Market Quick Take - May 25, 2021 Market Quick Take - May 25, 2021 Market Quick Take - May 25, 2021

Market Quick Take - May 25, 2021

Macro 6 minutes to read
Saxo Strategy Team

Summary:  US equity markets had a banner day yesterday, likely driven in part by additional comments from Fed members that they view inflation expectations as well anchored. US treasury yields edged lower to two-week lows at the long end of the curve, and the US dollar dipped. Cryptocurrencies rebounded sharply from a week-end sell-off.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the strong surge in equities yesterday, in part on a trio of Fed members commenting on the expectation that the recent inflation spike will prove temporary, saw the Nasdaq 100 index surge back above the 21-day MA near 13,520 and the 61.8% retracement of the sell-off at 13,625, which leaves only the all-time highs just above 14,050 as the only remaining resistance as the yield-sensitive index has staged a strong recover while long US treasury yields have pushed to two-week lows. The S&P 500 was never as heavily impacted, but also rose clear of recent resistance, including its own 21-day MA at 4,162, leaving it less than a percent from the all-time high of 4,238.

Euro STOXX 50 (EU50.I) - yesterday’s session saw a strong breakout of the recent highs and the momentum in European equities is continuing this morning with STOXX 50 futures pushing firmly above the 4,050 level. The banks are leading the momentum together with cyclical industries. Today’s key support level is naturally yesterday’s close at 4,043.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). After testing the recent lows at the weekend, major cryptocurrencies rallied sharply yesterday, perhaps in part on comments from famed hedge fund billionaire Ray Dalio, who said that he owns Bitcoin yesterday, touting its potential to remain a store of value, although he also noted that “Bitcoin’s greatest risk is its success” as governments could move against the space at some point.The key area of resistance for Bitcoin remains the 42k area that it recently failed to retake after its rebound from the prior large selling wave. Similarly, the 3,000 area looks like the key resistance for Ethereum.

EURUSD we have seen four sessions in a row with a direction changes, with the latest one back to the upside yesterday in the wake of Fed comments indicating widespread belief among Fed members that inflation pressures will prove transitory yesterday. EURUSD Is trading this morning poised near the top of the recent range (just below 1.2250), and has perhaps been unable to punch higher as the recent sharp rise in German Bund yields has reversed sharply in recent sessions, indicating the enthusiasm surrounding an improved post-Covid lockdown growth outlook is unable to take yields higher. A close above range resistance will set the focus on the cycle high from early this year at 1.2349.

JPY crosses – a US travel warning to Japan is adding to widespread clamor for Japan to cancel the Tokyo Olympics that are scheduled to begin in just under two months, as Japan struggles with Covid outbreaks and a very low level of vaccinating its population. This issue hanging over Japan may have spoiled the JPY’s ability to rally on the recent drop in global safe haven yields as the focus elsewhere is on post-opening up growth surges. A cancellation of the Olympics could mark a near-term capitulation in JPY longs, but if yields remain low, the JPY looks too cheap, particularly given recent reminders that Japanese real yields (the nominal yield less inflation) are far less negative than elsewhere.

Crude oil (OILUKJUL21 & OILUSJUN21) trades higher after spending the past two trading sessions reversing most of last week's losses. This in response to expectations the market will be able to absorb additional Iranian barrels should U.S. sanctions end up being lifted. A weaker dollar and steady Treasury yields providing some additional macroeconomic tail wind. Until the global recovery in fuel demand becomes more synchronized, Brent is likely to remain stuck in a $65 to low $70 range. Focus on Vienna today where nuclear talks resumes and the Brent prompt spread which remains close to flat, signaling a market in doubt about the short-term outlook.

Metal's trade mixed following soothing Fed comments on inflation (see below) with HG copper (COPPERUSJUL21) rebounding from a three-week low and a relatively shallow 9% correction. Recent Chinese announcement about striking down on commodity price manipulation having a limited impact given the bullish outlook for so-called “green” metals. Gold (XAUUSD) meanwhile has drifted lower and increasingly looks like a metal that needs to consolidate recent strong gains. As long the consolidation/correction does not challenge the 200-day moving average at $1843, the potential for further upside remains. However, the recent pullback in industrial metals have seen both silver (XAGUSD, XAUXAG) and platinum (XPTUSD) underperform gold, potentially setting up some interesting relative value trades.

