Market Quick Take - September 23, 2021
Saxo Strategy Team
Summary: In the wake of a very cautious indication of Fed intentions to taper asset purchases in the new FOMC policy statement last night, Fed Chair Powell surprised on the hawkish side during his press conference. This kept a lid on the equity market rally comeback and boost the US dollar modestly as markets slightly pulled forward the anticipated time frame for the first Fed rate hike. Today Norges Bank and the Bank of England add to the parade of central bank announcements this week.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures continue higher after yesterday’s big rebound on news that Evergrande has reached a deal with creditors on its bond payments due today. Nervousness over China is easing and we the 50-day moving average at 4,430 as the next target from S&P 500 futures.
Hang Seng (HSI.I) - PBOC has infused the market with more liquidity today and Evergrande shares in Hong Kong are up 17% after being up 32% intraday. There is no news about Evergrande bond payment, but one of Evergrande’s biggest shareholders China Estates is considering selling its shares in the developer. Hang Seng futures are following the move of Evergrande up 0.9% after being up as much as 2.6% earlier in the session.
EURUSD – the US dollar actually fell slightly in the wake of the FOMC monetary policy statement and dot plot/economic forecast releases last night before rallying, taking EURUSD below 1.1700 at one point as Fed Chair Powell sharpened the message on the likely time frame and pace of the Fed’s QE tapering. The pair bounced back overnight, but the focus remains on the 1.1664 lows in coming sessions for whether the adjustment in Fed expectations will take EURUSD below the range and on to the key 1.1500 area or lower.
GBPUSD and EURGBP – GBPUSD has been toying with key range support that extends just below 1.3600 (the July lows) even as the market has brought Bank of England rate hike expectations significantly forward in recent weeks. As noted in the Bank of England preview below, the question today is not only whether the BoE fulfills market expectations but whether sterling will necessarily trade higher on higher rate expectations. In EURGBP, we are also watching the important range highs just above 0.8600 for the risk of a squeeze higher.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – cryptocurrencies bounced strongly yesterday after the steep sell-off at the start of the week, with Bitcoin trading near 44k this morning and Ethereum above 3,100.
Gold (XAUUSD) dropped after Fed chair Powell delivered a somewhat hawkish press conference (see below), and as concerns about the Evergrande debt crises showed signs of easing. The prospect of taper to begin in November and moving forward the timing of the first rate hike helped send the dollar higher towards key resistance while bond yields managed to close lower on the day. The failed break above $1780 and subsequent 25 dollar drop shows the yellow metals continued fragility with support at $1740. Supported by the industrial metal bounce, platinum (XPTUSD) has rallied 95 dollars from the Monday low with its discount to gold falling to a five-week low at $760/b.
Crude Oil (OILUSNOV21 & OILUKNOV21) trades at a two-month high following another day that delivered price supportive fundamentals. US crude stocks dropped to the lowest since 2018 with Hurricane Ida production seeing a slow recovery. Time spreads points to an increasingly tight market with the Dec21-June22 Brent spread jumping to a fresh high above $4/b. Driven by an ongoing recovery in demand and the risk elevated gas prices may cause a knock-on impact on oil markets due to substitution. Brent support at $73.40 with the next upside focus being a layer of resistance between $76.75 and $78.
The natural gas surge in Europe shows signs of easing but tightness into the winter months remains a major concern. The Dutch TTF benchmark settled at $24/MMBtu yesterday from a recent peak at $25.3/MMBtu. Competition for LNG cargoes with Asia remains fierce with the Japan-Korea LNG price trading close to $27. The short-term outlook for Europe has somewhat improved with increasing wind power generation forecast during the coming days. In the US, easing supply disruptions and lower temperatures in the West has taken the gas future to a two-week low. Weekly inventory report later today expected to show a 75bcf increase, in line with the seasonal average.
