The models are broken
The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.
Chief Investment Officer
Summary: The US equity market staged a strong recovery on Friday and futures extended the rally in a strong Asian session overnight, with the Nasdaq 100 index futures trading back up within a fraction of a percent of the all-time highs. The sentiment shift is in evidence nearly everywhere, with crude oil rallying sharply and the US dollar and JPY safe havens wilting to start the week. The Thursday through Saturday Jackson Hole conference this week is the calendar highlight of the week ahead.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the “buy-the-dip strategy” is very much alive with Nasdaq 100 futures strongly higher from last week’s lows following a couple of nervous sessions. Nasdaq 100 futures trade around 15,130 with the market likely aiming to push into new highs in today’s session. S&P 500 futures have also bounced but are further away from the recent all-time high compared to US technology stocks.
EURUSD – is creeping back above 1.1700 this morning after breaking below that key level last week, with the US dollar weakening clearly the driver of the action after risk sentiment staged a strong recovery on Wall Street on Friday and this time avoided a weak session in Asia that plagued much of last week. A close above perhaps 1.1750 would start to suggest a rejection of the downside break, although really a 1.1800 move through the Fed Jackson Hole conference this week would be needed to make a statement that the lows are in for now.
USDCAD – with the reversal back to positive for nearly everything pro-cyclical on Friday, USDCAD has come tumbling off its Friday highs that fell well short of the huge 1.3000 level, with a high of 1.2949. Still, last week saw an enormous squeeze from near the 1.2500 level at the start of the week, and it will take considerably more USD selling to fully reverse developments, perhaps as low as 1.2600.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - powered higher to start the week, taking Bitcoin above 50k for the first time since the huge sell-off in May. Ethereum is also well bid and trading up at new local highs to start the week. The smaller crypto Cardano (AADA:xswx) is now the 3rd largest crypto, due to a price hike from positive expectations on its long-awaited smart contract capabilities. Additionally, Paypal (PYPL:xnas) is expanding its crypto offerings outside US and will allow clients in UK to buy, hold and sell four different cryptocurrencies.
Crude oil (OILUSOCT21 & OILUKOCT21) as well as most other commodities has started the week with gains in response to improved risk appetite, not least supported by a softer dollar. Last week’s slump, the worst in three years for oil, was driven by the delta variant, Chinese growth worries, and the prospect of reduced Federal Reserve stimulus. While the virus remains a threat to the short-term demand outlook, despite signs of an improving situation in China, this week’s Jackson Hole summit may give the market some ideas about the timing of tapering (see below). Double bottoms have emerged in Brent at $64.50 and WTI at $62 while speculators cut bullish oil bets to a 9-month low in week to August 17.
HG Copper (COPPERDEC21) continues to recover following last week's slump on supportive signs from China where stock levels have fallen and local premiums above LME spot has risen in response to the government’s efforts to combat the recent virus outbreak. Also, the risk of strike related disruptions in Chile remains with a slew of mines undergoing contract renewal talks, with unions at two mines currently out on strike. The sharp recovery from below $4/lb, now a double bottom, together with the long-term supportive outlook for copper has helped attract fresh buying and short covering. First level of resistance at $4.215 followed by $4.295.
What is going on?
Advantage Scholz – In a hypothetical direct vote of the German chancellor, SPD’s Olaf Schulz would get 41% of the votes against only 16% for CDU/CSU’s Armin Laschet and 12% for the green candidate Annalena Baerbock according to a DeutschlandTrend poll of 20 August. On the question of « Which party should lead the next government? », the SPD has now drawn level with the CDU at 30% of support. What is even more striking is that a majority of FDP voters – who normally are closer to the CDU/CSU – want Scholz rather than Laschet. Laschet’s disastrous campaign and apparent lack of compassion during the flood crisis pushed the CDU/CSU much lower in recent polls. The race is wide-open. It is still early days. Much can happen in the next four weeks (see our last German election update here).
Dallas Federal Reserve President Robert Kaplan warned Friday he may rethink his call to taper to start in October if the Delta variant significantly impacts the U.S. economy. Until now, the Delta variant had no material effect on mobility. According to the latest data released by Google, the visits to retail and recreation stores – which are a good barometer to assess the economic impact of the pandemic – are back to the same level as before the outbreak. But a pending question remains regarding how quickly people will get vaccinated, especially in Southern States.
Covid in Asia: Australia and New Zealand outbreaks worsen, China announces zero cases. Despite strict lockdowns, Australia is dealing with record Covid case numbers and is said to be rethinking its approach to fighting the virus, while New Zealand extended its lockdown on the discovery of 35 new cases, all linked back to the first case discovered in several months in the community last week. China, meanwhile, announced that found zero new cases of Covid after a string of strict lockdown measures of late that has disrupted traffic at major ports, among other effects.
Sweden Prime Minister Stefan Löfven to step down in November – a surprise move that could eventually trigger new elections, although the market fall-out is so far very limited, in that Löfven was already leading a very unstable coalition and polls don’t point to clear outcomes in the case of an election.
It may be too early to short US Treasuries (TLT). On Friday, the 5s30s spread broke below 109bps for the first time since August 2020. While 30-year US Treasuries remained flat, the belly of the curve widened slightly. It fits in the market narrative that tapering might be a policy mistake and that in the long-term the Federal Reserve will need to return to its accommodative monetary policy. However, things can change in the fall as we will have more information about tapering, inflation and the US Treasury will cut issuance on the front part to issue longer-term securities. At that point, we might see the yield curve resuming its steeping. Until then, yields will remain in check contained by extreme market liquidity.
What are we watching next?
Jackson Hole this week - the bottom line in the wake of the FOMC minutes last week is that most on the Fed seem ready to taper and before the end of the year – but when? This week’s Fed Jackson Hole symposium (Thu-Sat) could provide clues. This theme at the symposium is « Macroeconomic Policy in an Uneven Economy ». We will look for any signs on how the Fed might begin to taper their asset purchases. There are eleven on the FOMC who will decide on taper timing. Of this group, the large majority (i.e., Powell, Clarida, Williams, Evans etc.) look to be advocating late 2021/early 2022 taper. Powell’s speech is scheduled for Friday at 14:00 GMT. Expect higher market volatility.
Earnings to watch today. This week’s earnings are dominated by Chinese companies across banking, insurance, consumer, automakers. Today the focus is on Chinese JD.com which business model is quite like Amazon and also been caught by technology crackdown in China. Palo Alto Networks also reports earnings today and will most likely report strong earnings as demand for cyber security solutions remains high.
Economic calendar highlights for today (times GMT)
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