The bond market’s focus for the week needs to be inflation (TLT, IEF). Before the US Personal Consumption Expenditures are released on Friday, it will be important to see where inflation expectations will go following today’s Consumer Confidence numbers. Breakeven rates fell from their highs last week after the FOMC minutes showed that members are open to start discussions about tapering in the next meetings. Yet, the Federal Reserve remains committed to the average inflation targeting framework leaving inflation venerable. If inflation expectations resume their rise, we might see US Treasury yields resume their rise.

What is going on?

Fed officials indicate clear bias to believe that inflation spike will prove temporary - with the Fed’s Lael Brainard, an FOMC voter on the Board of Governors, stating that “A very important part of inflation dynamics is longer-term inflation expectations and those have been extremely well anchored, implying that if we saw some  development pushing inflation up I wouldn’t expect that to get embedded in the ongoing inflation rate.” The St. Louis Fed president Bullard and Atlanta Fed president Bostic (FOMC voter) made similar comments yesterday.

The main takeaways from the latest Commitments of Traders report in the week to May 18 were hedge funds increasing their net long in gold to a 16-week high due to continued improvement in the technical outlook during a period of stable Treasury yields and a weaker dollar. Overall funds cut bullish bets to a four-week low with selling across the agricultural sector being the main culprits. Most noticeable was the accelerated net selling across the three key crops where reductions in both corn and soybeans triggered a reduction in the net long to a December low.

What are we watching next?

Swelling use of Fed reverse repo facility, a sign that the Fed will be forced to taper purchases? Daily usage of the Fed’s reverse repo facility reached nearly $395B yesterday, above the $369B from Friday and the highest level since 2017. Normally, a rise in this facility was associated with quarter-end, as financial institutions strived to reduce their balance sheet size for reporting purposes. But many suggest that this time, the swelling of this facility (ironically showing the Fed having to lend out huge amounts of treasuries when it is buying them via QE to supposedly support the market) suggests that there is too much liquidity in the US financial system and that the Fed’s QE is worsening this distortion and they will need to taper asset purchases.

US infrastructure talks in Washington near collapse? Recent signals suggest that Republicans and Democrats are not nearing any agreement on an infrastructure deal and Republicans may not even bother to make a counter-proposal in response to Biden’s initial proposal. Progressive Democrats are arguing in favour of moving without Republican involvement.

Robinhood IPO S-1 filing is expected this week – 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 published this week and is aiming for first day of trading by the end of June.

Earnings reports this week. The earnings season is lost its transmission into broader equity sentiment at this point, but there are still earnings releases on the tap. Nvidia earnings on Wednesday are expected to be strong due to strong demand for crypto mining and gaming and is key release for the semiconductor industry and the overall technology sector. Snowflake is part of the bubble theme basket and will report its second earnings release since its red hot IPO last year. On Chinese earnings the key focus this week will be on Xiaomi, Pinduoduo, and Meituan.

  • Monday: Sino Pharmaceutical
  • Tuesday: Alibaba Health, Intuit, AutoZone, Zscaler,
  • Wednesday: Xiaomi, Bank of Montreal, Nvidia, Pinduoduo, Snowflake, Workday
  • Thursday: Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Salesforce, Medtronic, Costco Wholesale, Dell Technologies, VMware, Autodesk
  • Friday: Meituan

Economic Calendar Highlights for today (times GMT)

  • 0800 – Germany May IFO Business Climate Survey
  • 1200 – US Fed’s Barkin (Voter) to speak
  • 1300 – US Mar. S&P CoreLogic Home Price Index
  • 1340 – US Fed’s Evans (voter) to speak
  • 1400 – US Apr. New Home Sales
  • 1400 – US Fed’s Quarles (Voter) to testify before Senate committee
  • 1400 – ECB Chief Economist Lane to speak
  • 1400 – US May Consumer Confidence
  • 2030 – API’s Weekly Crude and Product Stock Report
  • 0200 – New Zealand RBNZ Official Cash Rate Announcement
  • 0300 – New Zealand RBNZ Governor Orr press conference

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.