Summary: US equities suffered a broad sell-off on Friday, with volatility possibly aggravated by the expiration of many futures and options contracts and in the wake of hawkish comments from St. Louis Fed president James Bullard. US long yields have collapsed as the market prices in higher rates at the front-end of the curve, a sign of the shock administered by the hawkish turn from the Fed at the FOMC last Wednesday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the unwinding of inflation trades is causing S&P 500 to underperform technology stocks and caused the largest weekly decline in broader US equities for quite some time. S&P 500 futures stabilising around 4,150 this morning in European trading and are in an area of support unless interest rates continue down. The key events for US equities this week are Eurozone flash PMI for June on Wednesday and then the PCE inflation reading for May on Friday.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Considerable volatility in cryptocurrencies at the weekend, as yesterday saw the major ones dipping below recent lows before mounting an almost full recover, before falling back again overnight in Monday’s Asian session. The key range support focus for Bitcoin traders is the 30,000 area, while the focus for Ethereum is perhaps 2,000, a level it traded below in May, but only briefly intraday.
EURUSD and GBPUSD – the EURUSD sell-off accelerated last week after the hawkish turn at the FOMC meeting that has taken markets by storm. The next focus for EURUSD traders is whether the price action completes what resembles a head-and-shoulders formation on the chart by moving toward the neckline, currently near 1.1775, with levels below at 1.1695 and then perhaps 1.1500. Resistance is 1.2000. In GBPUSD, the big focus is on the major pivot at 1.3670 and the 200-day moving average, currently just above 1.3600 - but the huge level still some way off is 1.3500.
JPY pairs –the Japanese yen has been the strongest major currency in the wake of the FOMC meeting, as safe haven bond yields have collapsed, a boon to the yield-sensitive yen, with a dose of generally weak risk sentiment late last week adding to the support for the currency. There may be more upside to come for the yen in the near term, although any eventual return to a focus on inflationary outcomes could put an end to the rally beyond the near term. Technical focus on USDJPY at 109.20 and then 107.75, and for many JPY crosses at their respective 200-day moving averages.
Gold (XAUUSD) remains on the defensive despite a fresh slump in long-end Treasury yields on Bullard comment about raising rates already next year (see below). While the dollar is stronger, 10-year real yields have almost returned to pre-FOMC levels. It highlights the biggest weekly loss in 15 months was much bigger than what could be justified by movements in yields and the dollar. Instead, the deteriorating technical outlook helped drive an accelerated accumulation from system funds. With RSI’s moving into oversold territory, the metal may get close to stabilizing with support at $1755, the March and early April high, while a break above $1800 is needed to signal calmer waters.
Copper (COPPERUSSEP21) weakness continue as speculators cut reflation hedges, the dollar strengthens and China broadened its drive to cool metal prices. Adding to these rising stocks at LME-monitored warehouses signaling a current lack of market tightness. We view the correction as a response to financial market developments, and not a change in the fundamental outlook which still points to demand outpacing supply over the coming years. The price has entered the March consolidation range with support at $3.95 ahead of the 200-day moving average at $3.75.
The bond market’s rection to last week’s FOMC meeting is indicating that a tightening cycle might have started, but it will be short lived (TLT, IEF, SHY). The abrupt bear flattening of the yield curve indicates that the bond market believes that a tightening cycle has already started, but that the Federal Reserve might not be able to go through with it in the long term. Thus, this week’s personal consumption expenditure data is key because if it surprises on the upside, the short part of the yield curve might rise even further. The 2-, 5- and 7-year auctions starting tomorrow are pivotal as they are extremely vulnerable to the current monetary policy shift and inflationary pressures.
What is going on?
St. Louis Fed president Bullard spooked markets with hawkish talk on Friday – Bullard is not a voter this year, but is one of the forecasters for the Fed “dot plot” and one of the ones that is forecasting a rate hike in late 2022, as he spelled out in a TV interview on Friday, also predicting 2.5% core PCE inflation in 2022 versus only 2.1% forecast at the June FOMC meeting last week.
Nikkei 225 futures drop 3.5% as inflation and cyclical trades are unwound. The FOMC event continues to reverberate through financial markets this morning with the JPY stronger and cyclical equity markets such as China, India and Japan selling off. Given interest rates are also falling this suggests that the market is pricing is a higher growth slowdown not offset by lower interest rates.
Crude oil trades higher as Iran nuclear talks end without agreement. The energy market remains the only commodity sector currently finding support while metals and agriculture have suffered from reduced reflation hedges and improved weather and production outlook. The oil market is currently being driven by tight supply at a time of rising demand, and with this in mind the focus now turns to the next OPEC+ on July 1. The market will be looking for signs of whether the group is looking for higher prices through keeping supplies tight or price stability through adding ample supply to cool the month-long rally.
What are we watching next?
US Fed Chair Powell testimony tomorrow. Other Fed members to speak more freely? Tomorrow offers Fed Chair Powell a chance to communicate with financial markets again after the powerful reaction to last week’s FOMC meeting as he is set to appear before a House committee to discuss emergency lending and the economy. Friday made it clear, meanwhile, that some Fed members are concerned about inflation and now that the FOMC meeting is out of the way, are happy to air those concerns.
Earnings this week. The second quarter is soon an old chapter, and a new exciting earnings season will begin in three weeks. In the meantime, there are still companies not following the normal calendar year reporting earnings. This morning, Prosus (the international arm of Naspers) is reporting fiscal year earnings beating expectations on EPS. Later this week, Nike and FedEx are the two most important earnings to watch from a consumer and logistics standpoint.
Economic calendar focus this week: besides the Powell appearance tomorrow noted above, this week features quite a mix of data points, from initial June PMI’s for many countries, including the EU, to the first rate hike in Europe tomorrow from Hungary, a Bank of England meeting on Thursday and the week’s data highlight, Friday’s US PCE inflation data point.
Economic Calendar Highlights for today (times GMT)
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