Summary: US equities rose to new all-time high in futures trading overnight after US President Biden was out with his first speech before Congress touting his big new stimulus and tax proposals. Earlier, the market had closed indifferently after the FOMC meeting saw the fed sticking to its guns in its latest policy statement and in the Chair Powell press conference, vowing to not provide any tightening guidance until inflation and employment outcomes are sufficiently established and sustained to do so.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities closed slightly lower in the cash session as the Fed did exactly what consensus expected (nothing – see more below), while the futures market seemed reactive to US President Biden’s speech on his new tax and spending proposals. The S&P 500 was up over 4,200 for the first time overnight and the Nasdaq 100 tried at its latest resistance level, the 14,000 area. Big earnings reports continue to roll today and tomorrow.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin continues to struggle a bit for altitude after failing to rally back anywhere near the 61.8% retracement of the sell-off from the 64.9k to the 47.1k low, which comes in near 58k. Ethereum, meanwhile, has managed a new all-time high yesterday and marginally again overnight north of 2,700 as Bitcoin dominance has faded notably for mor than a month, currently just below 49% of the crypto market cap.
AUDUSD – interesting to note how quickly the reaction to the weak Australia Q1 CPI release faded for AUDUSD, although the cross show us that this was more about USD weakness as opposed to AUD strength. Still, the pair has chopped back and forth in the critical area near the key upside resistance around 0.7825 as we need a rally and close through this area to point to the cycle highs of 0.8000+. Copper and iron ore prices are doing their part to support the upside argument. With the FOMC meeting in the rear-view mirror, and sharp sell-off back toward 0.7700 would be a real disappointment for the bulls, so the next couple of sessions are important for direction.
EURUSD and EURJPY – the euro is trading to new local highs versus the US dollar, where it has rallied through the key 1.2103 Fibo retracement level in the wake of last night’s FOMC meeting, where the Fed delivered the expected do-nothing-for-now guidance. And EURJPY has pulled to strong new highs recently that mimic the widening spread in EU-Japanese yields as the BoJ as established its yield cap for 10-year debt while EU yields have pulled higher. Those yields bear close watching here as a coincident indicator as the German 10-year Bund yield is poking at the key –20-15bps area.
Gold (XAUUSD) and silver (XAGUSD) both found a post-FOMC bid after spending most of the day trading near key support ($1760-65 and $25.80). Prices recovered after Chair Powell vowed not to provide any tightening guidance until inflation and employment outcomes are sufficiently established. U.S. Treasuries rose with the real yield component, a key driver for gold, falling to a near two-month low at –0.82% while the dollar eased (see above). The question remains if these developments are strong enough to rekindle fading investor interest after the biggest one-day redemptions from ETFs since November 2016. In search of answers, the focus now returns to the $1800 resistance level.
Copper (COPPERUSJUL21) has following a short pause resumed its attempt to challenge the 2011 record high at $4.65/lb. First it must break the key $10,000/t level on LME, an attempt that is ongoing after reaching $9,997 during the Asian trading session. Rebounding economic growth and the green transformation look set to create a period where inelastic supply may struggle to keep up with growing demand. Biggest risk to the rally remains the prospect for rising scrap metal availability and a Chinese slowdown, both developments that have yet to occur.
US Treasuries remain vulnerable to inflation numbers, tomorrow’s PCE Index might be catalyst for a selloff (TLT; IEF). The Federal Reserve yesterday was able to convince the market that we are facing “transitory bottlenecks”, and that it is way too early to even talk about tapering. However, while the FOMC meeting went on, inflation expectations rose to new high levels. The USD Inflation Swap Zero Coupon rose above 2.5%, a level it didn’t break since 2014. The ten-year Breakeven also rose above 2.4%, a level previously seen in 2013. Tomorrow the PCE Index it is expected to come out at 1.8%. Any surprise in this data will put inflation dangerously close to the FED’s target rate and a selloff in Treasuries may resume. If 10-year yields break above 1.70% there is a possibility for them to quickly rise to 2%.
What is going on?
US President Biden touts his spending and tax proposals before joint session of Congress, positioning the large recent $2.3 trillion infrastructure bill as a necessary effort, in part, to compete with countries like China and show that democracies can compete. On his tax plans, he noted the increase in wealth of billionaires by some $1 trillion while the pandemic drove millions of Americans out of work. US equities broke to new highs shortly after his speech began.
FOMC Statement and Fed Chair Powell press conference delivered almost nothing, as expected. There were very few changes to the actual statement, which only saw minor upgrades to the comments describing the economy and no changes to the policy guidance. In the press conference, Fed Chair Powell fended off all questions that would hint that the Fed will be tempted to react to incoming inflation and employment data any time soon and that there was not even a discussion of the likely timing of an eventual tapering of asset purchases.
What are we watching next?
Earnings reports this week:
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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