Market Quick Take - June 7, 2021

Market Quick Take - June 7, 2021

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Equities rallied hard in the US in the wake of a slightly weaker than expected payrolls change data for May, perhaps as the market feared that too strong data would unseat complacent forward rate expectations from the Fed. At the weekend, a G-7 meeting produced an agreement on minimum taxation rules that will particularly affect the US internet giants. Focus this week on the latest US CPI data and an ECB meeting on Thursday.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – Friday’s weaker than expected Nonfarm Payrolls was a boon for technology stocks pushing Nasdaq 100 futures into its highest close since 3 May, as the figures were interpreted by this part of the equity market as interest rates will stay lower for longer. Our view remains that this is the wrong interpretation by the market, and that the inflationary dynamics will increasingly become entrenched at higher levels changing the narrative to inflation not being transitory and that the Fed will have to move sooner rather than later.

Euro STOXX 50 (EU50.I) - volatility continues to come down across many equity markets and STOXX 50 futures trading ranges have collapsed to less than 1% in the past four trading sessions. There are no major macro figures on the table today that can move European equities except for Sentix Investor Confidence at 0830 GMT. Otherwise, our view is that STOXX 50 futures will try to aim for breaking above the 4,100 level today.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). This weekend was a particularly quiet one for cryptocurrencies, with Bitcoin mired in the lower part of the recent trading range below the key 40-42k resistance, while Ethereum has rebounded from a dip and traders there will focus on the major resistance at 3,000 this week that has capped price action since May 20.

EURUSD the US dollar posted a local high last week in the wake of strong ADP private payrolls and other data indicating a white-hot US economy, only to sell off sharply on Friday after the release of the weaker than expected May non-farm payrolls growth number. It is difficult to interpret Friday’s action, given that it feels like the market is chopping back and forth without directional follow-through recently, possibly suggesting that we may have to wait for the June 16 FOMC meeting to get a stronger impression of what lies ahead for the US dollar. The ECB meets on Thursday and will also bring its latest economic forecasts, but will likely produce similar expectations to the Fed in indicating that current inflationary pressures will prove transitory. The ECB will be reluctant to tilt too hawkish, at least, with the EUR trading near the top of the range versus the USD.

EURSEK – with risk sentiment still in a very positive mood in Europe and higher-than-expected inflation numbers keeping any thoughts of Riksbank dovishness at bay while Europe’s main surge of reopening growth is just now set to unfold, the Swedish krona looks in a good place to try punching higher versus the single currency as the huge 10.00 level looms for EURSEK, a level the pair has not traded below since early 2018, although given that Friday’s sell-off in EURSEK to new local lows coincided with the US employment data that send US treasury yields lower, SEK may require that global yields remain tame.

Gold (XAUUSD) trades softer in early trading following an end of week rollercoaster ride where prices first slumped on emerging profit-taking, only to bounce back on Friday following what looked like “Goldilocks” US payroll date (see below). Gold’s so far shallow correction following a 240-dollar rally highlighting the risk that all is not done yet on that front. The first key downside support level that will determine the underlying strength of the market is the 200-day moving average at $1842. Focus on the dollar and whether yields can maintain their Friday drop, Bidens spending plan and the market reaction to the G7 tax agreement (see below).

Speculations for a June Federal Reserve tapering weakens, but probability to discuss it during Jackson Hole increases (TLT, IEF). Ten-year US Treasury yields dropped to 1.55% after the jobs miss. However, wage growth is robust indicating that, after all, inflation might not be temporary. It may be what Janet Yellen is looking at when commenting on the beneficial impact of higher interest rates, showing that ground for tapering starts to being laid down. Although the Federal Reverse will not discuss tapering at next week’s meeting, we expect it do to so at Jackson Hole, pushing 10-year yields to 2%.

European sovereign yields may be volatile ahead of the ECB meeting on Thursday (VGEA, BTP10). We expect the ECB to keep monetary policies unchanged on Thursday as demand for EU government bonds continues to be weak. Yet, we might see yields rising ahead of the ECB meeting with Germany and Italy issuing long terms bonds. The correlation between US Treasuries and European sovereigns continues to be positive. Thus, it remains vital to understanding the direction of US peers before positioning, despite monetary policies in the bloc remain unchanged.

What is going on?

US payrolls change a “Goldilocks” data release for market, but note rapid earnings growth, equities and treasuries rallied sharply on the release of the US May jobs report, with the nonfarm payrolls change registering a solid +559k increase with a small positive revision to the prior two months’ data. After the May ADP private payrolls change data showed huge payroll gains near 1 million jobs earlier in the week, the market was perhaps fearing a very strong official NFP payrolls change that might lead to a sudden course correction from the Fed and a spike in hawkish expectations, but this slight miss is a “Goldilocks” number that suggests nothing is amiss with the recovery while possibly buying more time for the Fed to sit on its hands on policy guidance. Do note, however, that the May Average hourly earnings report came in very hot for a second month in a row with a 0.5% month-on-month increase after April’s +0.7%.

G-7 meeting at the weekend announced minimum tax of 15% for global. The G-7 meeting of finance ministers at the weekend produced an agreement to would see member countries collecting higher taxes from especially the huge US internet and tech firms at a rate of “at least 15%”. Details are few, as any eventual deal would have to include far more nations in any eventual framework, but the G20 meeting in July and talks within the OECD group of nations are next steps as this major initiative will inevitably gain traction after the agreement in principle.

China’s imports of major commodities in May were lower than April’s for crude oil, iron ore and coal while a small increase was seen in copper. These developments probably not related to last months attempted clamp down on commodity speculation and hoarding, instead the reduced imports were most likely a response to record prices deterring buyers and the economic recovery from the pandemic begins and massive stimulus begin to slow.

The weekly Commitment of Traders report covering the week to June 1 saw renewed fund buying of commodities following the May correction. All sectors apart from precious metals and livestock recorded strong gains led by crude oil, copper, corn and coffee. In response to these developments hedge funds increased bullish bets across 24 major commodity futures by 3%. A relatively small change given the strength of the recovery with contracts like copper and wheat seeing a reduction in net longs despite rallying strongly. Perhaps a sign that investors have adjusted their expectations in response to very elevated prices.

What are we watching next?

US CPI print this week to counter the reaction to Friday’s US jobs report? With the May US official Non-farm payrolls showing somewhat slower than expected growth in payrolls (even if earnings were sharply higher), the market is pricing the Fed to make no notable shift in guidance at the FOMC meeting next Wednesday, June 16. One of the last key data points ahead of that meeting is this Thursday’s May CPI report, expected to show headline inflation running at 4.7% year-on-year and core inflation at 3.4%, both multi-decade highs – if the data comes in hotter still, the Fed may need to shift to a more two-way message that sees a shift higher in asset purchase tapering and rate expectations.

Impact of G-7 tax deal on technology stocks. The new G-7 tax deal includes at 20% taxation of profits above 10% profit margin for digital companies, which effectively increases their relative effective tax rate and therefore should be a negative. We will be watching how the market reacts over the week to this new digital tax.

Earnings reports this week. The quietest earnings week since early March

  • Monday: Marvell Technology, Coupa Software
  • Wednesday: Inditex, Brown-Forman
  • Thursday: Chewy

Economic Calendar Highlights for today (times GMT)

  • 1900 – US Apr. Consumer Credit
  • 0130 – Australia May NAB Business Conditions/Confidence

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.