The reaction of the bond market to the Federal Reserve’s meeting has been somewhat muted (IEF, TLT). The US yield curve flattened with the 5s30s spread falling below 100bps. Yet, the reaction of the Treasury market was muted giving that yields rose just a couple of basis points in the front part of the yield curve and long-term yields moved the most with 30-year yields falling by 4.5bps. The Fed suggested that tapering might begin in November, as per consensus, and if needed they would speed up tapering before rising rates. It opens for interest rates hikes to begin closer to the end of tapering than the market expects. Yet, the Central bank remains adamant about the job market, making the market doubt Powell’s hawkishness. Today we might see the bond market adjusting to yesterday‘s FOMC meeting, with 10-year yields trading rangebound between 1.26% and 1.37%.
What is going on?
FOMC proves somewhat hawkish relative to expectations. The new FOMC policy statement contained very few changes save for an indication that the Fed is soon likely set to taper asset purchases, and the new Fed projections showed the median Fed forecast pulled forward to a rate hike lift-off by the end of 2022 (although there was no change to unemployment rate forecasts, seen as a key for Fed policy normalization). But it was Fed Chair Powell’s press conference that saw the more hawkish indications as Powell indicated more explicitly that he and many on the Fed are ready to start tapering soon and that it makes sense to complete the tape by the middle of next year, with the pace determined by incoming data. By the end of the press conference, rate expectations had edged some few basis points higher for the Fed funds rate by the end of 2022.
China ups liquidity injections to deal with Evergrande fallout - with the latest injection from the PBOC at some CNY 110 billion in cash, the largest injection since January. Evergrande is due to pay $83.5 million in coupon payments on USD bonds today (although there is a 30-day grace period before nonpayment is declared a default).
Facebook CTO steps down. This is the first significant stepdown of an executive at the company in a decade. The CEO Mike Schroepfer is a 13-year veteran at the group and has been instrumental in Facebook’s growth. Facebook shares were down 4% yesterday and are now trading close to the lows from July.
What are we watching next?
Rate hike set for Norway today – Norway is set to become the first DM central bank to hike rates for this cycle today with an anticipated hike of 25 basis points, after RBNZ hike intentions in New Zealand were derailed in August by a covid outbreak. The intent to hike has been flagged for some time, and rates at the short end of the Norwegian yield curve have been rising steadily since of late, suggesting that the Norges Bank will need to deliver rather hawkish guidance to keep the NOK firm, as EURNOK eyes the huge 10.00 level and the krone is also supported by the latest surge in oil and gas prices.
Bank of England meeting today – despite the market taking rates at the front end of the UK yield curve higher as the market has brought forward the anticipated lift-off time frame for the policy rate to as early as Q2 of next year, the pound has been languishing, perhaps on the woes in the UK labour market that are limiting economic output and the natural gas debacle that could crimp economic growth this winter, as BoE policy is not particularly relevant for the issues plaguing the UK economy in its Brexit hangover. In other words, the bar is fairly high for even a hawkish BoE to surprise the market and support sterling, given that the market has already priced a more hawkish stance in recent weeks.
Earnings Watch – today’s focus is Nike reporting earnings after the market close. Analysts expect revenue growth of 18% y/y and EPS growth of 17% y/y as Nike continues to expand revenue beyond the pre pandemic levels. Our focus will be on any colour about rising input costs and potential decisions to diversify their manufacturing.
- Today: Nike, Costco, Trip.com, Accenture
Economic calendar highlights for today (times GMT)
- 0715-0800 – Euro Zone Flash Sep. PMI
- 0730 – Switzerland SNB Interest Rate Decision
- 0830 - UK Flash Sep. PMI
- 1100 – UK Bank of England Rate Decision
- 1100 – Turkey Central Bank Rate Decision
- South Africa Reserve Bank Rate Decision
- 1230 – US Aug. Chicago Fed National Activity Index
- 1230 – US Weekly Initial Jobless Claims
- 1230 – Canada Jul. Retail Sales
- 1345 – US Sep. Flash Markit PMI
- 1430 – DOE's Weekly NatGas Storage Change
- 2245 – New Zealand Aug. Trade Balance
- 2330 – Japan Aug. National CPI
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