Summary: Diverging fortunes for US equities yesterday, as value stocks and the broader index posted a strong session, while tech and momentum names were sideways. Overnight, most markets traded sideways to slightly higher, with the notable exception of China, which suffered a very weak session. Today the market is anticipating the June US jobs report and the reaction in not only the USD after its strong run lately, but also US treasuries.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures were undecided yesterday with large intraday range and closing a bit lower with Nasdaq 100 futures extending the declines this morning. The 14,500 level in Nasdaq 100 futures is today’s key support level. Across our theme basket the biggest price action remains in our NextGen Medicine basket which was last month’s biggest winner.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Rather uninspiring price action in the cryptocurrency space, as Bitcoin has drifted back to the middle of the recent range, trading near 33k this morning, with Ethereum also still consolidating after its sharp rally off the lows earlier this week, trading at 2,050.
EURUSD – the USD is working close to important resistance levels if the rally continues, with the US jobs report today the obvious focus and possibly providing more energy for this USD rally if the treasury market gets involved here with more pronounce volatility in either direction in reaction to the news. The next focus is the 1.1704-1.1775 area, the upper part of which is arguably the “neckline” of a head-and-shoulders formation, while the lower bit is the pivot low from the end of March that coincided with the last major peak in US treasury yields, which have since drifted lower, with only raised expectations of Fed imminent QE tapering and rate hikes coming by late 2022 or early 2023 after the June 16 FOMC meeting now propping up the US dollar.
AUDUSD – the AUDUSD technical situation is similar to that of EURUSD, as a head-and-shoulders like neckline comes in around current levels near 0.7470, with AUDUSD also trading below the recent pivot low of 0.7476, although arguably, the key level broken on the way down and current resistance is 0.7600. The bigger level to the downside is the 0.7400 area, which was a major peak in early September last year, as a significant break of that level could begin to point toward a more significant consolidation of the post-pandemic break-out rally. Note, an important RBA meeting is up next Tuesday.
Soybeans and corn futures remain on track for big weekly gains with the Bloomberg Grains Index currently up 10%. This after the USDA earlier in the week released a report showing U.S. farmers likely planted fewer acres than previously expected. With available stocks ahead of the harvest down to a six-year low, the market continues to watch short-term weather developments with little room for error to avoid a winter of tight supplies.
Gold (XAUUSD) did something unusual yesterday as it managed to recover while the dollar rose towards important resistant levels (see above). Perhaps a reflection of a market where traders by now have adjusted their positions to reflect a more hawkish Federal Reserve, but also a market seeing inflationary pressures through rising cost of energy, both oil and natural gas. So far, however the bounce has been relatively shallow with a break above $1795 and more importantly $1815 needed to change the sentiment back to neutral from negative.
US Treasury yields are capped by extreme liquidity, making them more resilient ahead of today’s NFP numbers (SHY, IEF, TLT). Strong nonfarm payrolls may push forward a timetable for tapering. Hence, bonds could be upset if numbers exceed expectations. Yet, wages are expected to rise 3.6% YoY, the highest since the Global Financial Crisis in 2008/09 suggesting that inflation may not be as transitory as the Federal Reserve suggests. Any surprise on the upside may push US Treasury to a selloff, however, in the most bearish scenario, we believe that the extreme amount of liquidity in market will prevent 10-year yields to break above 1.70%. We need the Federal Reserve to engage more actively in tapering and signs that inflation is more persistent before seeing yields breaking this level.
What is going on?
The OPEC+ circus rolled into town yesterday after a price supportive proposal from Russia and Saudi Arabia to increase production by only 0.4 million bpd from August to December failed to achieve support due to UAE objections. While supporting the increase, the UAE, which has raised its production capacity since 2018 when the individual baselines were set, insisted on having its baseline lifted by 0.6 million bpd to 3.8 million bpd, thereby allowing them a unilateral production increase within the current quota framework. WTI crude oil almost jumped 4% on the news of a smaller than expected increase before paring gains on the UAE objection. However, judging from the price action, the market believes a price supportive deal will be struck when the group meets later today.
US Jun. ISM Manufacturing comes in at 60.6, Prices Paid at new modern record of 92. The headline survey number was in line with expectations and points to strong growth in US manufacturing, while the Prices Paid number is the highest since 1979, suggesting the most intense inflation pressures in more than forty years. The Employment sub-index disappointed again at 49.9, but may be due to the inability to source both employees and components leaving companies unable to increase production as much as desired.
US wins widespread support for its global minimum tax deal. Officials from 130 countries have agreed to a broad outline of new rules for taxing international companies, including a global minimum tax rate. The list of countries backing the new rules include China and India, which had previously withheld support for similar proposals. There are important holdouts that don’t support the deal, including low-tax areas in Europe, and new legislation would have to pass the US Congress.
Fed’s reverse repo facility drops $250 billion in one day. This suggests that a significant portion of the recent huge build up in the facility to nearly a trillion dollars was due to quarter-end effects as banks sought to reduce the size of their balance sheets. Whether this could mean more volatility potential in US treasury markets due to reduced liquidity remains to be seen.
What are we watching next?
Today the last best chance for volatility to pick up to avoid summer doldrums? As noted above, yesterday saw an enormous drop in the use of the Fed reverse repo facility after the quarter-end ramp-up. So far this has mean little volatility for US treasuries, but we’ll watch the US jobs report today, where major surprises may be needed to spark volatility across asset classes, most importantly treasuries, where all of the attention has been on the still relatively minor adjustments higher to forward Fed rate hike expectations. Sluggishness in the wake of US data today could mean a summer of low volatility until the Fed’s Jackson Hole conference rolls into view in late August, although we also have a July 28 FOMC meeting.
Economic Calendar Highlights for today (times GMT)
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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.
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