases.

Earnings for the rest of this week. We are moving into the heart of the earnings season starting this week, with many prominent names reporting. Netflix reporting on Tuesday, and Intel and Twitter, both reporting on Thursday, are perhaps the highlights of the week, in terms of heavily traded equities.

• Monday: IBM
• Tuesday: UBS, Netflix, United Airlines, Halliburton
• Wednesday: ASML, Daimler, SAP, Johnson and Johnson, Verizon, Texas Instruments, Anthem, Tenet Healthcare
• Thursday: Unilever, Intel, AT&T, Twitter, Snap, Biogen, Union Pacific, American Airlines, VeriSign
• Friday: Honeywell, American Express, Schlumberger

Economic Calendar Highlights for today (times are GMT)

• 1400 – US Jul. NAHB Housing Market Index
• 2330 – Japan Jun. National CPI
• 0130 – China Rate Announcement
• 0130 – Australia RBA Minutes of July policy meeting

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