Summary: Stocks edged higher on Wednesday as concerns of China's latest technology clampdown once again eased after Chinese state media tempered their language towards the sector. In addition, a continued flow of solid earnings from Europe and US also helping to offset a more somber mood in Asia. The Delta coronavirus variant remains a key focus, not least in the oil market, given concerns that the global economic rebound could be losing steam. A development that may drive additional government support while keeping bond yields low despite rising inflation. Ahead of Friday's key US jobs report the market will focus on ADP employment and services PMI data.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – strong US earnings releases and better than expected US factory orders and durable goods orders lifted sentiment in equities with Nasdaq 100 futures pushing back above the 15,000 level which has extended in early European trading hours. The 15,075 level is today’s key resistance level to watch and if pushed through could send Nasdaq 100 futures towards recent highs.
NZDUSD – New Zealand Q2 employment rate hit 4%, much better than the 4.4% expected, down from 4.6% in Q1 increasing bets that the central bank will hike interest rates. NZDUSD trades at .7047 this morning with the 0.7100 level as the natural next key level to watch as this is where the 200-day moving average sits.
AUDUSD – managed a small bounce in response to a surprisingly bullish RBA saying it will stick with its planned tapering of bond purchases, thereby betting the economy will recover strongly from a contraction this quarter driven by Sydney’s protracted virus lockdown. Following the recent recovery in the US dollar, speculators now hold the biggest short positions in JPY and AUD. While AUDUSD is currently challenging resistance above 74, the market is nevertheless also keeping an eye on AUDJPY where a break below 80 could signal renewed risk aversion in the market.
Crude oil continues to trade soft with the focus on the risk to demand from a fast-spreading outbreak of the delta coronavirus variant in key importer China. Yesterday’s shallow bounce was followed by another slump which for Brent and WTI was not arrested before prices almost reached $71 and $69. Focus on EIA’s weekly supply report which in recent weeks has provided support with oil and product stocks falling and demand rising while production remains flat despite a year-long price rally. The API report last night however only showed a small decline in oil stocks while Cushing stocks may rise, its first in eight weeks. Also, the aftermath of last week's deadly drone attack on an Israel-managed tanker near the Gulf of Oman remains a focus.
CBOT Wheat (WHEATDEC21) trades near the highest since May as global supplies look set to tighten due to expectations of lower output from top exporters Russia and the US. Rains have hurt grain quality in parts of Europe and China, while heat and drought have slashed production outlook in Russia and North America. According to the latest COT report, speculators have only just flipped their position in wheat back to a net long, and further positive price momentum, supported by bullish fundamentals, may force them to chase the market higher in the short-term. In the short-term, mounting cases of the Delta coronavirus variant may raise doubts over the level of demand.
US Govt Bonds (SHY:xnas, TLT:xnas, IEF:xnas) - The downward move in US 10-year yield seems to have run out of fuel for now with intraday ranges coming in and the benchmark rate stabilising around 1.17%. Yesterday’s story about the hedge fund Alphadyne’s large losses on rising interest rates bets are indications that the recent sharp move lower in interest rates could have a technical character as many market participants have been squeezed on their positions.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin has stabilised around the 38,000 level after several days of declines following SEC Chair Gensler remarks that he views all tokens as securities and that the crypto industry needs much more regulation and oversight to safeguard investors.
What is going on?
Toyota shares decline on earnings. Toyota shares are slightly lower (-1%) in Japanese trading despite a strong beat in Q1 operating income. Investors had clearly hoped for guidance on profits to be raised amid record volume for Japan’s largest carmaker. The company managed to control production despite some challenges on securing semiconductor chips, but Toyota is the carmaker that has been the least impacted by current constraints in semiconductors. Toyota also said that sales of electric vehicles progressed steadily through the quarter.
Losses are showing up in relentless US bond squeeze. Alphadyne Asset Management is rumoured to have lost $1.5bn in its $12bn macro fund as the hedge fund had bet on rising interest rates, but instead as we have described over the past couple of weeks US government bond yields have declined and the curve has flattened. Alphadyne’s flagship fund is down 10% year-to-date. It is stories about significant losses that typically marks the turning points in a given market, so maybe this is a sign that US yields could soon bottom out.
SoftBank Group has built $5bn stake in Roche. The Japanese investment firm says that it believes that Roche’s division Genentech, one of the world’s first biotechnology companies that was the first use bacteria to create a human protein, is hugely undervalued.
Better than expected earnings from Lyft and Amgen. In after-hours trading investors got earnings from Lyft showing Q2 adjusted EBITDA of $23.8mn vs loss of $40.2mn expected and revenue of $765mn vs $700mn expected leading to its shares gaining in extended trading. This is the first profitable quarter for the company and will put pressure on Uber reporting today to also reach profitability sooner (the company has Q4 as its target). Amgen is one of the largest biotechnology companies in the US and delivered EPS of $4.38 vs est. $4.09 and revenue also came in above estimates, but shares were lower indicating investors had hoped for the revenue guidance to be raised.
What are we watching next?
Advantage CDU/CSU ahead of the national German election on 26 September. The latest IPSOS poll of 3 August shows the CDU/CSU candidate Armin Laschet is way ahead of the Green candidate Annalena Baerbock, at 27% against 20%. After an initial surge in polls in mid-April, Baerbock has come under more scrutiny and has started to lose ground. Her party is not fully trusted to deliver across the board. In contrast, the CDU/CSU is trusted to lead the country (Angela Merkel’s legacy). We see a 70% probability that Laschet will succeed Merkel as chancellor. We assign a 60% probability to a CDU/CSU-Green coalition.
Key US macro data are out today. Consensus economists are looking for U.S. private nonfarm establishments to have added 650,000 jobs in July against 692,000 in June. Labor scarcities are still the main issue of the U.S. labor market, in our view. It is related to a bunch of factors, the lingering impacts of enhanced unemployment benefits, fears over going back to work and becoming sick, and difficulties finding childcare before schools reopen in person. The ISM non-manufacturing index is expected to be a bit higher in July at 60.6 against 60.4 in June. The services sector continues to recover, but at a slower path than anticipated, mostly due to labor shortages and supply problems, especially in the leisure industry.
U.S. vice chair of the Federal Reserve Richard H. Clarida will discuss U.S. economy outlook and monetary policy. He will join the Peterson Institute at 1400 GMT today. If he expresses similar views to Governor Christopher Waller on the need to start tapering from October onwards, it raises the likelihood that Chair Jerome Powell would signal taper intentions at the upcoming Symposium of Jackson Hole scheduled for 26-28 August.
Earnings to watch this week. Earnings releases yesterday showed good results, with Alibaba being one of the few disappointments. The slowdown in the Chinese economy and the regulatory crackdown added to Alibaba’s headwinds translating into its first revenue miss in more than two years. Profitability is still strong but a bit more under pressure. Today’s earnings focus is on Toyota Motor and whether they will soon step up their efforts on electric vehicles. We will also focus on Booking due to its travel exposure and Siemens Energy which is part of the green transformation. Roku and Etsy are popular stocks among growth-oriented retail investors and will be important as well. JDE Peet’s is the world’s largest coffee and tea company by revenue and given the latest price gains in coffee futures driven by frost in Brazil it will be interesting to get JDE’s view on the situation.
Economic Calendar Highlights for today (times GMT)
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2024: The wasted year
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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
