Summary: The US equity market blasted higher, taking out a number of resistance levels and closing on a strong note before fading again overnight in a downbeat Asian session. The USD remained firm, and the Antipodean currencies AUD and NZD were in for a sharp sell-off, the latter especially so as New Zealand moved with a raft of measures to stamp out house price rises.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities blasted higher yesterday, particularly the more speculative and traditional momentum names, with the Nasdaq 100 index pulling up within striking distance of the key 13,300 area resistance. If the index can’t maintain altitude after the sharply rally, a close back below 12,800 would suggest yesterday was a mere squeeze, while that 13,300+ resistance need swift taking out if the index is to generate proper upside momentum. The S&P 500 poked above a minor tactical Fibonacci retracement, but the momentum picture is still sluggish unless the pair takes out the 3,978 high quickly – the downside trigger there remains 3,875, which could open for the important 3,813 retracement level.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin and Ethereum sold off sharply, with the former suffering its worst drop in a month to well below 54k and the latter breaking below its recent tight range and below 1,700.
NZDUSD and NZD crosses – the New Zealand dollar suffered a significant blow overnight after the NZ government followed up on its threat to do something about rising housing prices (after writing in a mandated for the RBNZ to include housing price considerations in its official mandate) with a number of moves to limit speculation in housing, including taxing capital gains on properties owned for investment for less than ten years and eliminating a tax loophole for deducting mortgage interest against rental income. Land will also be opened for more building. The RBNZ may follow up soon with additional macroprudential measures. NZDUSD fell over a percent to its lowest level of 2021.
EURUSD – how long can this pair trade in the impossibly tight 1.1840-1.2000 area? Waiting for further developments as a powerful risk-on rally in US equities yesterday, combined with consolidation in treasuries failed to take the pair close to the key 1.2000 resistance. Any fresh rise in US yields (note US treasury auction calendar, particularly tomorrow and Thursday’s 5-year and 7-year auctions) could provide fresh downside pressure if yields rise again.
Gold (XAUUSD) found a bid towards $1725 yesterday as both the dollar and yields weakened, but generally activity is light ahead of Powell’s two-day testimony before House and Senate, as well as key U.S. bond auctions, also starting from today. While hedge funds increased bullish bets by 30% from a 22-month low in the week to March 16, ETF holdings continue to dwindle with almost daily declines seen since early February. We remain short-term neutral below $1765 with the risk of additional weakness below $1725. Silver (XAGUSD) meanwhile remains near a three-week low against gold following its early Monday drubbing in Asia.
Crude oil (OILUKMAY21 & OILUSAPR21) continues to consolidate, but with both Brent and WTI still below their 38.2% retracement levels at $65.25 and $62 respectively, levels below which still signal correction risks. The short-term outlook remains challenged by pockets of excess supplies and a slow vaccine rollout as well as extended lockdowns. Both WTI and Brent prompt month spreads are close to moving back into a bearish contango, a signal of oversupply. Continued focus on the risk of verbal intervention from producers and the April OPEC+ meeting and how the group will react to the latest price weakness.
European sovereign yields stabilized as the European Central Bank increases bond purchases under PEPP (BTP10, IS0P). Bond purchases under PEPP rose the most since December showing that the ECB is holding on the promise to fight the rise in yields. Yet, it is not proven that it will be enough to slow them down when US Treasury resume to tumble. A European recovery remain uncertain as vaccination campaigns are slow and further lockdowns are imposed ahead of Easter. Italy will sell linkers with 2030 maturity on Thursday, bidding metrics will be key to understand whether a rotation from the periphery to the US safe-haven materializes amid rising yields.
What is going on?
As Turkey’s new central bank chief Kavcioglu takes charge, TRY forward dysfunctional – the spot USDTRY rate rose nearly as high as 8.50 (from Friday’s close of 7.22) on the shock news that Turkish President Erdogan was firing the orthodox central bank head Naci Agbal and replacing him with Sahap Kavcioglu, who is sympathetic with Erdogan’s views on cutting interest rates to lower inflation (triggering unease among investors). While the spot level trades this morning near 7.90, the forward market shows that is very expensive to borrow lira with 1-month forwards trading at 8.50.
The New Zealand government moves with a raft of measures against property speculators in a bid to tame housing prices, deemed the highest in the OECD – see more above in the NZDUSD and NZD comments.
Biden advisers drawing up plans for up to $3 trillion in new public investments – the focus here is not on the style of stimulus deals done during the pandemic, but on longer term investments in infrastructure, alternative energy and education. Some of the spending will have to be offset by new taxes, generally on higher earners and corporations, where the Biden administration will likely look to reduce some of the tax cuts for companies carried out by Trump.
What are we watching next?
US Treasury Yields and Treasury auctions this week – the US treasury market has been the source of considerable attention after the recent yield spike sparked widespread unease for interest rate sensitive assets, from gold to equities and the US dollar. Treasury yields have eased lower to start the week since their peak last Thursday in the wake of the FOMC meeting, which made it clear once again that the Fed is not concerned with the level of yields at the longer end of the curve just yet. Treasury auctions are worth watching this week for the level of demand, both foreign and domestic. A 2-year auction is up today, a 5-year auction tomorrow and a 7-year on Thursday.
Earnings to watch – the earnings season is thin these weeks as the market is waiting for the Q1 earnings season to kick off in three weeks. This week many major Chinese companies across the energy, industrial and banking industries will report earnings. The only important US company to report this week is Adobe. - which reports today after the market close. All names marked in red are the ones that can impact overall market sentiment or their specific industry.
Economic Calendar Highlights for today (times GMT)
1150 – UK BoE Governor Bailey to speak
1300 – Hungary Central Bank Rate Decision
1400 – US Feb. New Home Sales
1400 – US Mar. Richmond Fed Manufacturing Index
1500 – US Fed’s Barkin (Voter) speaking
1600 – US Fed’s Powell, Secretary of Treasury Yellen speak before House panel on CARES act.
1715 – Canada Bank of Canada’s Gravelle to speak
1845 – US Fed’s Williams (Voter) to Speak
1945 – US Fed’s Brainard (Voter) to speak on economic outlook
2030 – Weekly crude stocks from the American Petroleum Institute
2200 – Australia Mar. Flash Manufacturing and Services PMI
0030 – Japan Mar. Flash Manufacturing and Services PMI
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
