Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: Yesterday and overnight saw equity markets generally trying to extend their recent sharp gains but unable to sustain the new highs as a sideways consolidation set in. A bit of caution may settle over the market ahead of the speech from Fed Chair Powell at the Jackson Hole Fed Symposium on Friday, although many question whether the Fed is ready to stick its neck out and indicate any urgency to slow purchases with the delta variant clouding the outlook.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures waxed and waned yesterday deciding in the end at a higher close with momentum extending into today’s session. Talks from PBOC to support the Chinese economy and the general sentiment lift across assets related to China has blown fresh optimism into US technology stocks. The MSCI World Index has now had 211 trading days with drawdowns less than 5% indicating that the market is getting too frothy.
EURUSD and EURJPY – while we await for EURUSD to resolve either back below the key 1.1700 area after finding support below there at the beginning of the week, or posting a more definitive bullish reversal above 1.1800 in the wake of the Fed Chair Powell speech on Friday, we keep an eye on EURJPY and JPY crosses generally as any surprises from the Fed could jolt US yields, which have been incredibly quiet of late (higher yields generally JPY negative and vice versa). EURJPY has remained heavy even as EURUSD has tried to back up higher despite the strong surge in risk sentiment and continues to trade below 130.00 and below its 200-day moving average, possibly ready for a full capitulation lower if the next key zone around 127.00-50 gives way.
AUDUSD – the Aussie rally fell short of the key 0.7304 level (61.8% Fibo) in its sharp rally attempt off the 0.7106 lows as it topped out at 0.7260 before rolling over slightly overnight. AUDUSD certainly needs to achieve a rally back above 0.7300-50 to indicate a neutralization of the downside threat. Metals prices are mixed, with iron ore jumping higher before fading overnight after a strong day yesterday, while copper futures are heavily bid over the last few sessions, as a re-igniting of the commodity rally would likely be needed to spark new outperformance from the Aussie.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin has suffered a further setback after recently poking above the 50k level, trading as low as 47.6k overnight before rebounding. Ethereum retreated further away from the important 3,350 resistance area, trading near 3,200 this morning. The Friday US futures positioning data indicates that leveraged funds (usually hedge funds and money managers) held 16,000 short positions in the week ending Aug. 17. This may indicate the use of “carry trades” to profit from basis premiums on futures contracts relative to spot positions.
Gold (XAUUSD) has once again hit the pause button after its recent advance got rejected at the 200-day simple moving average at $1810, thereby falling short of challenging key resistance above $1830. With no major price negative signals coming from yields and the dollar overnight, the retracement back below $1800 is mostly due to caution ahead of the Jackson Hole symposium on Friday where the market will be looking for more insight on when the Fed plans to begin tapering its bond purchases. The July dislocation between falling Treasury yields and stable gold prices may indicate current gold prices are already pricing in a potential 0.25% rise in the 10-year real yield. Support around $1790 followed by $1780.
Crude oil (OILUSOCT21 & OILUKOCT21) has paused following its biggest two-day gain since November. The price has in our opinion returned to neutral with delta worries being offset by increased demand in India and Sunday’s fire on an oil platform off Mexico halting 0.4m b/d of production. The market is also adopting a wait-and-see approach ahead of Friday’s Jackson Hole speech by Fed chair Powell, and after US crude and product stocks, according to API, may have dropped by less than expected last week. Following Powell’s potential dollar moving speech the market will look for any change to OPEC+ output policy when the group meets September 1. Brent has paused after retracing half the July to August correction, with a break above $71.25 targeting $72.8.
The US yield curve steepens following a strong 2-year note auction, putting in focus today’s 5-year note auction (SHY, TLT). The 2s10s spread widened 3.5bps yesterday after a strong 2-year note auction which saw the highest demand of indirect bidders since 2009. Investors might have been attracted by the auction’s high yield, which offered 2bps more compared to the previous. Yet, a lot of speculation is for the front part of the yield curve to fall further as the RRP registers new record high volumes almost every day. Today’s expectations for the 5-year note auction are high, and pivotal to understand how investors position ahead of the Jackson Hole symposium.
What is going on?
Hungary’s central bank adds QT to rate hikes, boosts HUF – the 30 basis point rate hike to 1.50% was expected, but the Hungarian central bank added a tapering of bond purchases of some HUF 10 billion per week (to HUF 50 billion) and indicated that it will continue to tighten until the inflation level reaches its goal of 3%. HUF jumped on the news on top of significant gains in recent weeks against the Euro as it closes in on the lows near 345 from June. The central bank will use the September meeting to assess the success of its current policy and may offer new guidance.
Mixed August U.S. Richmond Fed Manufacturing Index. In a pattern seen in other regional US manufacturing surveys this month, the headline figure here dropped to 9 versus 25 expected. This is mostly explained by a deterioration in local business conditions. On the bright side, manufacturers were still optimistic that conditions would improve in the next six months. They also reported a slight decline in the average growth rate of prices paid.
The rebound of the German economy is weaker than in many other eurozone countries. The economy grew by 1.6% quarter-on-quarter in Q2 versus 2.1% in Q1. The rebound was mostly driven by an increase in private consumption (+3.2% QoQ) and government spending (+1.8% QoQ). On the downside, private investment and exports experienced slow growth (+0.5% QoQ for both). This highlights the negative impact from supply chain disruptions which is likely to last longer than most expect.
US Speaker of the House Pelosi moves forward with Biden’s $3.5 trillion social spending plan, by making a deal with moderate House Democrats in promising that she would move to pass the bipartisan $1 trillion Senate infrastructure bill by September 27.
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.
German election polls – the German social democratic party (SPD) is polling above the long-ruling CDU/CSU bloc for the first time in this election cycle and the first time since 2006. A revolution may be coming to German policy, both toward Europe and toward fiscal spending. The situation bears watching as we look for the potential of a new centre-left coalition with the Greens after the September 26 election.
Earnings to watch today. Today’s key US earnings focus is Salesforce and Snowflake both set to report after the close. Xioami, the biggest manufacturer of smartphones in China, is expected to report after the close in China.
Economic calendar highlights for today (times GMT)
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