Market Quick Take - August 17, 2021

Macro 6 minutes to read
Saxo Strategy Team

Summary:  US equities recovered yesterday from a relatively minor stumble, with the broader S&P 500 managing to claw back to a new all-time high by the close before the Asian session brought a bit of retrenchment. In New Zealand, the first community case of Covid-19 in six months spooked crowded NZD longs on the day before the central bank is expected to hike rates. Ongoing Covid-19 concerns in Asia are holding back sentiment outside of the US.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 future nosedived 1.3% in a short timespan late in yesterday’s session before starting a comeback rally that has closed the drop. With the US 10-year yield dropping back towards the 1.2% level technology stocks will get a natural support. The broader equity market is sliding today with Asia looking heavy and European equity futures all in red.

USDJPY and JPY crosses – we continue to focus on USDJPY as a relative measure of JPY strength, but the real action in JPY has been in the crosses, where the recent slide in yields is supporting further JPY strength and major support is under attack in the likes of EURJPY (200-day moving average fell yesterday for the first time in over a year and testing the lowest levels since April) and AUDJPY in a similar state. The JPY rally could deepen if a bit of weak risk sentiment is thrown into the mix.

NZDUSD and all NZD crosses – the NZD was sent into a sudden tailspin overnight on the first confirmed community case of Covid in six months (see more below), which, given New Zealand’s history of extreme measures to prevent the disease from spreading, could result in profound shutdowns of the economy, particularly if it is determined that there are more cases afoot and even more so if it is confirmed that the case or cases are of the delta variant. Already, a rush on supermarkets has been set in motion by this news. Given that yields at the front end of the NZ yield curve has soared to over 100 basis points in anticipation of a string of rate hikes starting with tonight’s RBNZ meeting, the further negative impact on NZD could be considerable if the RBNZ holds tonight, particularly given potentially crowded long NZD positioning.

EU gas (GASNLBASESEP21) and power (POWERDEBASESEP21) soared to new highs yesterday as a Russian supply crunch look set to extend into September. With little explanation from state-controlled gas exporter Gazprom being provided, the market has been left wondering whether the drop is politically motivated related to the Nord Stream 2 which still needs German regulator approval. The current depletion has left the market short of time to refill stocks before winter with the short-term impact being much higher gas and electricity bills across the region as well as higher pollution with gas being substituted by coal.

Gold (XAUUSD) trades higher for a fifth day with lower Treasury yields helping to offset a firmer dollar. With economic activity in China slowing and sentiment in the US taking a knock from a resurgent delta virus, the investment metals have attracted renewed demand. This morning gold trades above its 21-day moving average at $1790, and it may signal a return to the recent range where key resistance remains the multiple tops just above $1830. Silver (XAGUSD) is facing some resistance at $24 followed by $24.50. Today the market will be watching a speech by Fed chair Powell, as well as minutes of the Fed’s last meeting.

This week’s FOMC minutes might be a step towards tapering, but the bond market is not ready for it (TLT). The market is not prepared for the Federal Reserve to taper purchases under its QE programs. Rates have been plummeting since March, hinting at gloomier expectations ahead, dismissing any sign of early tapering. We believe that this week’s FOMC minutes will reveal whether stimulus withdrawal was tackled in depth by the central bank’s members, which could hint to a tapering announcement as soon as Jackson Hole. A surprise will put upward pressure on long term yields, in particular 30-year rates, which are now trading below 2%. Demand diminishes below this level, leaving this maturity particularly vulnerable to a tapering surprise.

Italian government bond yields hit six months low (BTPS). Last week, Italy had to call off a debt auction because the government is flooded with cash. We expect the honeymoon to continue and the BTPS-Bund spread to tighten to 75bps. Yet, it doesn’t mean that Italian yields will not resume their rise. We believe the German election will push yields higher in the entire Eurozone, including Italy. Yet, BTPS yields will soar slower than peers, provoking spread compression against the Bund.

What is going on?

