Summary: US equities exploded to new all-time highs, at least if the focus is on the S&P 500 Index and especially the Nasdaq 100 Index, which had been rangebound for weeks. Some of the credit for the move was given to the full approval of the Pfizer vaccine in the US, which many see as supportive for vaccine mandates. The good mood continued in Asia overnight as the USD remained on its back foot, while gold surged over 25 dollars off its lows yesterday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures rallied 1.4% in yesterday’s session reaching a new all-time high and the momentum is extending this morning with the index futures sitting at 15,344. The rebound in sentiment in China, stable interest rates, and the rally in cryptocurrencies are likely all contributing to the strong buying of US technology stocks. The broader US equity market measured by S&P 500 futures also closed at an all-time high yesterday and pushing this morning.
Hang Seng (HK50.I) - the index is up 5% over two trading sessions driven by technical buying, better than expected revenue from JD.com, China’s second largest e-commerce company, and buybacks from Tencent on top of Cathie Wood and Ark Invest buying shares in JD.com. Hang Seng futures are trading around the 25,480 level in early European trading hours and the next natural level is half the selloff range at 25,644 and then 25,902.
EURUSD – managed a solid rally back above 1.1700 yesterday, though clearly EURUSD is a low beta USD pair to the general direction of the US dollar. After breaking below that key 1.1700 level last week, the recovery in risk sentiment has partially rejected the move. A close above perhaps 1.1750 would add further support for the bullish reversal scenario, although really the pair needs to return above 1.1800 on the other side of Powell’s speech at the Fed’s Jackson Hole conference this week to make a statement that the lows are in for now.
AUDUSD – the Aussie has been the weakest of the G-10 currencies over the last couple of weeks as a significant correction in key metals prices weighed and as the country deals with its worst Covid outbreak for the cycle, all while the central bank maintains one of the more accommodative outlooks, forecasting no rate hikes until 2024. Yesterday saw a significant snap-back rally from Friday’s lows of just above 0.7100 in the Aussie versus the US dollar in sympathy with the reversal in risk sentiment. But the move will need to extend to above 0.7350 to suggest a reversal of the latest large down-wave. A 61.8% retracement of the latest sell-off wave comes in a bit lower at 0.7304.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin slipped below 50k yesterday after breaking above the level earlier in the day and traded below that level in this morning’s trade, suggesting that it is the latest key resistance level for the current rally. The equivalent resistance level in Ethereum is near 3,350.
Gold (XAUUSD) trades near a two-week high above $1800 in response to a weaker dollar amid speculation the Federal Reserve may hold off from signaling a taper timeline at the annual Jackson Hole symposium later this week. The general risk on rally gave growth dependent commodities like oil and copper a major boost, thereby allowing silver (XAGUSD) to make up some lost ground against gold. The focus remains squarely on Friday and Jay Powells speech given its potential impact on the dollar and yields. Having clawed back most of the flash crash drop, gold is now back to neutral, and a break above $1830 is needed to change that outlook.
Crude oil (OILUSOCT21 & OILUKOCT21) jumped more than 5% during yesterday’s broader market rally in response to a softer the dollar, easing taper fears and signs China has managed to control its coronavirus outbreak. The rally helped establish double bottoms in Brent at $64.60, and WTI at $62, potentially a sign that the oil market is ready to look beyond the short-term challenges created by the delta variant still sweeping through other regions. A rebound in demand over the coming weeks could still see Brent hit the top end of our current preferred range at $75. In the short-term however, and ahead of Friday’s Jackson Hole event, Brent may find resistance at $70.40 followed by $71.75.
What is going on?
Strong earnings from JD.com and ANTA Sports. JD.com shares rallied more than 10% yesterday as the Chinese e-commerce retailer reported Q2 revenue of CNY 254bn vs est. 248bn and much stronger earnings at CNY 2.90 vs est. 2.12. The result caused Cathie Wood and Ark Invest to buy back JD.com shares following its reduction of Chinese exposure due to the recent technology crackdown. ANTA Sports reported during the Hang Seng session today 1H revenue of CNY 22.8bn vs est. 21.9bn underscoring that the Chinese consumer is still strong. The sports company also announced that it is reducing its board lot size from 1,000 to 200 shares which will lower the bar for investors and likely increase liquidity longer term.
The Pfizer Covid drug given full FDA approval in the US - the shift from “emergency use” approval is seen as a key step for allowing various authorities across the country to implement vaccine mandates. The New York City public school system, for example, will require vaccinations for all staff and teachers.
Economic recovery loses momentum in August. The private sector experienced a slowdown in Europe and in the United States with the composite flash PMI down in most European countries and in the United States due to supply constraints. In France, it was out at 55.9 (4-month low), in Germany at 60.6 (2-month low), in the UK at 55.3 (6-month low) and in the US at 59.9 (8-month low). In the United States, inflation remains a key concern. Markit stated “the rate of input price inflation accelerated to the second-fastest on record (since October 2009), with both manufacturing and service sectors registering a quicker rise in costs. At the same time, the rate of selling price inflation ticked higher as firms sought to pass higher input prices on to clients."
U.S. July existing-home sales rose 2% on a seasonally adjusted annual rate from June to July, with no sales declines showing in any regions. July inventory was up 7.3% yoy. This is equivalent to 2.6 months of the monthly sales pace. We are clearly heading towards more supply in the coming months due to high prices.
European government bond yields remain closely correlated to US treasury yields (BTP10, VGEA, IS0L). Yesterday’s flash composite Purchasing Management Index came out well above 50 showing that the EU economy is growing. It was enough for the market to turn “risk-on” and sell bonds to buy equities. We expect European sovereign yields to resume their rise as soon as the German election next month, and as US Treasury yields begin to soar. The correlation between US treasury yields and Bund yields rose since May showing that falling yields in Europe have largely been caused by plummeting US yields. Hence, the rally in government bonds might be short-lived.
We expect a solid 2-year US Treasury auction today despite poor liquidity in the bond market (SHY). This week the US Treasury will sell 2-, 5-, and 7-year Notes. We expect today’s 2-year notes to be well bid as demand for short-term US Treasuries continues to be high. Yesterday’s overnight RRP facility hit a new record volume at $1.136 trillion showing that there is too much cash chasing very few assets. Some T-Bill trade below the floor of 5bps that the Fed’s set with the RRP facility. Thursday’s 7-year auction will be a bigger focus as the belly of the curve tends to underperform amid tapering expectations, plus liquidity is poor in the bond market as investors are reluctant to take positions.
What are we watching next?
Jackson Hole this week - the latest FOMC minutes from last week suggest that most on the Fed seem ready to taper and before the end of the year – but when? This week’s Fed Jackson Hole symposium (Thu-Sat) could provide clues. The theme at the symposium is « Macroeconomic Policy in an Uneven Economy ». We will look for signs of how the Fed might begin to taper their asset purchases. There are eleven on the FOMC who will decide on taper timing. Of this group, the large majority (i.e., Powell, Clarida, Williams, Evans etc.) look to be advocating late 2021/early 2022 taper. Powell’s speech is scheduled for Friday at 14:00 GMT. Expect higher market volatility.
Earnings to watch today. Today’s key earnings focus is Pinduoduo given yesterday's strong earnings from JD.com which has alleviated some of the concerns over corporate earnings in China. Analysts expect Pinduoduo to deliver Q2 revenue growth of 119% y/y but still reporting a negative net income.
Economic calendar highlights for today (times GMT)
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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.
