Summary: Asian stocks traded mixed overnight after the S&P 500 failed to reach another closing record high while Amazon pushed the Nasdaq higher. Treasuries holding onto yesterday's advance which saw yields drop to February lows on concerns about the strength of the economic recovery, fast spreading virus variants and China's scrutiny of the technology sector. Crude oil futures dropped from a six-year high thereby pulling copper, a favorite reflation trade, lower while gold trades steady with support from lower yields offsetting a firmer dollar. FOMC minutes from the mid-June meeting the focus today.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the inflation trade continues to be unwound with the US 10-year yield plunging yesterday dragging down the Russell 2000 Index and sending Nasdaq 100 to a new all-time high on the close. Among our theme baskets only the cyber security, green transformation and mega caps gained in yesterday’s trading. S&P 500 futures failed to reach a new all-time high and opened lower overnight, while the Nasdaq 100 futures are pushing higher above yesterday’s close in early European trading.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - one of the largest exchanges Binance was banned from doing business in the UK last month and now the exchange cannot receive payments through SEPA (Single Euro Payments Area) in another sign of regulatory crackdown on the industry. Despite a string of bad news for the industry, Bitcoin trades around 34,800 against the USD in early European trading boxed into a narrow trading range from 33,000 to 36,000.
Crude oil saw a near 5% top to bottom slump yesterday as traders wondered what happens next following the failure by OPEC+ to set production targets beyond July. The risk of a no deal raising noncompliance, White House urging a compromise, a rapid spreading virus variant, and a very overbought market all helped trigger the correction which was then feed some additional fuel from a stronger dollar. While the longer-term outlook looks bullish, short-term uncertainties may lead to increased volatility, not least considering the time of year where summer vacations swing into full gear, thereby removing liquidity from absent traders.
Gold (XAUUSD) looks increasingly cheap relative to US real yields which dropped to their lowest level since February following weaker than expected US economic data. However, the firmer dollar and the sudden drop in crude oil prevented an attempt to break resistance at $1814, the 38.2% retracement of the post-FOMC sell-off. Continued focus on the dollar and whether US Treasuries have more unfinished business to the upside. Copper’s (COPPERUSSEP21) firm rejection at $4.40 and subsequent correction, as crude oil dropped and the dollar rose, potentially sending a signal it has entered a summer period of consolidation with support at $4.2.
What is going on?
US Treasury yields hit lowest levels since February following a weaker than expected US services PMI read. Ten-year yields dropped to 1.346% low with real yields once again taking a closer look at –1%. It is worth noting that we are getting into full peak summer in the Northern hemisphere, so low volumes across the board could be sending us more noise than signals across asset classes. The market will not be watching the 1.20-25% as the next key support level with resistance now in the 1.40-45% area.
The ECB bought €80bn bonds in June according to the latest data. Over the same period, the total issuance from eurozone governments and the EU was around €100bn. As it is the case since the outbreak, the ECB absorbed almost all the new debt issued by eurozone countries. We can expect the same to happen between now and year-end. Despite divergence within the Governing Council about the future of monetary policy, labor market slack and rising concerns over the delta variant are likely to prevent to ECB to envisage a significant reduction in the monthly purchases under PEPP until its likely end in March 2022 (running on average at €80bn per month in Q2 2021). In addition, the ECB is expected to unveil changes to monetary policy as early as this week following the strategy review. In our view, making the 2% target explicitly symmetrical is an absolute necessity given the ambiguity of the current formulation “below, but close to, 2% over the medium term”.
Sydney locked down for another week as the Delta COVID-19 variant continues to spread with the leader of the state warning new cases are bound to rise as the country’s biggest city grapples with the highly infectious variant. Clearly a development that sends a warning to other countries with low vaccine rollouts, that the 18-month battle has not yet been won.
What are we watching next?
G20 meeting on Friday and Saturday in Venice. A new global corporate tax plan on the agenda. The French Minister says to Reuters that he expects the global tax deal to be accepted by G20 as 130 countries last week backed the US-led tax plan to harmonize corporate taxes on multinational companies with a set minimum tax of 15%. The tax plan is expected to take effect in 2023. The US is not pleased about the EU Commission’s plan to iron out an EU digital tax levy on digital companies which will hurt US interest as according to the US is not aligned with the tax plan idea.
The June FOMC minutes will probably show a fuller discussion of the decision to taper asset purchases, but it is very unlikely it will give clarity on key issues regarding when to begin tapering, the composition of Fed tapering and the pace at which to taper purchases.
U.S. debt limit ceiling focus: Short-term look rates traders are getting ready for volatility ahead, as the U.S. debt ceiling looks poised to return on August 1, while Congress so far has not clear plan to increase it.
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.
