Market Quick Take - June 22 2021

Market Quick Take - June 22 2021

Macro
Saxo-Strats
Saxo Strategy Team

Summary:  Equities came roaring back and erased the losses from Friday and longer US treasuries sold off heavily, suggesting that the action to end last week may have had more to do with options and futures expiry rather than with the FOMC meeting. Elsewhere, the USD strength and Fed rate hike expectations have largely stuck as the market awaits an appearance from Fed Chair Powell before lawmakers in Washington today.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the Friday sell-off was entirely reversed in the case of the broader S&P 500 Index, suggesting that the action may have had more to do with options and futures expiry flows rather than a delayed reaction to the FOMC meeting. The strong session puts the focus back on the all-time highs in the S&P 500 about a percent higher at 4,258, while the Nasdaq 100 is within even closer striking distance to the top, even if it could prove a bit more sensitive to any yield rises after yesterday’s strong bounce from local lows in longer US treasury yields.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Pressure on cryptocurrencies continues, especially on the smaller coins in the space. Yesterday saw Bitcoin selling off deeply on further measures taken by Chinese officials to crack down on Bitcoin mining and after China called officials of the country’s biggest banks in for a meeting to remind them of the government’s ban on cryptocurrency services. Bitcoin hit close to 31k before bouncing overnight, while Ethereum has traded below the key 2,000 area since late yesterday and briefly tested its 200-day moving average at 1,875 overnight before rising back close to 2,000 this morning.

EURUSD and GBPUSD the EURUSD bounce has proven very modest so far, perhaps as, despite the improved risk sentiment yesterday that is normally not USD supportive, the shift in Fed rate hike expectations in the wake of last Wednesday’s FOMC meeting have largely stuck. 1.1920 has provided resistance, with 1.2000 a notable resistance level there, with the next step whether the sell-off completes a kind of head-and-shoulders formation with a neckline currency coming in around 1.1775, and range support for the year at the March low of 1.1704. GBPUSD bounced more than EURUSD, but still looks in sell-off mode as long as the action stays below 1.4000. next key levels to the downside include the March low at 1.3670 and the 200-day moving average, currently at 1.3610 ahead of Thursday’s BoE meeting.

JPY pairs – the action yesterday reminded once again that the yen chiefly only has eyes for one thing: the direction of long US treasury yields, with the significant reversal yesterday at the long end of the yield curve mimicked in the JPY crosses, as these bounced sharply from new local lows, although the reversal is modest in scale relative to the scale of the prior sell-off, even if USDJPY is gunning back toward the cycle highs just short of 111.00.

Crude oil futures continue higher with Brent trading above $75 for the first time in more than two years while in WTI futures spreads continue to tighten. An example being the Sept - Oct spread which trades at a seven-year high at $1.09/b on expectations storage levels at the WTI futures delivery hub at Cushing will continue to decline amid strong Midwest refinery demand. In addition, crude oil futures are benefitting from a continued rotation out of metals and agriculture (see COT update below) as speculators see better prospects crude oil amid tight supplies and rising demand. Focus on weekly US inventory reports from API tonight and EIA Wednesday.

Gold (XAUUSD) making a tentative but still fragile attempt to rebound after the biggest loss in 15 months. Some investors have been lured back by the fact the sell-off was much bigger than what could be justified by movements in yields and the dollar. The technical outlook remains fragile below $1800 with support being the $1755-60 area.

Weaker demand at today’s 2-year auction might indicate that the market is expecting an interest rate hike earlier than the dot plot forecasts (SHY, IEF, TLT). The abrupt bear-flattening of the yield curve signals that a tightening cycle has already begun. Pressure might add if demand is lagging at today’s 2-year US Treasury auction indicating that an interest rate hike might arrive earlier than the end of next year. Last week, 2-year yields rose above the upper range of Federal Reserve benchmark Fund rate but stabilized at 0.25%. If yields break and sustain above this level, it may indicate that the market is expecting an interest rate hike soon. Thus, a further flattening of the yield curve can be expected with the 2s10s and the 5s30s spread falling as low as 100 basis points.

