What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – last week’s price action was about as quiet as we have seen in a long time as markets struggle for inspiration in either making a go at the record highs or in finding any new reason to sell. A basic support level like the 21-day moving average is a useful gauge for whether the market will continue to look higher for now. For the Nasdaq 100 this comes in around 13,475, and for the S&P 500 a rather tight 4,165, only about a percent above the current level.
Euro STOXX 50 (EU50.I) - European equity futures opened above Friday’s close but have since given up the gains. Energy is low in equities, also evident in the VIX Index trading below 17, which makes it cheaper for investors to buy some optionality on volatility over the coming six months where we will get a better picture on the transitory vs permanent inflation. In the STOXX 50 futures the 4,050 level is the key support level on the downside, and otherwise the upside is driven by inflows into Europe due to higher beta to inflation and commodities in addition to lower equity valuation compared to US equities.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). The FT leads with a story (paywall) this morning describing US financial regulators readying a more active role in the cryptocurrency market, with the article noting the struggle that US regulatory authorities are experiencing in coordinating their efforts across agencies in their purported intent is to protect savers and investors from harm. Bitcoin traded below 35k this morning, while Ethereum struggled near 2,300, with 42k and 3k the key resistance levels for the two largest cryptocurrencies, respectively.
USDCNH – Even as the USD has failed to head lower recently against other major currencies, the Chinese renminbi has powered to new highs against the greenback not seen since early 2018 as China keeps tight policy and may be using a strong currency policy in part to offset inflationary pressures from rising commodity pressures, which it has moved aggressively against recently. Still, the move seems to be going a bit to quickly for Chinese authorities, which set the daily fix for the CNY a bit weaker than expected and sent out warnings against rapid gains in state-run media. The next major chart area is just below 6.25, the lows of early 2018.
USDJPY – the US inflation data on Friday should remind the market that the US is in a very negative real rates regime as inflation rises far above the policy rate, leaving holders of US dollars with decreasing purchasing power while, despite a weaker yen over the last many months, inflation in Japan remains virtually non-existent. Yet USDJPY rushed higher toward 110.00 last week before the move faded slightly. This week will be a test of whether the break above the prior highs around 109.75 can hold and whether 110.00 will prove a solid resistance level, which it might if US treasury yields remain bogged down in the range. A close back below 109.50-25 would begin to suggest that last week’s move was the latest misleading directional move in the currency market plagued with many such moves that quickly mean revert in recent weeks.
Gold (XAUUSD) is heading for its biggest monthly gain since July as inflation remains the key focus, while Bitcoin at the same time is heading for its worst month since 2011. The recovery in ETF holdings backed by bullion and fund positions in futures remain subdued, a sign that many investors remain unconvinced about the short to medium term direction. However, Friday’s failed downside attempt could indicate that constant bidding and short covering from long term trend systems has not finished. Focus this week on Friday’s job report and whether gold can break above $1923, the 61.8% retracement of the August to March correction. Key support at in the $1845-55 area.
Crude oil futures led by WTI (OILUSJUL21) remain supported as the U.S. summer driving season begins at a time when gasoline stockpiles are the lowest in almost three decades while crude stockpiles at Cushing, the WTI delivery hub, has fallen some 17% below the five-year average. Brent (OILUKAUG21) meanwhile has yet to break above $70 ahead of another round of Iran nuclear negotiations and Tuesday’s OPEC+ meeting where the group is expected to confirm an already agreed 0.8 million barrels per day increase for July. Until the market receives more clarity about the outcome of these, the upside potential beyond the March high at $71.40 seems limited.
European inflation numbers may ignite unfounded tapering fears ahead of the ECB meeting next week, but they will unfounded (VGEA, BTP10). European bond yields are rising ahead of the inflation report due tomorrow. Indeed, the CPI index is forecasted to come out at 1.9% YoY, the highest in three years and close to the ECB target. The market is concerned that the ECB will begin to discuss about tapering in the next meeting, however we believe these fears are unfounded. Following the disastrous 15-year Bund auction last week the ECB will be careful not to discuss about pulling support.
Prepare for another busy week for the bond market as US jobs data are released on Friday (TLT, IEF). If jobs numbers disappoint once again, the market would have some serious doubts about the state of the recovery. However, we believe that it will not change rates’ long-term trend as inflationary pressures continue to strengthen. The PCE core Index on Friday showed an increase of 3.1% YoY, the highest reading in almost thirty years. Additionally, 55% of respondents at the University of Michigan survey are expecting inflation to sustain above 3% in the next five years. Starting from now it will become harder for the market to buy the transitory message of the Federal Reserve, making yields vulnerable to rise.
What is going on?
US markets are closed today for Memorial Day.
US Apr. Core PCE Inflation registered its highest year-on-year reading since the early 1990’s. Even as a huge spike in core inflation was expected, the reading of 3.1% was above expectations of 2.9%, and the core month-on-month PCE reading of 0.7% was the highest since the early 1980’s save for a single spike the month after the September 11, 2001 terrorist attacks. Markets seemed ready for the surprise as US treasury yields closed the day slightly lower and were largely unchanged last week.
The US Commitments of Traders report covering the week to May 25 showed the impact of the recent correction in commodities. During the week the Bloomberg Commodity index dropped 1.9%, with heavy losses in industrial metals (-4.2%) and grains (-5.2%) offsetting continued gains in precious metals and livestock. In response to these developments, hedge funds cut bullish bets across 24 futures contracts by 6% to 2,286k lots, a six-week low. Except for gold and WTI crude oil selling was broad with the biggest reductions seen in natural gas, Brent crude oil, HG copper, soybeans and corn.
What are we watching next?
Australia RBA meeting tonight. Little is expected from this meeting as the RBA has set up the July meeting as the key decision point for whether to re-extend the horizon of its yield-curve-control policy (I.e., whether to keep the April 2024 Australian Government Bond yield capped at 0.1% or to shift that yield cap policy to the November 2024 bond), but we have seen sharp market reactions to moves from the RBNZ guidance shift and the Bank of Canada’s taper move, so any indication that the RBA is leaning more decisively for the more hawkish option could see a sharp reaction in the AUD.
Earnings reports this week. A quiet week ahead on earnings as the calendar Q1 season is over. Tomorrow’s earnings release from Zoom will be interesting to watch given the company has so far lived up to the market’s high expectations despite Covid-19 tailwinds fading for the company. Splunk has been hit hard the last year seeing negative revenue growth and will have to convince investors on Wednesday that revenue growth will come back to trend growth, otherwise the stock could come under pressure. Thursday is the biggest day on earnings with our focus on Lululemon, Crowdstrike, and DocuSign.
- Tuesday: Constellation Brands, Bank of Nova Scotia, Zoom Video Communications, StoneCo
- Wednesday: Varian Medical Systems, Splunk
- Thursday: Lululemon Athletica, Cooper Cos, Broadcom, Crowdstrike, DocuSign, Slack Technologies
Economic Calendar Highlights for today (times GMT)
- 1200 – Germany May Flash CPI
- 2245 – New Zealand Apr. Building Permits
- 0000 – South Korea May Exports/Imports
- 0030 – South Korea May Manufacturing PMI
- 0130 – Australia Apr. Building Approvals
- 0145 – China May. Caixin Manufacturing PMI
- 0430 – Australia RBA Cash Rate Target
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: