Market Quick Take - July 22, 2021

Macro 5 minutes to read
Saxo Strategy Team

Summary:  The recovery from the recent swoon in the US equity market is now almost complete, as stocks rallied to within about a percent of their all-time highs again, while other markets moved more or less in sympathy with the extension higher in risk sentiment this time. The USD rose, yields rose, and crude oil rose as the market seems to want to put aside reflation trade and recovery doubts again even more quickly than the recent deterioration in sentiment developed.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the comeback in US indices extended sharply yesterday, with especially strong participation from travel-related stocks suggesting that some portion of the comeback is seeing receding concerns on Covid variants holding back assets here. The rally took out further lines of resistance and supported the view that the recent sell-off was merely a brief consolidation rather than the beginning of a more significant correction. The focus could swing back to earnings and even interest rates as a possible eventual headwind if the latter begin rising in synch with strengthening confidence in the outlook.

DAX 30 (GER30.I) – European equities rallied hard yesterday after showing reluctance to do so the prior day, and the DAX is nearly back to where it ended last week after the steep sell-off on Monday and then yesterday’s recovery. The comeback looks more complete on another leg that slices back up through the 55-day moving average, currently at 15,531 relative to the 15,478 the index is trading this morning.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Besides the general ongoing recovery in risk sentiment in the background yesterday, Bitcoin and other cryptocurrencies rose on Elon Musk and Cathie Wood (of Ark Investment Management) noting their holdings at a crypto-themed conference, with Musk noting that the privately held SpaceX also holds Bitcoin. On the technical front, the strong recovery back above 30k is an important show of support, while an extension to well above 33k is needed to suggest a change of trend. Ethereum rallied hard as well after flirting with key cycle support near 1,700, but was unable to close above the psychologically important 2,000 level.

EURUSD – EURUSD in the spotlight today as we have noted endlessly, with some hope for the bullish holdouts that we won’t see a capitulation lower on a dovish ECB today (see preview below) as the backdrop has shifted quite suddenly against the USD’s favour over the last two sessions with the comeback in risk sentiment. 1.1750 is the downside break area, while a rally and close above 1.1850 would suggest that the downside threat has been neutralized.

GBPUSD – Many USD pairs are in a similar boat, but the technical situation is quite clearly etched here for GBPUSD after the pair crossed below its 200-day moving average just above 1.3700 and traded well below the range lows since March of 1.3670 before then rallying sharply back to trade above 1.370 this morning, near the early July low of 1.3733. Given the rally yesterday was in synch with the broadening recovery in risk sentiment, it suggests sterling will continue to do well if this extends and a rally above 1.3800 would help firm the view that further downside threats are receding.

Crude Oil the rally yesterday impressed and nearly matched the scale of the prior sell-off, and together with a strong recovery in things like our “Travel” theme basket in equities suggests that the scale of the recent plunge in oil prices may have been driven by order flow and thin liquidity as much as recent fundamental developments. The price action needs to extend another leg higher through 70/bbl in WTI and perhaps 72/bbl in Brent, but yesterday’s action helped neutralize the downside threat.

Gold (XAUUSD) Gold sidelined by the combined recovery in safe haven yields and risk sentiment, as a weaker US dollar provides some off-setting pressure. The area just below 1,800 has twice provided support this week and is important for keeping the precious metal away from a test back toward 1,750. Bulls are still walking in the desert until at least 1,850-75 is challenged after the huge slide in June.

US Treasuries (SHY:xnas, TLT:xnas, IEF:xnas) Safe haven yields rose for the first time in more than a week and did so around the world. For US treasuries, the sell-off in treasuries took the 10-year US benchmark back above the 20909-day moving average and north of the prior low and 1.25% level, an important psychological point. A more significant neutralization of the recent drop in yields would need the sell-off in treasuries to see yields rising toward the 1.40%+ level, the highs in yields last week, a move that would square well with evidence of confidence returning in the outlook elsewhere.

What’s going on?

US President Joe Biden claims inflation in the US is “transitory”– taking a rather large political risk in doing so, as admitting sustained inflation would threaten his administration’s ability to implement its agenda, with pushback already evident in Congress in part as the opposition hammers on the inflationary risks and the recent spike in data.

US Republicans block infrastructure bill – although talks are ongoing, and the overall impact of this bill is modest – in the mid-hundreds of billions spread over years – compared to the Democrats’ vastly larger $3.5 trillion plan for its social and climate agenda that is in circulation that bears closer watching in the months ahead.

What are we watching next?

Was recent sell-off merely a significant hiccup? Broadening bounce suggests it was. The reversal back to a more positive footing in broader asset markets yesterday that was only partial on Tuesday suggests that the significant swoon that took place starting last week, but accelerating badly on Monday, may have merely been a one-off stumble due to liquidity and stop-loss driven trading. The comeback in safe-haven bond yields and crude oil are the most immediate evidence pointing in this direction, while the US dollar is still a marginal hold-out, certainly weaker but not yet rolling fully back over to the downside – perhaps the final piece of the puzzle for an improved outlook for global markets.

The ECB meets today – Expect the new policy framework will make the Governing Council more committed to its dovish stance, at least in the short term. But investors might struggle to see major adjustments to the ECB's forward guidance. In our view, today’s meeting will mostly be a repeat of the previous one with slight adjustments to the ECB's wording and outlook. Behind the scenes, we believe that the divisions between the doves and the hawks about the future of the bond purchase remain intact.. The ECB is seen as likely to wait until September before providing new guidance on QE purchases.

The South African Reserve Bank meets today – For the time being, the central bank is likely to remain in a wait-and-see position and to keep interest rates unchanged at 3.50%. High-frequency data confirms that the recent lockdowns and social unrest will undoubtedly weigh on third-quarter growth. At the same time, risks to the inflation outlook have tilted to the upside, mostly due the sustained high level of global inflation and domestic factors (concerns over food and fuel supplies).

Earnings for the rest of this week. The largest of the US semiconductor companies, Intel, will report after the close today, as will Twitter and SNAP. American Airlines (AAL:xnys) reports before the market open today after its stock price has gone nearly vertical in recovering over the last two sessions from multi-month lows, a suggestion that, together with a very strong session in travel-related stocks yesterday suggests that the market is busy wiping away fears that the Covid variants will hold back the opening up in coming months.

  • 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)

  • South Africa Rate Announcement (no time given)
  • 0830 – UK Bank of England’s Broadbent to speak
  • 1000 – UK Jul. CBI Trends in Total Orders and Selling Prices, CBI Business Optimism
  • 1145 – ECB Rate Announcement
  • 1230 – ECB President Lagarde Press Conference
  • 1230 – US Jun. Chicago Fed National Activity Index
  • 1230 – US Weekly Initial Jobless Claims
  • 1230 – US Jun. Existing Home Sales
  • 1430 – US Weekly Natural Gas Storage
  • 1400 – Euro Zone Jul Consumer Confidence

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