Summary: Equity markets bounced overnight on word that Chinese state-backed funds were stepping into intervene after a more than 15% rout in the Chinese CSI-300 in the space of less than three weeks. Divergence in global equities is enormous, as value stocks, including large swathes of European markets, advanced aggressively yesterday, while the US Nasdaq 100 Index suffered a new low close for the cycle.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)–US equities were in sell-off mode yesterday despite no aggressive move higher in the US 10-year yield highlighting that the current drawdown in US technology stocks is altering sentiment among growth investors. US interest rates are coming down overnight and Nasdaq 100 futures are responding well to this move up 1%. Intraday, the 12,500 is the key resistance level on the upside and today’s open price at 12,326 is the support level to watch. Overall, technology stocks remain in a fragile mode with volatility and downside pressure lurking at any moment.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - cryptocurrenciesare finding strong new bids as bitcoin shot to 54,000 and thus beyond a recent pivot high and important Fibo retracement level near 52,500, leaving the all-time top above 58,300 as the last resistance on the chart. Ethereum has also recovered aggressively since the weekend and has snapped back above 1,800, within shouting distance of the 1,975 all-time high from just two weeks ago.
USDJPY – the USDJPY pairhas gone nearly vertical in recent trading, in part on the sensitive of the yen to rising long yields, although this latest extension of the rally higher has not been accompanied by any notable new highs in US yields, which actually eased slightly lower overnight. If yields fail to run higher still, the pair could hit an air pocketsoon – and worth noting that the psychologically important 110.00 level is looming into view, which also more or less coincides with the top of a trading channel in place that has formed since 2016.
AUDUSD–the AUDUSD found support again overnight, helped in part by the Chinese equity market stabilizing, although iron ore futures were in for a tumble overnight. The recent 0.7620 double low is a significant Fibonacci support level (38.2% of rally from early November lows) and is near the range low since the beginning of the year (0.7564), and if caution arises here on the strength of the commodity reflation theme, a break through this area could set the pair up for a test of the existential support levels for the rising trend in the bigger picture – starting with the major 0.7415 area prior top and then the final major Fibonacci support level of 0.7379.
Grain markets await the monthly WASDE report – Soybeans (SOYBEANSMAY21) trades near a 2014 high as the supply and demand report from the US Department of Agricultureis expected to lower even further 2020-21 ending stocks for soybeans and corn on South American supply worries. Dryness in Argentina and damp conditions in Brazil has slowed the harvest pace while reducing the quality of the crops. Wheat (WHEATMAY21) meanwhile took a tumble on Monday as the dollar strengthened, forecasts for beneficial showers in southern Plains and Midwest and expectations for a small upgrade to its carry-out stock.
Gold (XAUUSD) maintains its focus on yields and the dollar and as a result traded lower on Monday as both rose, before bouncing from a nine-month low overnight, andonce again confirming the importance of a band of support between $1670 and $1690. Multiple layers of resistance remain with the first being $1716 followed by $1765.While yields and dollar movements remain the short-term focus, some support may emerge from the potential inflationary impact of President Biden’s $1.9 trillion relief package which could be voted through today. Also watching Chinese PPI tonight given its role as a leading indicator for global inflation (see below).
Copper (COPPERUMAY21) did another pump and dump overnight in Asia as the impact of Chinese state-backed funds intervening in the stock market had a limited impact, thereby supporting the view, that the white metal has entered a period of consolidation while the negative impact on risk appetite from rising yields and a stronger dollar plays out. Copper fundamentals remain strong with the push for cleaner, greener energy transforming the outlook while raising expectations for a rising deficit and it would require a break below $3.83/lb to reduce that focus.
European sovereigns will continue to be fragile as the ECB doesn’t hold on its promises (BTP10, IS0P) - European sovereigns closed flat yesterday despite the ECB didn’t increase its bond purchases under PEPP. Several central bank’s speakers have talked about the risk that higher yields could pose for the European economy reassuring markets that the ECB will not be afraid to act if necessary. Yet, the central bank did not make considerable purchases under PEPP last week, leaving the ECB monetary policy meeting on Thursday the only event that could twist sentiment. It means that European sovereign will remain volatile until the ECB will not take the situation under control.
