Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Equities put in a weak session in the US yesterday and the sour mood continued overnight for most Asian markets, perhaps aggravated in part by a new ugly melt-down in the crypto currency space after the Chinese central bank reminded the market that digital tokens are not allowed as a form of payment. Elsewhere, the euro is stronger more than the US dollar is weak as EURUSD posts sharp new highs.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – while the broader equity market was down yesterday our equity theme baskets such as bubble stocks and green transformation were higher. Nasdaq 100 futures are edging lower in early European hours with the 13,095 being the next key support level. The ‘not-transitory-inflation' narrative is building momentum with inventory-to-sales figures in the US collapsing to new multi-decade lows and bottlenecks popping up everywhere in the economy. Rising inflation expectations is the key catalyst for value vs growth, and ultimately S&P 500 outperforming Nasdaq 100.
Euro STOXX 50 (EU50.I) - Friday’s big gains have almost been erased with STOXX 50 futures trading close to Friday’s open price following a sizeable move lower this morning. The price action suggests that European equities have entered a trading range as traders are digesting rising inflation expectations, the pace of the recovery, and the continuing chip shortage negatively impacting Europe’s auto industry. The 3,950 level is the key support level to watch in today’s trading session.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). A new widespread deleveraging has sloshed through the cryptocurrency market after the Chinese central bank, the PBOC, reiterated that crypto tokens are not a legal form of payment. Bitcoin sold off through the important 42k area and has tested below its 200-day moving average at 39.8k overnight and traded below 39k at one point before trying to bounce. This sell-off has been deeper and widespread than prior episodes, with Ethereum dumping below 3,000 overnight, with a total top to bottom correction of over 33%.
USDCAD – the USDCAD sell-off yesterday was corralled by a steep sell-off in crude oil and extension of the wobbly risk sentiment. The modest bounce in the pair came just after an attempt toward the very significant (both psychologically and on the chart) 1.2000 area in this pair. The action yesterday actually took the pair below the 2017 low of 1.2062, trading briefly at a more than six-year low. Focus is perhaps on relative yields at the short end of the curve where, if we ignore the gyrations around the pandemic last year, the spread of 2-year rates is back at the lows tested in March and also briefly in 2017 at the prior test below 1.2100. The April Canada CPI print is up today.
EURUSD – the EURUSD rally was interesting yesterday not just because of the break-through to new highs above 1.2180 that extended well above 1.2200, but also because other USD pairs were rangebound on the mild safe-haven bid for US dollars elsewhere amidst a weak session for risk sentiment. In other words, this looks more like a EUR rally than a USD sell-off at the moment. The action is taking the pair close to the 1.2349 top from early January. One coincident indicator worth tracking is the German Bund yield, which closed near the high of the cycle at –10 basis points while US treasury yields have been rangebound.
Gold (XAUUSD) paused after reaching our next key target at $1876, the 50% retracement of the August to April correction. A break above could see it challenge $1922 next with support currently at $1845. For the rally to extend beyond current levels, U.S. economic data needs to continue the recent downward trajectory. While not reducing gold and silver supportive inflation pressures a corrective period of the U.S. data cycle should continue to hold down U.S. Treasury yields while adding downward pressure on the dollar.
Crude oil (OILUKJUL21 & OILUSJUL21) trades lower after Brent again failed to gain a foothold above $70. While the main reason for oils inability to move higher is the ongoing virus threat preventing a synchronized recovery in global fuel demand at a time of rising OPEC+ production, the trigger that took it lower yesterday was an apparent progress of the Iran nuclear talks. Adding to the weakness was an API report showing an increase in US stockpiles. EIA publishing its weekly stock report later today at 14:30 GMT and remember this data covers the period that the Colonial pipeline was shut, hence some distortions can be expected. Channel support in Brent at $67 followed by $66 and then nothing major before the $60-62 area.
Arabica coffee (COFFEENYJUL21) jumped 5% yesterday as ongoing drought in Brazil is hurting plants during a key stage in their development. In addition, the 2020-21 drought has been so severe that it has limited the number of new nodes that trees have formed to carry the 2022 main on-season harvest. Further strength provided by a U.S. report showing American stockpiles at their lowest level since 2015, a sign of improving demand as Covid-19 lockdowns begin to ease. Delayed shipments from Columbia, the second biggest exporter, due to roadblocks and protest adding further fuel to the current bull run.
The bond market selloff could resume today sparked by a surprise in European CPI numbers (GOVT, TLT, VGA). Economists expect the CPI YoY figure to come out at 1.6% and the monthly at 0.6%. Any surprise in these numbers would put the CPI figure close to the ECB’s inflation target sparking tapering fears. Bearish sentiment could quickly leak to US Treasuries ahead of the FOMC minutes and the 20-year US Treasury auction. While US treasury yields are stable around 1.6% since March, they remain vulnerable to inflation and tapering expectations. If they break above 1.75% they could rise fast to 2%.
Italian BTPS are becoming more appetible by the day (BTP10). Italian BTPS are offering a pick up over Greek government bonds amid tapering fears and the reopening of the economy. Italian BTPS are the only European sovereigns offering a positive yield starting from four-years maturity, providing a much-needed space for savers where to park money as negative interest rates are applied to deposits. Italian BTPS are now offering the highest yield in the euro area when looking at long-term maturities paying 2% for 30-year BTPS and 2.45% for 50-year maturity, making them an interesting investment to real money.
What is going on?
UK Apr. CPI in line with expectations - the UK April CPI release had none of the drama of its US counterpart as the headline and core levels came in as expected at 1.5% year-on-year and 1.3% YoY for the core reading. Worth noting that the month-on-month headline rose 0.6%, even if that was expected.
Semiconductor chip delivery times rising to new record – with a metric from Susquehanna Financial Group rising to its highest since it began tracking data in 2017 to 17 weeks, with all major product categories reporting delay. Car companies could lose over $100 billion in sales this year on the chip delays.
Robinhood IPO is on track for June – the fastest US retail brokerage company which was catapulted Robinhood into world-wide fame during the historic GameStop squeeze as the company was forced by US regulators to put up more regulatory capital to maintain client positions. Since the hectic weeks of the GameStop squeeze the retail brokerage firm has worked to filed for IPO to both increase capital but also capitalize on its high growth rates over the past five years. The company is saying that it expects it S-1 filing to be ready by next week and is aiming for first day of trading by the end of June.
What are we watching next?
FOMC minutes up tonight – the minutes from the latest FOMC meeting will be published tonight and, while few expect major hints at any guidance shift in these minutes, analysts will dig around for hints that a rising number of Fed members are growing uncomfortable with the potential for inflation to continue rising to uncomfortable levels, or perhaps hints that the Fed’s purchases of Mortgage Backed Securities would be the first in line for a reduction in the rate of purchases, considering that the US housing market is on fire.
Earnings reports this week. It was a surprise that neither Walmart or Home Depot talked about rising commodity prices and inflationary pressures in their Q1 earnings statements suggesting that the retailers probably do not feel confident of predicting consumer prices. Both companies raised their sales forecasts and Q1 numbers showed yet again that analysts are too pessimistic. Today’s key focus will be on JD.com as emerging market equities could use some sentiment boost from the Chinese e-commerce industry.
Economic Calendar Highlights for today (times GMT)
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