Market Quick Take - September 9, 2021

Macro 6 minutes to read
Saxo Strategy Team

Summary:  US equities were weak across the board in a choppy session yesterday that saw a late attempt to put together a rally that found little success in holding as the Asian session brought fresh weakness. Elsewhere, a strong US 10-year treasury auction took US yields sharply back lower just after a key upside breakout level in yields was teased in recent sessions. Today the focus shifts to the ECB and whether it can bring anything beyond consensus expectations.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US technology stocks are under pressure with Nasdaq 100 futures down 0.6% over two sessions with US interest rates also declining suggesting investors are worried about growth. The next major support level for Nasdaq 100 futures is around 15,464 and unless yesterday’s low is not broken, we could see support for technology stocks coming in during the session today. The broader market is more under pressure with S&P 500 futures losing the last two weeks’ gains with the next support level around 4,463.

USDJPY – with a stellar US 10-year treasury auction taking long US treasury yields lower and risk sentiment souring yesterday, the JPY strengthened notably in the crosses and even slightly against the US dollar, just after upside interest in USDJPY was teased in the wake of a pop higher in US yields this week that took USDJPY to resistance. But the pair remains pinned in the impossibly restricted trading range between 109.40 and 110.45, where it has traded for more than three weeks. The two factors of long yields and risk sentiment (possibly correlated, but risk sentiment could also take a dive if US yields were to rise quickly) will determine the next steps here, with JPY simply tracking USD direction in all likelihood if US treasury yields become a non-factor and remain rangebound.

EURUSD – Today is the day to determine whether the euro can show more independent directional movement as we have an ECB meeting with the latest set of projections on the economy and inflation and a likely taper announcement – see more below. EURUSD traded up to the very edge of resistance at 1.1909 before a bout of weak risk sentiment and possible position squaring ahead of today’s meeting took the pair back toward as low as 1.1802 yesterday. The euro needs to find some inspiration from this meeting or it risks trading passively, with EURUSD finding itself dominated by USD direction. A dip and close significantly back below 1.1800 would fully neutralize the recent rally attempt and keep the pair in rangebound limbo at best.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – cryptocurrencies are trying to pick up the pieces after the traumatic sell-off on Tuesday with little success in inspiring a new rally as Bitcoin limps around near its 200-day moving average at 46.2k. Ethereum has shown more dynamic price action and trades near 3,500 this morning, but that is well away from the recent highs near 4,000.

Gold (XAUUSD) trades lower with $1780 the next technical target in response to a stronger dollar and the risk of a possible pullback in monetary stimulus. The sixth failed attempt since July to break an area of resistance above $1830 has triggered some disappointment and forced some traders to reduce exposure. Technical traders and algorithmic systems tracking the dollar are therefore in charge with the renewed weakness in US nominal and real yields so far being ignored. Focus today on the ECB meeting (see below), and how the dollar responds to the outcome.

Crude Oil (OILUSOCT21 & OILUKNOV21) remains rangebound with support being provided by a very slow return of US production halted by Hurricane Ida, and API data pointing to another price-supportive weekly drop in US oil and fuel stocks. While Covid-19 is suppressing demand in some regions, both the US and China have seen demand surpass pre-pandemic levels, thereby supporting a strong market into yearend. Also keeping an eye on developments in fragile Libya where weeks of protests at oilfields and ports could threaten exports. In the short term the stronger dollar and taper unease may hurt the general level of investor appetite as seen through the drift in equities and bond yields this week.

Corn (CORNDEC21) and soybeans (SOYBEANSNOV21) remain stuck near the lowest levels in months on a combination of a stronger dollar, increased supply as the harvest begins and disruptions at a key Gulf coast export terminal following Hurricane Ida. Sales of soybeans collapsed by 82% in the week to September 2 while corn was 53% lower. In addition, some position squaring has also been seen ahead of Friday’s monthly World Agriculture Supply and Demand Estimates (WASDE) with the market convinced the US Department of Agriculture will publish larger US corn and soybeans estimates.

An incredibly strong 10-year US Treasury auction drives yields lower. Today the Treasury sells 30-year bonds (IEF, TLT). Yesterday’s ten-year Treasury auction saw strong demand with a bid-to-cover of 2.59x (just below the previous 2.65x) and indirect bidders at 71.1% (it’s the highest since November 2018, if we do not consider August’s record). The auction stopped through by 1.4 basis points making it the fifth consecutive stopped through auction on record. Today the US Treasury sells 30-year bonds, however, the demand could be weaker than yesterday’s auction as the ECB is expected to deliver a dovish taper.

