Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: US equities lurched to new all-time highs once more as a higher-than-expected CPI reading failed to spook the market and a strong US T-bond auction sent US treasury yields lower. Equities were mixed in Asia overnight. If forex, the lower US yields sent the USD sharply lower, with EURUSD now not far from the 1.2000 area that suggests a neutralization of the recent sell-off.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the major US averages were strong across the board, with many speculative and interest rate-sensitive names like Tesla enjoying a surge after the hot US March CPI number failed to take US treasury yields higher – quite the opposite, in fact. The Nasdaq 100 case index closed within a few points of the 14,000 level and the S&P 500 index reached all the way above 4,140. Breadth was not impressive, however, if we look at small caps and how the median stock performed on the day.
Stoxx 50 (EU.I) - yesterday’s session bounced back from the key support level around 3,900 and Stoxx 50 futures jumped higher this morning on the open and have taken out yesterday’s highs. A close today above 3,929 would be a new all-time high on the close and open up for a potential breakout and more gains. The profit raise from SAP in pre-market news is also bolstering sentiment that Europe is recovering from the pandemic despite a slow vaccine rollout.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin ripped to new dramatic highs as traders abandoned the prior caution in recent sessions around the 60k level. It traded above 64k today. The price action in Ethereum has proven a leading indicator, and in percentage terms, the advance there was even larger in percentage terms. There is considerable anticipation in the crypto space surrounding the IPO today of Coinbase, a large US crypto exchange.
EURUSD and AUDUSD – the USD picture is beginning to tilt lower after yesterday’s action and in the wake of fresh US long treasury yield declines after a firm T-bond auction. EURUSD continued to poke higher through the recent resistance level around 1.1900-25, with little further progress needed to achieve 1.2000, which will neutralize the most recent sell-off wave. This will likely set the structural focus higher for the 1.2350 top. In AUDUSD, the pair is still bogged down in the range, but has put together a rally from well below 0.7600 yesterday after the recent bout of sideways trading took the steam out of the sell-off from the 0.8000+ top. A follow-on move higher through 0.7700-50 would suggest that the downside risks have been neutralized for now.
USDJPY and JPY crosses – a chunky rally in US treasuries yesterday brought yield sharply lower there at the long end of the US yield curve and has sent USDJPY back below 109.00 for the first time in three weeks. This could set up a deepening consolidation of the huge rally wave in USDJPY in February and March, possibly pointing to the next retracement levels near 107.80, while the 61.8% retracement level for the rally wave from the January lows does not come into view until 105.80, close to the 200-day moving average. A move of that magnitude would likely require a significant further decline in the US yields – to at least 1.50% if not lower in the US 10-year benchmark.
Spot Gold (XAUUSD) received a boost from a weaker dollar and favorably developments in the Treasury market where stronger-than-expected US CPI drove inflation expectations higher and real yields lower. Also supporting gold are stabilizing ETF holdings which has seen no significant outflows during the past week. We maintain a short-term neutral view on gold and while the twice rejection below $1680 points to a potential bottom it still needs confirmation, hence the focus on $1765. Silver meanwhile has outperformed gold with a XAUXAG ratio break below 68.5 potentially signaling more on that front.
Crude oil (OILUSMAY21 & OILUKJUN21) received a boost yesterday after OPEC upgraded its outlook for 2021 saying demand would continue to recover despite a resurgence in Covid-19 cases. Additional support was provided by the weaker dollar and an industry report from the API pointing to another decline in US crude stocks. While the demand outlook into the second half looks strong, short-term challenges may still curb the upside potentials to keep Brent rangebound, currently between $60.5 and $65.5. However, a series of higher daily lows could signal a market quietly gathering some momentum to challenge resistance. Focus today on EIA’s weekly stock report and the monthly Oil Market Report from the IEA.
Thirty-year US Treasury auction drew strong domestic demand, however foreign bidders are still lagging (TLT, IEF). Yesterday's strong CPI numbers did not surprise the bond market, paving the way for a solid 30-year US Treasury bond auction. Domestic real money demand was the highest in six years, while foreign bidders are still below their five-year average. Bidding metrics are telling us that today the bond market is not concerned about inflation, however sentiment can quickly change as we head towards a stronger economy. We believe that 10-years will find strong support only when they hit the 2% level, and a selloff can easily be triggered while they trade below this level.
Long-term bond issuance continues with Germany selling 30-year Bunds and the United Kingdom selling 30-year linkers (IS0L, SDEU, GILI). We expect good demand for today’s 30-year Bunds and 30-year Gilt linkers as appetite for long-term issuances remain strong. We believe that more countries will follow up issuing more long-dated government debt as yield-starved investors are not afraid to pick up duration while US Treasuries remain rangebound.
What is going on?
US March CPI came in slightly hotter than expected, with both the core and headline readings rising 0.1% faster than expected for both month-on-month and year-on-year readings. The core CPI rose 0.3% MoM and 1.6% YoY and the headline rose 0.6% MoM and 2.6% YoY. If we exclude the crazy gyrations in CPI readings of last spring, it is notable to consider that the core month-on-month reading of +0.3% would have been the strongest since 2006.
New Zealand central bank leaves rate unchanged as expected. No real change of tune from the RBNZ, New Zealand’s central bank, which said in a long statement that it would like to be confident that inflation is sustained above 2% before indicating new policy tightening. In commenting on the new mandate from the government to ensure that housing prices were not rising excessively, it seems to be taking a wait-and-see approach, as it will take some time to observe the impact of recent government initiatives to restrain speculation. The RBNZ is proposing a “suite of indicators” to track housing price sustainability that will be included in the May Financial Stability Report.
Surging cost of fuel and lumber: While U.S. motorists could be paying the highest price at the pump since 2015 this summer, the cost of building an average new U.S. house has jumped $24,000 as the cost of lumber continues to surge higher. Years of low prices had cut supply and closed mills just before last years unexpected boom as the pandemic and lockdowns sparked a wave of DIY upgrades, renovations and purchase of bigger homes. An acute tightness across the entire timber supply chain has seen the lumber future (LBc1), currently at a record $1180/40ft length trade more than $800 above the average price seen during the previous five years.
SAP is raising its full-year outlook. Europe’s largest software company is raising its fiscal year outlook driven by strong demand for its cloud solutions and a much better than expected Q1 operating profit at €1.74bn vs est. €1.52bn.
LVMH sees Q1 organic revenue growth of 52% y/y. The revenue rebound in Q1 was much stronger than the estimated 29% y/y growth showing that high income households have bounced back much stronger than the general society.
What are we watching next?
The Coinbase IPO will be launched today with the ticker COIN on the Nasdaq (COIN:xnas in SaxoTrader) – this is a highly anticipated IPO, given that Coinbase is the largest US cryptocurrency exchange and more profitable than other exchanges in traditional financial products. The company is certainly lucky with its timing as the listing comes at a time when many cryptocurrencies have surged to new all-time highs, including the two biggest, Bitcoin and Ethereum. The reference price has been set to $250 per share which equals a market value on a fully diluted basis of $65.3bn, but it is our expectation that the opening price in the auction will be much higher given the latest run-up in Bitcoin prices above $64,000.
Earnings reports this week. The Q1 earnings season starts today with the two major US banks, JPMorgan Chase and Wells Fargo, reporting earnings in pre-market. Besides the focus on US financials today, we will also keep an eye on Teladoc Health as this stock is part of our bubble stocks basket and the first test of how much the market demands from these richly valued stocks.
Economic Calendar Highlights for today (times GMT)
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