RBA Minutes suggest the central bank is ready to act if Covid impact mounts - in minutes released overnight, the central bank pledged that it is “prepared to act in response to further bad news on the health front should that lead to a more significant setback for the economic recovery”. This sounded rather more cautious than an optimistic statement of just a couple of weeks ago as shutdowns in some of Australia’s largest cities have been widened amid community spread of the delta variant of the Covid virus.

KOSPI 200 plunges 6% in 7 trading sessions. Signs of China slowing down, a semiconductor industry that is peaking in terms of pricing, and a spreading a delta variant in Asia are putting the South Korean equity market under pressure hitting the lowest levels since March. The leading equity index, KOSPI 200, is close to touching its 200-day moving average which is the first time since June 2020.

US August Empire Manufacturing far lower than expected – although it was still at a relatively robust 18.3 reading, the expectations were for 28.5 after the blowout 43.0 of July (highest in the survey’s 20-year history). The index of Prices Received came in at 46.0 versus 39.4, the highest in the history of the survey (three previous all-time highs were set in April, May and July), while the Prices Paid series saw a reading of 76.1, still very elevated if slightly lower than the July reading.

The agriculture sector remains in demand and in the latest COT report covering the week to August 10, the speculative net length in 12 major food commodities exceeded one million lots. Driven by strong buying of soybeans, corn and not least wheat ahead of last week’s bullish WASDE report, with the latter surging higher on weather related production downgrades in the US, Canada and Russia. Dwindling stocks of high protein milling wheat used for human consumption in bread, has given a boost to Paris Milling wheat and Kansas HRW wheat. Sugar is another highflyer due to lower supplies from frost and drought hit regions in Brazil, and news India, the world’s second largest shipper is considering diverting canes towards the production of biofuel to curb imports of increasingly expensive crude oil.

What are we watching next?

Early elections possible for Poland – the ruing Law and Justice party may decide it needs the support of other parties to pass legislation - including a very controversial Media Law that would compromise media independence as well as a tax and spending programme aimed at its populist base - after a party supporting the ruling coalition pulled its support.

RBNZ meeting tonight (Wednesday, 18 August for APAC time zones) – the 25- basis point rate strongly expected by consensus tonight is suddenly in doubt after New Zealand found its first case of “community” Covid in the largest city Auckland today – the first such case since February. No confirmation as of yet on the variant of this case, but Prime Minister Ardern has already called tonight for a nationwide lockdown of 3-days to fight the risk of an outbreak and a 7-day lockdown for Auckland.

Earnings to watch today. We expected Meituan yesterday to release their Q2 earnings, but it has been postponed until 23 August. Today’s earnings focus is BHP Group due to its vast mining operations and thus link to commodity inflation. Walmart and Home Depot are two big retailers in groceries and home improvement which will give good insights into the US consumer outlook for the rest of the year. Sea, which is fast-growing Southeast Asian e-commerce and gaming company, is also reporting and a highly anticipated earnings release as many retail investors are invested in the company.

  • Tuesday: BHP Group, Just Eat Takeaway, Adyen, Alcon, Walmart, Home Depot, Sea Ltd, Agilent Technologies, AIA Group, Fortum
  • Wednesday: NVIDIA, Cisco, Lowe’s, Target, TJX Cos, Analog Devices, Synopsys, Tencent, Geely Automobile, CSL, Coloplast, Carlsberg
  • Thursday: Geberit, Estee Lauder, Applied Materials, Ross Stores, Bilibili, CNOOC
  • Friday: Deere

Economic calendar highlights for today (times GMT)

  • 0900 – Euro Zone Q2 GDP and Employment
  • 1215 – Canada Jul. Housing Starts
  • 1230 – US Jul. Retail Sales
  • 1315 – US Jul. Industrial Production and Capacity Utilization
  • 1400 – US Aug. NAHB Housing Market Index
  • 1730 – US Fed Chair Powell Town Hall Discussion with Educators
  • 1945 – US Fed’s Kashkari (non-voter) to speak
  • 2030 – API Weekly Report on US Oil Inventories
  • 0130 – Australia Q2 Wage Price Index
  • 0200 – New Zealand RBNZ Official Cash Rate announcement

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved, we have put together a general Risk Warning and a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed here or within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.