Summary: US equity markets took a breather after their recent sharp rally and the Asian session overnight saw mostly tepid gains. Elsewhere, signs of too much liquidity continue as the Fed reverse repo facility rose sharply again and a 2-year treasury auction saw voracious demand. Lower rates helped feed a strong further rally in gold, with spot gold prices rising above 1,900 for the first time since January.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – after a couple of sharp up-days, yesterday’s action fizzled, keeping the major averages below their all-time highs, with the S&P 500 index still within about a percent of that 4,238 mark, while the Nasdaq 100 index has a bit more work to do to get there. Follower of Dow Theory (that transportation stocks are a leader) might note yesterday’s weak session as an interesting divergence.
Euro STOXX 50 (EU50.I) - European equities are opening slightly higher carrying over the positive sentiment from Asia with the Hang Seng up 0.7%. STOXX 50 futures is sitting just below the 4,050 level which has now proved a key resistance level in three sessions. The declining Bund yield is a short-term risk for European equities as financials have been leading the momentum recently.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin continues to mull the 40-42k resistance area, the upper edge of which has been the clear resistance since the price bottomed recently. Ethereum has managed to clear the highs from Monday, but has to contend with resistance near 3,000 if it is to launch a more full-scale comeback attempt.
EURUSD – the USD is generally lower on the argument that Fed QE is creating excessive liquidity that is spilling into everything, not just other currencies, but risky assets in general and a reach for yield. With US treasury yields falling sharply yesterday also at the short end of the curve on a very strong US 2-year auction, the recent fall in EU yields looks less negative for the euro and EURUSD has pulled back higher, leaving that 1.2349 high from the beginning of the year as the last chart point ahead of perhaps 1.2500-50.
NZDUSD and NZD pairs – at its meeting overnight, the RBNZ is the latest developed market central bank (after Norway and Canada, where the BoC also actually moved to taper purchases at its April meeting) to signal that rate hikes are eventually coming, as new forecasts show liftoff for mid-2022 with a number of caveats that the economy is developing as expected, etc. RBNZ Governor Orr tried to soften the implications by saying that they are highly conditional and “You’re talking about the second half of next year – who knows where we’ll be by then”. But the market reacted sharply, taking NZD sharply higher to new highs in NZDUSD since February above 0.7300, leaving the 0.7465 high from them as the final chart resistance point. AUDNZD was also sharply lower.
Gold (XAUUSD) trades above $1900 and up on the year with the next key level being $1923, the 61.8% retracement of the August to March correction, and support at $1890 and $1870. The latest boost in response to lower Treasury yields after Fed’s Clarida joined other Fed officials in talking down the prospect of a prolonged period of inflation. An improved technical outlook during the past couple of weeks have finally started to see longer term trend funds calibrate their positions through constant bidding in smaller lots, hence the lack of setbacks during this time. Apart from bond yields developments also focus on dollar which sits just above its January low
US Treasuries are in focus amid 5-year notes sale today and 7-year notes auction tomorrow (TLT, IEF). US Treasuries rallied yesterday after the consumer confidence fell in May for the first time this year. Ten-year US Treasury yields closed five basis points lower on the day at 1.55%. The focus turns to today and tomorrow’s 5- and 7-year notes auction. We are not expecting these auctions to cause a selloff in the bond market unless bidding metrics are particularly weak. The focus continues to be Friday’s PCE numbers and next week’s nonfarm payrolls, which could reactivate the reflation trade.
What is going on?
China’s latest attempt to reduce the involvement from speculators in some key markets, has so far been successful when it comes to China-centric commodities such as hot-rolled coil (-24%), steel rebar (-23%) and iron ore (-25%). Others such as the more internationalized base metals have seen a lower impact. One example being copper which following a shallow 9% correction has managed to consolidate above $4.50/lb. The short-term outlook however remains somewhat murky with support from a weaker dollar and rising threat of strike action in Chile offsetting weaker than expected US home sales.
Speculation and supply shortages, and not actual physical demand have been the primary driver of the commodity rally according to a Bloomberg Economics model. It found that investors have been betting a strong recovery in the global economy would lift demand sufficiently to justify the elevated commodity levels, thereby supporting the inflation narrative. Being spot assets that needs to balance supply and demand, a lack of actual physical demand would ultimately send prices lower and with that trigger a sharp reduction in positions held by investors.
What are we watching next?
Signs that Fed QE is creating distortions widening – when does the Fed surrender? As recently as Monday we have seen a prominent Fed official out expressing the belief that inflation pressures will prove transitory, suggesting little pressure for the Fed to shift its guidance, but its QE is creating clear market distortions from excess liquidity in the system that are becoming rather too large to ignore, from a rapidly swelling reverse repo facility to the strong 2-year treasury auction yesterday and incredibly compressed credit spreads and high equity prices. This is all fine for risk-takers, but at some point, a change in direction from the Fed (advance warning of taper, etc.) will likely cause a rather volatile reaction. If recent pressures continue to build into mid-June, the June 16 FOMC meeting will likely prove a pivotal event risk.
Robinhood IPO S-1 filing is expected this week – the fastest US retail brokerage company which was catapulted Robinhood into world-wide fame during the historic GameStop squeeze as the company was forced by US regulators to put up more regulatory capital to maintain client positions. Since the hectic weeks of the GameStop squeeze the retail brokerage firm has worked to filed for IPO to both increase capital but also capitalize on its high growth rates over the past five years. The company is saying that it expects it S-1 filing to be published this week and is aiming for first day of trading by the end of June.
Earnings reports this week. Today is the first important earnings release day this week with important Chinese earnings from Xiaomi (expected to report after Hong Kong close) and Pinduoduo the fastest growing e-commerce platform in China. In the US, the earnings from Nvidia are the most important to watch as the graphics card manufacturer sits in the middle of the growing crisis in semiconductors where manufacturers have difficulties sourcing components. This will also be the focus on the conference call as Nvidia may be hit on revenue growth in 2H as the company cannot increase supply. Snowflake is part of our bubble basket and thus is a good test of the market’s willingness to absorb short-term losses for growth gains.
Economic Calendar Highlights for today (times GMT)
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy