What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the US yields turnaround aided by the strong Nonfarm Payrolls on Friday have pushed the US 10-year yield to 1.3% and revived the interest rate sensitivity in technology stocks. Nasdaq 100 futures traded lower on the strong jobs report and higher bond yields and the decline has extended in early European trading. S&P 500 futures on the other hand were higher on Friday showing that higher interest rates will benefit value stocks.
EURUSD - pushing lower again on the US jobs report trading around the lows from July. The big support level to watch is now the 1.1717, which is the lows from late March and early April. If this support level is not hold then we could see a major short-term trend lower. A higher USD and potentially higher US interest rates would tighten financial conditions globally but especially emerging markets.
Gold (XAUUSD) and silver (XAGUSD) already under pressure following Friday’s stronger than expected US jobs report, suffered a flash crash during the early parts of the Asian session. Following the weak close on Friday both metals had been left vulnerable into the opening, with the Sunday evening / Monday morning opening often offering a very limited amount of liquidity. Within minutes gold dropped more than 4% while silver slumped 7%, before pairing losses ahead of the European opening. Traders have been rattled by golds strange behavior in recent weeks when falling yields failed to boost the price, while last week’s small turnaround in yields triggered an immediate and strong negative response. This sort of capitulation can often coincide with a significant low in the market but for that to happen economic data is required to turn more gold friendly. With the market focus on jobs over for now, the short-term direction of precious metals could be dictated by U.S. inflation – the other part of the Fed’s mandate - with July CPI due on Wednesday.
Crude oil futures extended Friday’s losses overnight with Brent crude oil trading below $70 as the Covid-19 comeback led by the rapid spreading delta variant continues to raise concerns about the short-term outlook. Additional headwind has also emerged following last week’s dollar and yield rises which is likely to have led to reduced exposure from macro-oriented investors. The market is still expected to be able to absorb the announced production increases from OPEC+ and if not, the group is likely to step in to support prices. Focus this week on monthly oil market reports from EIA, IEA and OPEC (see below).
What is going on?
US infrastructure bill passes last hurdles. Over the weekend the last hurdles were cleared in the US Senate on the new $550bn infrastructure bill creating a bipartisan solution that is expected to be passed in a vote today. This will add more spending to the US economy. Part of the infrastructure bill are two amendments on reporting requirements for cryptocurrencies and tax collection with the former being the most controversial in talks over the past weeks and have hit the crypto industry.
The US job report showed strength across the board. According to the Department of Labor, non-farm payrolls increased by 943k in July, following an upwardly revised 938k person gain in June. The biggest surprise was seen in the rate of unemployment. The official U-3 rate fell from 5.9% in June to 5.4% for July, sharply undershooting the 5.7% rate expected by the consensus. The U-6 rate, which is a better gauge of labor underutilization, was out at 10.1% in June versus a pandemic peak at 22.40% in August 2020. But what is probably the most impressive is that the involuntary part-time employment, which gives a real sense of people that want to work full time but cannot, was down to 4.48 million, below the long-term average of 5.4 million. All of this is likely to seriously fuel tapering expectations.
ECB governing member Jens Weidmann warns of inflation. The German central banker said inflation could rise faster than expected in the euro area and in that case the ECB should prolonging its bond purchase programme too long. He also said that the emergency bond buying programme (PEPP) should end when the downside risks from Covid-19 were limited. The interview is an indication of the hawkish voices inside ECB publicly getting more vocal.
Berkshire Hathaway is running out of things to buy. Warren Buffett’s investment conglomerate increased Q2 operating profit from a year ago, but its underwriting profit across its insurance businesses decline. The company also reduced buybacks and did not announce any big acquisition during the quarter catapulting cash on the balance sheet to a whopping $144bn.
In forex, a mild bout of dollar weakness in the COT reporting week to last Tuesday, saw speculators reduce bullish dollar bets from a 17-month high by 18% to $3.6 billion. This before Clarida the Fed vice-chair’s hawkish comment on Wednesday and Fridays across the board strong jobs report saw the 10-year Treasury yield climb to 1.3% and the dollar strengthen against it major peers, not least the Euro which ended the week at a four-month low. The reduction was primarily driven by GBP and JPY buying. The sterling position returned to neutral while the yen short was reduced to a six-week low. Overall, and just like the previous week, the overriding theme was the reduction in positions, both long and short, as the peak summer holiday period continues to reduce risk appetite.
What are we watching next?
July U.S. CPI is out on 11 August. The consensus expects it will hover around 4.9% YoY after a jump at 5.4% YoY in June. It was the largest gain since August 2008. If the headline figure is higher than anticipated, which is likely, the market might seriously question the concept of « transitory » inflation used by the Federal Reserve. What worries us the most is that more and more firms are now inclined to increase prices in order to cope with higher wages and soaring transportation costs. In turn, this could make inflation run uncomfortably high in coming months
Monthly oil market reports – Following the worst week for crude oil in ten months on delta fears and a post US job report jump in the dollar and yields, the market will be watching closely the monthly oil market reports from EIA on Tuesday followed by the IEA and OPEC on Thursday for any signs of changes in the demand outlook. The rapid spreading of the delta coronavirus variant in Asia and parts of the US has seen the market focus switch back to demand worries from OPEC’s ability to keep prices supported by keeping supplies sufficiently tight.
Earnings to watch this week. Q2 earnings have been strong we expect earnings releases this week to reflect this. Monday the key earnings release is from BioNTech which is leading the Covid-19 vaccine race with Moderna and investors are hoping for a strong outlook and potential indications that the company’s mRNA technology can be used in other applications. On Wednesday, Vestas and NIO are the key earnings releases to watch with both being part of the green transformation and enjoying a massive tailwind from regulation and policy trajectory. NIO has recently disappointed a bit on deliveries and with VW and other carmakers ramping up EV production the pressure is on NIO. Thursday is the big day with Orsted on the green transformation in Europe, Walt Disney on video streaming and its attack on Netflix with its Disney+ offering. On Thursday, we also have earnings from Baidu and iQIYI which are currently in the middle of the Chinese technology crackdown.
- Monday: Barrick Gold, Nutrien, BioNTech, Air Products and Chemicals, Trade Desk
- Tuesday: SoftBank Group, Flutter Entertainment, Unity Software
- Wednesday: Commonwealth Bank of Australia, Franco-Nevada, Vestas Wind Systems, Genmab, E.ON, Prudential, Wilmar International, NIO, eBay
- Thursday: Brookfield Asset Management, Orsted, Novozymes, China Mobile, Zurich Insurance, Walt Disney, Baidu, Palantir Technologies, XPeng, Li Auto, iQIYI
- Friday: Deutsche Wohnen, NetEase, Trip.com Group
Economic calendar highlights for today (times GMT)
- 0545 – Switzerland Unemployment Rate Jul
- 0600 – Germany Trade Balance Jun
- 0600 – Norway Industrial Production Jun
- 0830 – Eurozone Sentix Investor Confidence Aug
- 1400 – US JOLTS Job Openings Jun
- 2350 – Japan Current Account Jun
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