What is going on?

Swedish Prime Minister Löfven loses confidence vote – The Prime Minister lost the confidence of the Left party, a supporting party to the government coalition, after his government raised the idea of lifting rent controls on new housing developments amidst a widespread housing shortage for lower income households and a raging housing bubble. The Prime Minister will announce within a week whether to call snap elections or try to patch together a new coalition. The effect on SEK was modest as the country still appears extremely divided politically, suggesting few prospects for new policy moves of note from whatever government eventually emerges.

The delayed COT report covering the week to June 15, the day before the FOMC meeting, showed continued selling of dollars while in commodities speculators carried on with their rotation out of metals and agriculture futures into energy, especially crude oil. The dollar short against ten IMM futures and the DXY rose 5% to a three-month high at $19.3 and overall, the upcoming FOMC meeting was being felt with both long and short positions being reduced across most crosses. In commodities, the managed money crude oil long reached the highest since October 2018, gold and copper was sold again while the combined grain long in wheat, corn and soybeans was down 15% to lowest since last October.

Port issues in China over Covid outbreak impact global supply chain. It is no secret that logistics issues with congestion and empty containers have caused trouble for over a year with rapidly rising logistics costs as a consequence. A recent Covid outbreak around ports in China is now causing further pain and will underpin inflationary pressures in the economy over the summer months.

Bridgewater says 70s inflation environment will not replay. The question between transitory and sticky inflation is key for investors to get right over the coming year and Bridgewater’s Bob Prince is saying in a Financial Times interview that there is not capacity for credit expansion to drive 70s inflation levels but that the US will experience moderately high inflation for some time due to stimulus.

What are we watching next?

US Fed Chair Powell testimony today. Today offers Fed Chair Powell a chance to communicate with financial markets again after the powerful reaction to last week’s FOMC meeting as he is set to appear before a House committee to discuss pandemic emergency lending and the economy, Yesterday’s change of direction suggests there is less pressure on the Fed Chair to repair any “damage”. Ten-year US treasury yields and equities are essentially unchanged now relative to levels before the FOMC meeting despite notable volatility, with only the adjustments to Fed hike expectations higher and the USD move higher the developments that have stuck since the meeting.

Earnings this week. The second quarter is soon an old chapter, and a new exciting earnings season will begin in three weeks. In the meantime, there are still companies not following the normal calendar year reporting earnings. This week, Nike and FedEx are the two most important earnings to watch from a consumer and logistics standpoint.

  • Wednesday: IHS Markit
  • Thursday: Nike, FedEx, Accenture
  • Friday: Paychex, CarMax

Hungarian central bank to hike – how much? The Hungarian central bank has flagged a rate hike at today’s meeting, which will make Hungary the first country in Europe to hike rates. But the size of the hike and guidance are critical here amidst a rather diverse set of forecasts from analysts. The rate currently sits at an odd 0.60%, with some looking for moves in multiples of 0.15%, with consensus centered on a hike of 30 bps to 0.90%. There will be considerable focus on the guidance as well, and considerable hawkishness seems in order to lift HUF, given what the Fed has just done to the US dollar. Interestingly, the move lower in EURHUF, for example, that unfolded when the Hungarian central bank made it clear in mid-May that a hike was coming, had recently been completely unwound ahead of today’s meeting.

Economic Calendar Highlights for today (times GMT)

  • 0730 - Sweden May Unemployment Rate
  • 1200 – Hungary Central Bank Rate Decision
  • 1400 – ECB Chief Economist Lane to speak
  • 1400 – US May Existing Home Sales
  • 1400 – US Jun. Richmond Fed Manufacturing Index
  • 1400 – Euro Zone Jun. Consumer Confidence
  • 1430 – US Fed’s Mester (non-voter) to speak
  • 1500 – US Fed’s Daly (voter) to speak
  • 1800 – US Fed Chair Powell to testify on Covid 19 response and economy
  • 2030 – API's weekly report on US oil inventories
  • 0315 – Australia RBA’s Ellis to speak

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