What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities ripped higher yesterday in one of the strongest sessions in months as US long treasury yields remained tame and the US dollar weak, helping sustain the comeback, which blasted through the key local resistance in the major indices, including the 4,400-20 area in the S&P 500 Index and the 15,000 level in the Nasdaq 100 index, which now become the support levels. The upside followed through further overnight, with the indices trading closer to the record highs than the recent lows, although the Nasdaq 100 is relatively weak in that sense.
GBPUSD and EURGBP – sterling was unable to fully participate in the full court press against the US dollar yesterday. While key resistance in GBPUDS above 1.3670 did give way and the pair traded all the way to 1.3734, the gains were capped and the pair closed weakly back below 1.3700. Similarly, EURGBP traded to new local lows and down toward the post-Brexit low of 0.8450, but rallied back into the range late yesterday – an interesting sign of weakness despite the supportive backdrop of strong risk sentiment, although two Bank of England officials were out yesterday suggesting that talk of an imminent rate hike are premature (more below), reversing some of the recent rise in short UK rates. The highs in sterling posted yesterday look critical for next steps.
USDJPY – managed to trade above 114.00 this morning as risk sentiment flashes green across the board, while commodities prices are soaring and US longer treasury yields have been tamed this week. The next major resistance level is into 114.50, but it feels like the JPY downside is getting a bit overcooked in the near term. Anticipation of a new Prime Minister Kishida, who is more interested in ironing out inequalities than the supposed neoliberalism of Abenomics may be adding pressure on the JPY at the margin. The Japanese election that Kishida should win with ease is set for October 31.
Gold hesitant at resistance, as the precious metal didn’t find further fuel yesterday from the recently weaker US dollar or lower US yields to rally and close through the 200-day moving average near 1,795 nor the psychological 1,800 level. Possibly also holding back gold at the margin is that gold could struggle to find a bid as long as risk sentiment is full steam ahead as it was yesterday.
Copper prices leapt higher again yesterday, extending gains above the important 450 cents per pound area and eyeing the fourth highest weekly close ever if the price closes near the current 463 cents level (the highest weekly close was back in May at 478 cents per pound, versus an all-time intra-week high at just below 490 cents). It is interesting in the background to consider the risk of a negative demand shock from a slowing Chinese property sector, while the requirements of a significant buildout of alternative energy priorities in everything from wind turbines to EV’s will require a significant expansion of supply. The London Metals Index, an index of six base metals that includes copper, hit an all-time peak yesterday.
European sovereign bonds (VGEA, IS0L, BTP10). Government bond yields in the Eurozone dropped considerably in the past couple of days as fears concerning an economic slowdown are intensifying. Top German research institutes for Germany slashed the country’s GDP forecasts from 3.7% to 2.4% for this year on a spike of energy costs, lack of shipping capacity and inputs shortages. Thirty-year Bund yields fell by 11bps in two sessions falling to 0.23%. Similarly, 10-year Bunds fell to -0.17% after touching -0.08%, the second highest since May 2019. Similarly, benchmark Italian, French and Spanish bond yields fell by approximately 6bpsv each on the day of yesterday. We expect the rally to be transitory as rising yields in the US and a new German government will ultimately lift year higher by the end of the year. Despite the economy is slowing down, it is not contracting telling us that stagflationary fears might be overblown.
US Treasuries (IEF, TLT). Bond yields in the US have dropped amid this week’s stellar 10-year and 30-year Treasury auctions and weak PPI data yesterday. Investors begin to fear that the economic slowdown might translate to stagflation. We believe that stagflation remains a risk, but we are not near it yet, as the economy is still expanding, and unemployment continues to fall. Today retail sales might add to the bond rally if they disappoint. The University of Michigan inflation expectations are also going to be a focus today. It’s likely that bond yields test again their support at 1.5% before resuming their rise. However, we still expect yields to soar during the last quarter of the year as CPI numbers remain well above 5% and growth is still expected at 5.9% this year.
What is going on?
US SEC likely set to allow Bitcoin futures ETF to start trading next week – Bloomberg cites unnamed sources who suggest that the ProShares and Invesco plans to launch Bitcoin ETFs based on futures will provide “significant investor protections.”, according to SEC Chair Gary Gensler. Bitcoin gained strongly overnight, lurching from the 57k area to nearly 60k as of this writing on the news.
Two BoE officials push back against imminent rate hike talk. Catherine Mann said that she “can wait” to hike rates as the market has already tightened, while noted dove Silvana Tenreyro was likewise cautious and said that a hike could be “self-defeating” in attempting to contain inflation. UK short rates were very slightly lower in the wake of the comments, but sterling was capped and reversed most of its gains yesterday as noted above. The market is split in pricing a BoE hike for the November meeting (low odds) or the December meeting (mostly priced in).
Soft PPI, strong US weekly initial jobless claims. The US September PPI posted softer than expecte month-on-month readings relative to expectations at 0.5% on the headline vs. 0.6% expected and 0.2% at the core vs. 0.5% expected. Elsewhere, the weekly US initial jobless claims plunged to new cycle lows with a reading of 293k versus 320k expected and thus by far the lowest since the pandemic outbreak early last year.
Rio Tinto cuts iron ore shipment forecasts, sees trouble in Mongolia copper project. The company said that labour constraints linked to covid in Western Australia will limit production in the coming quarter. Copper production from the company was up 8% on the previous quarter, but the company’s new Mongolian copper mine project will see significant delays due to covid spread there.
What are we watching next?
US Sep. Retail Sales and Preliminary October US University of Michigan sentiment up later today. The US Retail Sales remains in an interesting data series to watch after the crazy surges and retreats of last year and early this year on the series of stimulus checks issued by the US government. We should be mostly clear of that effect, but the “stimulus cliff” means that rising Retail Sales require a confident consumer that is willing to spend out of savings as well as income in the near term. Consensus is looking for a modest month-on-month drop of –0.2% at the headline and +0.4% ex Auto and Gas after the very strong +2.0% gain in the latter in August. Also worth watching, more than in many years, is the University of Michigan sentiment index, which has stumbled badly in recent months and actually posted a worse reading in August than during the worst initial phase of the pandemic outbreak before bouncing very slightly in September. Is this on popular concerns about rising prices or ongoing covid irritations and even disruptions caused by supply shortages and even vaccine mandates? The initial October reading today is expected near unchanged, and possibly most compelling to watch whether the 5-10 year inflation expectations in the survey are becoming unanchored. In September, this survey rose back to the decade high at 3.0%.
Earnings Watch – Yesterday, Bank of America surged to a new high close for the cycle on a strong earnings beat due to a record quarter for its mergers and acquisitions business, as investment banking advisory fees tacked on a 65% gain. Loan growth was anemic but contrasted with far worse performance from JP Morgan and especially Wells Fargo, the US’ largest Main Street bank, which also reported earnings yesterday. Wells Fargo’s share dropped more than 1.5% as it beat estimates, largely driven by a loan loss reserve release, as it saw lending drop 8% relative to the prior year. Hong Kong-based Zijin Minig surged overnight on news that it has received a permit to start copper and gold production at a new mine in Serbia.
Friday: Zijin Mining, BOC Hong Kong, PNC Financial Services, Goldman Sachs, Charles Schwab, Truist Financial
Economic calendar highlights for today (times GMT)
- 1230 – US Oct. Empire Manufacturing
- 1230 – US Sep. Retail Sales
- 1230 – US Sep. Import Price Index
- 1400 – US Preliminary Oct. University of Michigan Sentiment/Inflation expectations
- 1545 – US Fed’s Bullard (non-voter) to speak
- 1620 – US Fed’s Williams (voter) to speak
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: