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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - momentum in US equities has eased over the past week over downward revisions to economic growth amid rising Covid-19 cases. But with US interest rates staying steady around 1.3% equities are still bid, but the key risk remains the inflation question and to what extent it could be a catalyst for higher interest rates. The next support level in Nasdaq 100 futures remains the 15,464 level. In early European trading, S&P 500 futures are rebounding strongly almost closing the losses from yesterday's session trading around the 4,494 level.
USDJPY – the outlook here has suddenly been turned on its head after the severe reversal in US long yields in the wake of an indifferent ECB meeting that failed to spark higher yields in Europe and two US treasury auctions that have sharply reversed long US yields back lower. Still, USDJPY trades in a very narrow range between 109.40 and the recent highs near 110.50. A further decline in US treasury yields could see the pair testing the important 109.00-10 area that was tested on three occasions in July and August and held.
EURUSD – the ECB meeting was no catalyst for volatility yesterday, as the announcement of a modest taper (a “modestly slower pace” of purchases) and adjustments to the projections for growth and inflation were well within the consensus. 1.1800 looks the important support here for the bulls to stay in business, in hopes of a follow-up move above 1.1900 as the focus shifts to US data next week.
USDCNH – the Chinese renminbi saw one of its large moves of late overnight on the Xi-Biden phone call and is worth watching for whether the tight range established since June is set to be challenged, leading to a weaker US dollar – the lowest levels traded since then were near 6.425 last Friday, although this morning we are trading below the lowest daily close (currently 6.4375).
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – cryptocurrencies remain stuck in neutral as long as Bitcoin remains well below 50k and Ethereum has failed to sustain any move north of 3,500, much less mount an attack back toward the 4,000 area highs.
Gold (XAUUSD) trades close to $1800 after managing to recover from a fresh downside selling attempt. Supported by a softer dollar, and lower bond yields and after the ECB announcement of a modest taper. For now, the price remains trapped with potential bulls wanting to see a break above $1835 before getting involved while the case for bears seems limited with bond yields currently on their best behavior.
Palladium (PAZ1) and platinum (XPTUSD) - The shortage of semiconductors leading to constraints in global automobile production, and the prospects for substitutions helped send palladium to a 12-month low yesterday. The semi rare metal, used in vehicle pollution-control devices, reached a record $3018/oz. back in May before slumping by almost 30%. That surge has increasingly seen automakers switch to using more platinum in gasoline-powered cars. Both metals, however, have been hurt by constrained auto output with platinum’s discount to gold rising to $820/oz., the highest since January.
Crude Oil (OILUSOCT21 & OILUKNOV21) experienced wild price swings on Thursday with Brent still managing to hold above the 21-day moving average, currently at $70.81/b. A very distorted but nevertheless supportive weekly US inventory report was being offset by news that China for the first time had tapped its giant reserves to “ease the pressure of rising raw material prices”. The release, however, took place back in July so offered nothing new, apart from reiterating that the world’s two biggest consumers both feel uncomfortable with prices much above current levels, and therefore could do it again if needed. Focus next week on oil market reports from OPEC and IEA.
European government bonds’ honeymoon opens a window of opportunity to speculators (VGEA, BUNS, DSB). The ECB delivered a dovish taper successfully yesterday which led to a fast drop in rates in the euro area. GGBs and BTPS gained the most as they carry the highest beta with their 10-year yields dropping as much as 10 basis points. It may be the perfect opportunity to short EGBs cheap as the German election is poised to bring volatility in this space. Additionally, as Bunds are closely correlated to US Treasuries, we expect a deeper selloff to take off by end of October or the beginning of November. We expect Bunds to turn positive by year-end.
Another solid auction drives US yields lower (IEF, TLT). The US yield curve bull-flattened after a strong 30-year auction which stopped through WI by 1.8bps. The high yield was 1.91%, the lowest since January this year while indirect demand was at 69.7%. Demand was driven partially by the dovish taper delivered earlier from the ECB, and the fact that US Treasuries still offer a pick up over Europeans and Japanese government bonds increasing their appeal. Bullish sentiment may continue in the short run, but we expect yields to rise as the debt ceiling becomes an increasing concern.
What is going on?
US President Biden called Chinese leader Xi Jinping, apparently on frustration over the lack of progress in previous rounds of dialog between lower level officials. The call lasted 90 minutes with both sides putting their own spin on the call, although the civilized tone seemed to serve as a general boost to risk sentiment overnight.
Significant improvement in the U.S. labor market. U.S. jobless claims, a proxy for layoffs, reached a fresh pandemic low in the latest week, at 310,000 versus estimated 335,000 and prior 345,000. It seems to indicate the sharp slowdown in August hiring was more of an aberration. But continuing unemployment claims from all government programs remain elevated at 11.9 million.
No surprises from the ECB. The central bank revised up its forecasts for 2021 growth and inflation which it now sees at 5% (prior 4.6%) and 2.2% (prior 1.9%) respectively. As expected, the ECB announced a slower pace of asset purchases in Q4, from €80bn per month to €60-70bn per month. The pace of asset purchases would be similar to that of January-February of this year. Expect the Governing Council to discuss the future of monetary policy later this year.
SoftBank invests four times more in India than China this year. The recent year’s turmoil due to the pandemic and all the production constraints out of China combined with the country’s crackdown on its private sector, have caused investors to invest more in India including SoftBank. India could become the big winner post the pandemic if China continues to create an unpredictable regulatory environment and the tensions persist between the US and China.
Zscaler posts better than expected outlook. The fast-growing cyber security company reported last night better than expected FY22 Q1 (ending 31 October) revenue of $210-212mn vs est. $200mn and positive EPS. The company expects to deliver its first annual profit in the current fiscal year (ending 31 July 2022). The result should carry a positive sentiment into the overall cyber security industry.
What are we watching next?
Nervous grains market awaits US supply and demand report - Corn (CORNDEC21) and soybeans (SOYBEANSNOV21) remain stuck near the lowest levels in months on a combination of a stronger dollar, increased supply as the harvest begins and disruptions at a key Gulf coast export terminal following Hurricane Ida. In addition, some position squaring has also been seen ahead of today’s monthly World Agriculture Supply and Demand Estimates (WASDE) with the market convinced the US Department of Agriculture will publish larger US corn and soybeans estimates.
Risk sentiment into next Friday’s options expiry – risk sentiment was weak into the US close of trade yesterday and improved overnight on the Biden-Xi phone call, but it is worth noting the pattern over each of the last four months, in which there was a sharp dip in the major US equity indices around the time of options expiries on S&P 500 stocks on the third Friday of the month (next Friday, September 17 is the third Friday of this month.)
Russian central bank meeting today – the Russian central bank is expected to hike rates another 50 basis points, taking the policy rate to 7.00% as the central bank focuses on keeping the policy rate ahead of rising inflation, which has persisted and is running at a 5-year high of 6.7% year-on-year as of the August release, even as the ruble has stabilized this year.
Earnings to watch this week. Today’s earnings focus is Oracle with analysts expecting a low revenue growth of 4.3% y/y and steady EBITDA margin of 47%. Oracle has lost out on many of the fastest-growing technologies in recent years and investors will continue to pay a discount for the stock until the company can find a growth path.
Economic calendar highlights for today (times GMT)
0930 – ECB President Lagarde to Speak
1030 – Russia Central Bank Rate Announcement
1230 – Canada Aug. Employment Data
1230 – US Aug. PPI
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