Summary: Asian equity market spoiled the party overnight after the US equities extended their recent strength, with the S&P 500 posting a strong new all-time high after the March US ISM Services survey posted its strongest reading ever at 63.7, a sign that the dominant services sector is booming as the US opens up its economy from Covid lockdowns. The US dollar is weaker as US treasury yields remain tame.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – S&P 500 futures sprinted to new all-time high yesterday up 1% and Nasdaq 100 futures were up 2% pushing above the 13,500 level for the first time since 22 February. The moves were driven by mega cap stocks up 1.5% extending their lead as the best performing equity segment this month. We expect momentum to continue to positive unless the US 10-year yield suddenly break out to the upside and sprints to 2%.
German Dax (DAX.I) - the strong momentum since late March is continuing with DAX futures jumping higher this morning to 15,300 a new all-time high. The pace has been extraordinary but on the other hand, German companies are at the receiving end of global stimulus being heavily focused on exporting. Our view is that DAX futures could experience a short-term setback soon as a 10% move in two weeks seems too aggressive.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin price action has calmed as it trades just south of the key 60k area that is the psychological resistance ahead of the all-time highs. Ethereum, on the other hand, has burst highs again and trades well clear of the 2,000 level and even traded above 2,100 overnight.
EURUSD – despite the strength in US data, US yields have remained tame at the long end of the yield curve and even reversed back lower in the belly of the US treasury curve yesterday after a spring higher in the wake of the record ISM Services reading (more below). This helped EURUSD to continue to recover from recent lows near 1.1700 as 1.1800 fell yesterday, but technically, to begin suggesting a full neutralization of the late sell-off, the pair would need to continue to pull higher toward 1.2000, a rather high bar for now. US yields and risk sentiment bear watching, as the EU is badly in need of good news on Covid to help it out of its recent rut.
AUDUSD – the AUDUSD rebounded last week from the break of a key support level around 0.7565, but has so far merely traded back toward the highs of the recent, very tight range, up to just above 0.7650. The RBA decision overnight (more on this below) largely failed to make an impression despite a nominally hawkish shift on the potential for a modest YCC shortening later this year, and a downbeat equity session in Asia overnight weighed. The pair has avoided the downside with the rejection of new lows last week, but now it is time for the bulls to prove themselves with a follow through rally to 0.7750 and even 0.7800 or risk a new sell-off wave if 0.7550 can’t hold.
Spot Gold (XAUUSD) - remains rangebound but following another firm rejection below $1680 last week, the market is pondering whether the double bottom has sowed the foundation for a recovery. After losing 10% during the first quarter to come bottom of the performance table, the technical level it needs to break as a minimum remains at $1765. For now, however, most of the recovery has been a result of a weaker dollar and yields that have stopped rising. Stronger than expected inflation remains gold and with that silver’s best chance of a recovery.
Crude oil (OILUSMAY21 & OILUKJUN21) experienced a volatile Easter period with the OPEC+ decision to ease production curbs initially sending prices higher, as it sent a signal of optimism, before turning lower on worries about increased supplies from Iran, who currently ship 1 million barrels/day of sanctioned oil to China and another wave of corona virus cases. Exempted from supply restrictions due to sanctions Iran can produce at will as long it can find buyers willing to take the risk. Iran and U.S. will take part in indirect talks today in Vienna on the Iranian nuclear agreement. For now, Brent crude oil remains locked in a wide $60 to $65 range. Focus today the monthly “Short-term energy outlook” from the EIA and its projections for US production and global demand.
Reflation contributes to more steepening of the US Treasury yield curve, the focus will be on the belly of curve (TLT, IEF). Job data surprised on the upside on Friday and the US yield curve continued to steepen despite the Easter Holidays. This week our attention turns to the belly of the yield curve where the 5-year US Treasuries are underperforming other maturities with yields about to break the pivotal level of 1%, where they would enter in a fast area until 1.4%. The market is telling the Fed that they are wrong about inflation and they might need to hike sooner than planned. Tomorrow’s FOMC minutes will be on the spotlight to understand whether there is divergence amongst FOMC members’ Forecasts.
Emerging market in the spotlight as IMF spring meetings start (EMB). As investors look to create a buffer against rising yields in the US, the focus shifts towards lower rates credits and non-dollar debt. However, according to the Bloomberg Barclays Global Aggregate, CNY-denominated debt is the only sub-class to have recorded a positive return YTD as the Chinese Yuan is getting more and more identified as a safe-haven. A report published by the IMF on Monday shows that if the Fed commits a “monetary policy mistake” there might be a repeat of 2013’s taper tantrum. More concerns regarding this topic might be raised this week by the IMF meeting.
What is going on?
The US March ISM Services survey posted its strongest reading ever at 63.7, suggesting a record pace of improvement in the services sector as Covid-lockdowns are ending in fits and starts across the US. The New Orders sub-index rose to a record 67.2 and the Prices Paid index rose to 74.0, suggesting strong inflationary pressures.
Reserve Bank of Australia rate decision unchanged, to decide on YCC shift later this year. Overnight, the Reserve Bank of Australia kept its guidance largely unchanged as it predicted that the conditions would likely not be ripe for a rate hike until at least 2024. The one slightly “hawkish” note was the guidance that the bank would decide “later in the year” whether to continue to target the April 2024 government bond yield of 10 bps or shift it further out (no shift menas that the bank would be shortening the horizon of its yield-curve-control policy of 3 years.
Copper surged higher in thin holiday trading on Monday in response to Chiles announcement on Friday it would shut it borders throughout April in order to battle a deadly surge in coronavirus cases. Together with its next-door neighbor Peru it supplies around 40% of global output and while Chile said production is safe (hence the softer tone overnight) the risk of a supply disruption from mine closures combined with the prospect for strong demand is likely to keep prices supported. Having cut bullish bets by 50% during the past six weeks, a break above $4.2/lb may be the trigger that forces funds back on the buying side.
US Treasury Secretary Janet Yellen calls for global tax minimum. The US treasury secretary made the cast for harmonizing corporate tax rates to lower the use of tax havens, particularly by the most profitable large global companies. This is a very different approach from the Trump administration and can be seen as an attempt to return the US to its role as a leader of multi-lateral institutions.
What are we watching next?
US treasury yields – incredible strength in some of the US data recently, including a massive jump in Consumer Confidence in March, a strong payrolls change number last Friday and the record ISM Services reading for March released yesterday, boosted US yields in the belly of the curve sharply higher – to just shy of the 1.00% level yesterday for the US 5-year Treasury yield benchmark. But the longer end of the curve, from 10- to 30-years, yields have remained anchored below recent cycle highs, which has helped boost yield-sensitive equities on the strength of the economic data. Yesterday, the 5-year Treasury benchmark retreated sharply after a fresh burst higher. Is the market cautious that economic data improvements will prove fleeting once the Covid lockdown end boost fades?
Earnings reports this week and next week. The earnings calendar is non-existent this week as the Q1 earnings season is warming up for its beginning next week. Major US banks will be in focus with Wells Fargo and Bank of America being interesting because of their large footprint among ordinary US households. With the latest talk about retail investors disappearing from the market earnings from Charles Schwab will be of interest, and finally Delta Air Lines is crucial for understanding travel dynamics as the economy recovers.
Economic Calendar Highlights for today (times GMT)
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