Summary: Yesterday saw a mixed session in the US, with the broader market settling a bit lower even as megacaps mostly managed to hold the line. A key focus for the equity market will likely be the long end of the US yield curve, as the US 10-year Treasury benchmark yield rose yesterday to a critical breakout level. The recent sharp rise in yields has put pressure on gold and the Japanese yen.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the broader market traded slightly lower on the day, losing just under 0.5% on the session, while the more megacap heavy Nasdaq 100 index managed to scratch higher to a new record all-time high. The Nasdaq 100 could actually prove more sensitive to any further rise in US treasury yields, however, which will quickly dominate the focus if yields rise at anything approaching the recent two-day pace. The first pivotal levels lower are perhaps the respective 21-day moving average for the indices, near 4,478 currently for the S&P 500 index and some distance away just above 15,300 for the Nasdaq 100 index.
USDJPY – the USDJPY responding very strongly yesterday to the fresh pop in US yields, which is often the case. As the 10-year US treasury yield is near a key breakout level at 1.38% after yesterday’s session, and with anticipation of new LDP leadership in Japan and a new election that could bring a new effort to stimulate Japan and bring more inflation, USDJPY looks primed for a potential major breakout higher if Treasury yields support a move higher. Next key levels include the local pivot near 110.80 and then the cycle top of 111.65 from the summer, above which the focus could shift all the way to 115.00.
USDCAD – USDCAD lurched higher from the 200-day moving average near 1.2525 yesterday and traded well above 1.2600 ahead of today’s Bank of Canada meeting, which we preview below and is unlikely to bring new strong guidance on uncertainty over Covid, etc. The key for traders here could be the direction of US yields and risk sentiment. A spike higher in yields that hits confidence in risk sentiment could see USDCAD rising back toward the highs of the recent squeeze, which topped out below 1.3000, with the next level of note on that directional outcome the 61.8% retracement near 1.2775.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – the cryptocurrency space suffered a near flash-crash correction yesterday, with Bitcoin plunging well back below 50k and trading just above 46k this morning, while the meltdown in Ethereum was worse in percentage terms, as it was down nearly 25% at one point yesterday, just above 3k, before rebound near 3,400 in early trade today. Some argue that the move was a “sell the fact” response to El Salvador’s move to make Bitcoin its national currency yesterday.
Gold (XAUUSD) broke below support-turned-resistance at $1810 yesterday before finding support at $1795, the 21-day moving average. The sixth failed attempt since July to break an area of resistance above $1830 had left the metal vulnerable and once yields rose in response to a massive issuance of US debt, both government and corporate, the dollar rose as well. In addition, investors will watch Thursday’s ECB meeting for any hints of policy changes as it may announce a reduction in its massive stimulus program. Below $1795 the next level of support is $1780, the 38.2% retracement of the recent rally.
Crude Oil (OILUSOCT21 & OILUKNOV21) drifted lower yesterday with the market on the lockout for fresh input. Today the EIA will publish its monthly Short-term Energy Outlook while weekly US stock data will not be published until tomorrow. The report will give a snapshot of Hurricane Ida’s impact on US stockpiles and production, with the latter still struggling to restart. A stubborn Covid-19 refuses to loosen its grip in many regions, thereby continuing to cloud the demand outlook. For now, Brent remains stuck in a tight range between $70.70 and $73.70.
What is going on?
US 10-year Treasury yield rose to 1.38%, which looks a key breakout level. In a very quiet market recently, any further move in US yields could begin to see volatility increasing across asset classes, so equity traders should keep an eye on what treasuries are doing as the persistence and smoothness of the late rally have likely seen complacency and even leverage building in risky assets.
UK Prime Minister Boris Johnson announces tax hike on national insurance (a payroll tax) of 1.25%, more than the 1% expected. The new tax raise is intended to help clear the NHS of a backlog from the Covid outbreak and will unusually also be assessed on pensioners as well as wage earners and employers. It will only run until April of 2023, when a new “health and social care” levy will be implemented. The tax changes will be put up to a vote in Parliament today.
Blackrock raises $1 billion for first Chinese mutual fund run by a foreign company - the fund will be allowed to sell to Chinese individuals, a setup made possible by the trade deal signed during the Trump administration early last year. The move has been heavily criticized by legendary investor George Soros and is an interesting one by Blackrock, which has a dominant position in the fund market in the US.
Corn (CORNDEC21) and soybeans (SOYBEANNOV21) remain stuck near the lowest levels in months on a combination of increased supply as the harvest begins and disruptions at a key Gulf coast export terminal following Hurrican Ida. Sales of soybeans collapsed by 82% in the week to September 2 while corn was 53% lower. In addition, the market is pricing in expectations the USDA will increase production estimates in its monthly report on Friday.
PayPal acquires ‘buy-now-pay-later' Japanese company Paidy for $2.7bn. The acquisition follows Square’s recent acquisition of Afterpay for $26bn as the payments industry is heating up expanding into ever more new corners of the payments industry.
What are we watching next?
ECB meeting tomorrow. Expect the ECB to revise its staff projections upward, given the positive economic momentum in the Eurozone this summer. The Governing Council will also probably announce a slower pace of asset purchases in Q4, from €80bn per month to €60bn per month. The pace of asset purchases would be similar to that of January-February of this year. Looking ahead, we believe ECB hawks will push further in favor of an exit strategy from emergency monetary policy measures. Initially, we expected the debate about the future of the PEPP to happen in December or early next year, but it might happen sooner. Unless the pandemic revives in the coming months, it is unlikely the PEPP will be extended beyond March 2022. Two options are on the table: a transitory accommodative asset purchases program (which has been mentioned by ECB President Christine Lagarde earlier this summer) or an increase of the standard QE program to avoid a cliff edge when the PEPP ends.
Poland’s Central Bank to meet today - amid soaring inflation in recent months, rate expectations have been rising for the National Bank of Poland as the policy rate of 0.10% contrasts with a CPI that rose to 5.4% in August, although recent comments threw some cold water on expectations for today’s meeting as President Glapinski recently cited the risks of rate hikes to the economy. But guidance for eventual future hikes will prove very important for the zloty (PLN).
Bank of Canada meeting later today - the Bank of Canada was one of the first movers this spring in moving to tighten policy with its asset purchase taper in April, but expectations for today’s meeting are very muted with the BoC taking a low profile during the short election campaign ahead of the September 20 election and as the delta variant is surging in Canada as well. USDCAD recently found support at its 200-day moving average near 1.2525 and will be sensitive to guidance from the BoC.
Earnings to watch this week. The earnings season slows this week with most major Chinese earnings releases out of the way, so we will see little impact from earnings going forward. Today’s main earnings focus is on Lululemon Athletica which is expected to show FY22 Q2 (ending 31 July) revenue growth of 48% y/y and adjusted EPS growth of 62% y/y. The focus for investors is to what degree the post pandemic opening is impacting the business; we have seen other companies that have enjoyed tailwind from the pandemic such as Zoom beginning to experiencing a rapid slowdown in growth.
Economic calendar highlights for today (times GMT)
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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