Summary: Asian stocks, as well as U.S. futures rose in Asia as some concerns over China's regulatory crackdown eased and progress on a U.S. infrastructure plan helped sentiment. In addition, a Covid-19 spike in China has raised some growth concerns spurring bets on monetary easing driving lower both Chinese and U.S. Treasury yields overnight. The dollar trades steady following an end of week squeeze on recently established longs. Crude oil trades lower on China growth and Delta worries while gold remains stuck despite strong tailwinds from lower yields and dollar. Focus on Friday's U.S. job report and further news from China after July Manufacturing weakened amid export weakness and supply disruptions.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures are starting the week on a positive note with Nasdaq 100 futures up 0.5% driven by strong earnings across the board and positive sentiment coming out of Square’s $29bn acquisition of Afterpay, and of course the lower US 10-year yield which is compressing real yields and supporting valuations. S&P 500 futures are also following Nasdaq 100 up higher highlighting that today’s rally is broad-based.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin is falling below 40,000 this morning as regulatory pressures continue to darken the news sentiment. The latest worries for crypto traders are a new bill in the US Congress aiming to tax crypto profits to fund the US infrastructure deal and a new bill that aims to require US firms in the crypto industry to send a form 1099 to their customers; in the case a customers choose to remain anonymous it will per definition be regarded as US tax evasion.
AUDUSD – despite weaker than expected Chinese PMI figures AUDUSD is not extending its declines from last week showing the market is not selling commodity currencies on weak news despite CFTC data shows that the non-commercial futures positions increased their net short position for the fifth straight week. Maybe traders are betting that China will soon swing into stimulus and revert some of that recent negative sentiment over the economy and its markets.
Arabica coffee (COFFEENYSEP21) continues to see the biggest price swings since 2014 after weather worries in Brazil, the world’s largest producer and exporter of coffee, last week sent prices to a 2014 high at $2.15/lb, before dropping to $1.80 on Friday after reports the recent cold spell may have been less devastating than expected. It is still too early to estimate production losses, as more cold weather may emerge, and with that in mind we expect continued volatility with some underlying support emerging soon.
Gold (XAUUSD) remains stuck close to $1800 following an end of week roller-coaster which saw the metal reverse sharply lower after once again finding resistance above the 200-day moving average, currently at $1820. These developments have created a double top which has led to fresh tactical short selling. Having just returned from my summer holiday, the first thing that springs to mind is golds continued inability to respond positively to the July collapse in US 10-year real yields to a record low. Overall, the metal remains stuck in a 50-dollar range with a continued recovery in silver (XAGUSD) from a recent six-month low against gold needed to support precious metals in general. Focus on Friday’s U.S. job report.
Crude oil futures have given back some of last week's gains overnight in response to weaker China data and continued worried about the spreading of the delta coronavirus variant. The market meanwhile is also watching rising tensions between the U.S. and Iran as Washington on Sunday warned about an “appropriate response” after blaming Tehran for last week’s drone attack on an Israel-linked oil tanker. Brent crude oil has settled into a range around $75 with Delta demand worries offsetting the current tight supply outlook. Focus on Iran developments and EIA’s weekly stock report with Cushing levels currently trailing the five-year average by close to 30%.
US Govt Bonds (SHY:xnas, TLT:xnas, IEF:xnas) - The US 10-year yield is trading below 1.23% this morning continuing its push lower as investors demand safe assets driven by increased worries over the economy driven by a Chinese economy slowing down (PMI figures disappointed today). New data is also showing that Japan’s GPIF (public pension fund) has reduced its US Treasury holdings to 35% down from 47% previously highlighting that foreign investors are increasingly worried about the real yields offered by US bonds.
What is going on?
Bullard leans more hawkish than Powell in recent speech. On Friday Federal Reserve Bank of St. Louis President James Bullard said Federal Reserve policy makers should begin tapering of asset purchases in the fall and wind up the process by March 2022 in light of U.S. inflation running much higher than expected. Furthermore, he said “My preference would be to get a decision in September and start sometime after that”.
Square is buying Afterpay in $29bn acquisition. The Australian-based Afterpay is the most successful story within the buy now and pay after industry, with revenue growing 93% in 2020. With today’s acquisition announcement Afterpay gets a takeover value to revenue metric of 42x which is most likely the highest in modern equity markets for an acquisition of this size.
Protests in South Africa cloud the outlook, shake the Rand. Violent protests against the jailing of former South African president Jacob Zuma have resulted in several deaths, road closures and widespread business closures as more than 200 shopping centres were looted in what current president Ramaphosa described as “opportunistic looting”. AT the same time, the country is in the midst of a fresh and deadly Covid resurgence.
What are we watching next?
SEC blocking of Chinese IPOs. The US regulators are scrutinizing Chinese IPOs and blocking them until demanding better risk disclosures are met. This is another step in the ongoing tensions between the US and China and follows China’s own crackdown on for-profit education companies and technology firms relying on user data. The news has got Chinese-listed technology firms to rally today.
Earnings to watch this week. The Q2 earnings season has so far been strong with few signs of companies being hit by rising commodity prices. However, some companies such as Unilever are out saying that it is beginning to impact margins and thus the rising commodity prices could be a theme to watch for Q3 or Q4. This week almost 200 companies are reporting earnings with the most important listed below:
Economic Calendar Highlights for today (times GMT)
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2024: The wasted year
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.
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.