Emerging market debt’s selloff poses a threat to investors (PCY, ELD) - Despite emerging market bonds still represent an important source of yield and in the long-term they will benefit from recovering commodity prices, in the short to midterm they pose high risks to investors. The selloff in EM debt is unstoppable amid rising US Treasury yields as investors quickly realize that they cost of funding is rising with it. In addition, as bond yields rise in the US many are going to swap EM risk for US risk in order position for a recovery. All of this suggests weaker EM bond prices in the short to mid-term that could prove to be a trap to investors.
What is going on?
Extreme shift in favour of value versus momentum. The performance differential in the US Russell 2000 (small-cap) value index versus the Russell 2000 Growth index shows an extreme shift in favour of value relative to more aggressively valued speculative and growth stocks.This approximately coincides with the more aggressive rise in US treasury yields. Since peaking out on February 10, the R2000 growth index is down some 13.7%, while the R2000 value index is up some 4.7% over the same time frame – a stunning performance differential that speaks to a profound shift in market internals.
What are we watching next?
US Treasury auctions critical to watch-many market developments, from the rout in extremely speculative stocks to the suddenly crumbling yen and some emerging market currencies has been triggered by the sharp recent rise in US yields – most intensely in the wake of a weak 7-year US Treasury Note auction the week before last. So traders and investorsneed to watch the US treasury market for a sense of whether the yield rise and volatility is set to continue or calm for a while, as it is the most important driver of market volatility here.The US treasury is set to auction 3-year Treasury notes today, likely somewhat less pivotal for the overall impression of the strength/weakness of the market than the 10-year Treasury auction tomorrow and a 30-year T-Bond auction on Thursday.
China February PPI tonight - as the world’s factory of consumer goods the price index of Chinese producers is a leading indicator for global inflation. The latest figure for February is scheduled to be released this Wednesday,with expectations at 1.4% y/y figure up from 0.3% y/y in January, and –3.7% y/y in March 2020 at the low point of the pandemic. With basing effects of those year ago price drops rolling into view this month and next, the index will likely risesignificantly further in coming months.
Earnings releases to watch this week:
Yesterday’s earnings from Chinese EV-maker Xpeng were better than expected and the outlook for this year looks strong. It lifted Tesla shares initially, but as US technology stocks weakened throughout the session. Deutsche Post is the earnings release in focus today and has reported before the open in Europe. The German logistics firm is raising its guidance for operating profit in the current fiscal year as the company is finally seeing tailwind from current price hikes in logistics services and higher demand from e-commerce. Revenue was up 13% y/y in Q4, the highest growth in 10 years.
Today: China Telecom Corp, Deutsche Post, JDE Peet’s, Continental
Wednesday: Adidas, Geberit, Oracle, Franco-Nevada, Inditex, Legal & General Group
Thursday: Pinduoduo, Jardine, Matheson, MTR Corp, Jardine Strategic, China Unicom Hong Kong, Sunac China, Swire Properties, Hannover Rueck, JD.com, DocuSign, StoneCo,GoodRx, Wheaton Precious Metals, Assicurazioni Generali
Friday: China Mengniu Dairy, EssilorLuxottica, Fortum, AIA Group
Economic Calendar Highlights for today (times GMT)
0900 – Norway Feb. Region Survey
1100 – US Feb. NFIB Small Business Optimism
1700 – USDA’s World Agriculture Supply & Demand report (WASDE)
1700 - EIA’s Short-term Energy Outlook (STEO)
1800 – US 3-year Treasury Auction
2200 – Australia RBA’s Lowe to speak
2330 – Australia Mar. Westpac Consumer Confidence
0130 – China Feb. CPI / PPI
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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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