European Government Bonds end the day flat as the market expects the ECB to deliver a dovish taper (VGEA, BTP10, IS0L). EGBs yesterday closed the day flat as the market prepared for today’s ECB’s meeting. The consensus expects the ECB to taper purchases under PEPP signaling the end of the program by March next year. Yet, depending on how the message is delivered, EGBs might be volatile at first but then stabilize. Indeed, maturities under PEPP will be reinvested until the end of 2023. Expectations are for the central bank to either create a new program or expand the scope of the APP scheme to continue to provide favorable financing conditions. We believe that a dovish taper from the ECB will pose a bigger risk for US Treasuries as the Fed falls behind the curve and it will need soon to taper and tighten the economy more aggressively than forecasted.

What is going on?

China Aug. PPI hits 9.5% year-on-year, higher than the 9.0% expected and 9.0% in July. This key gauge of global inflation is flashing its highest reading since the mid-1990's save for two readings in the summer of 2008. On top of that, we got nickel hitting a 7-year high on rising demand underscoring that the commodity inflation story is not dead yet.

Poland warned on EU recovery funds if judicial reforms not undertaken. A justice commissioner from the European Court of Justice said that Poland must bring reform that ensures judicial independence or it will be blocked from receiving EUR 36 billion in Covid-19 recovery funds and could face fines of EUR 1 million per day in addition. The commissioner said that Poland is “at the end of the road” on this issue, which is only one of two cases that the ECJ is considering against the country.

No surprise from the Bank of Canada (BoC) – The Bank of Canada left policy setting unchanged in September, as expected. The benchmark overnight rate remains at 0.25%. The BoC also maintains weekly bond purchases at C$2bn.

Another new record for U.S. job openings according to Jul. JOLTS survey – The report from the Bureau of Labor Statistics indicated an increase in job openings at 10.934M versus estimate 10.03M as hires were little changed. This report reflects the state of the U.S. labor market before the latest wave of Covid and prior to vaccine mandates from employers and for customers.

UK Parliament approves PM Boris Johnson’s payroll tax hike - the hike will raise the payroll tax (national insurance) another 1.25% and will be assessed both by both workers and employers until the spring of 2023, when a new levy will replace it.

Sea Ltd announces biggest equity financing deal in 2021. One of the fastest growing companies within e-commerce and gaming in Southeast Asia is announcing an equity and convertible bond deal worth $6.3bn to finance its expansion across many key markets including its upcoming expansion into Europe starting in Poland.

What are we watching next?

Risk sentiment into next Friday’s options expiry – so far the drop in risk sentiment over the last couple of sessions has proven modest, but it is worth noting the pattern over each of the last four months, when there was a sharp dip in the major US equity indices around the time of options expiries on S&P 500 stocks on the third Friday of the month (next Friday for September)

ECB meeting today - We are onside with consensus in expecting no change to monetary policy at today's Governing Council. Overall financing conditions appear very easy. This opens the door to slower monthly purchases under the Pandemic Emergency Purchase Programme (PEPP) in Q4, from €80bn per month to €60bn per month. ECB doves, such as Chief economist Philip Lane, are likely to play down the significance of this announcement. We also expect the ECB to revise upward its staff projections given the positive economic momentum in the eurozone this summer (see our preview).

Earnings to watch this week. Today’s earnings focus is on Zscaler which is a fast-growing cloud-based cyber security company. Analysts expect Fy21 Q4 (ending 31 July) revenue growth to hit 49% y/y and EBITDA to swing into positive for the first time.

  • Today: Sun Hung Kai Properties, Zscaler
  • Friday: Oracle, Kroger

Economic calendar highlights for today (times GMT)

  • 0820 – Australia RBA’s Debelle to Speak
  • 1145 – ECB Meeting
  • 1230 – ECB President Lagarde to speak
  • 1230 – US Weekly Initial Jobless Claims
  • 1430 – EIA Natural Gas Storage Change
  • 1500 – EIA's Weekly Petroleum Status Report
  • 1505 – US Fed’s Daly (Voter) to speak
  • 1600 – Canada Bank of Canada’s Macklem to speak

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