Market Quick Take - September 29, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - with interest rates moving higher lately the key focus has moved back to technology stocks and Nasdaq 100 futures. Yesterday’s session was brutal with Nasdaq 100 down 2.9% but has bounced back this morning and thereby establishing the low from 19 August at 14,710 as the key support level to watch if we get a renewed sell-off. Energy prices today will likely dictate where equities and interest rates go today.

Nikkei 225 (JP225.I) - Fumio Kishida has won the battle to become Japan’s prime minister until the general election is held within a couple of weeks.  He is seen as slightly negative for the market reform agenda in Japan but firmer on military likely leading to increases in military spending. Nikkei 225 futures are trading lower catching some of the declines from yesterday’s US session.

EURUSD – it was interesting to note the price action stalling yesterday in EURUSD even as risk sentiment continued to crater in US equity markets and US treasury yields traded to new local highs. Does this suggest some degree of euro resilience at the margin, or was the euro held up by a vicious sell-off in sterling that supported a potent EURGBP rally (more below)? Not sure – but the 1.1664 lows remain the key focus for whether the area to 1.1500 is opened up by a follow-up sell-off.

GBPUSD and EURGBP – a very sharp sell-off in GBP yesterday, with EURGBP reversing the reaction to the German election and GBPUSD taking out key support around 1.3600. The sentiment on the pound is crumbling as the UK is beset with problems including the energy crunch, a shortage on capacity in domestic goods transport, and a general sense of post-Brexit isolation, with the government set to take a turn toward austerity to shore up the holes in the country’s finances even as the pandemic continues to affect the country more than on the continent.

USDJPY and JPY crosses – USDJPY rallied to the very top of its range and even posted a marginal new high above the previous 111.66 mark as quarter end approaches tomorrow. New highs and a test toward the next major area on the chart into 114.50-115.00 would likely require an additional surge in long US treasury yields, where the next focus is perhaps on the cycle high in the 10-year US yield benchmark at 1.75% (currently 1.53%). The LDP leadership election resulting in Kishida’s victory saw JPY marginally weaker this morning as the alternative Kono was the candidate for more change as he had spoken against Abenomics.

Crude oil futures ran into profit taking after Brent’s first attempt above $80 in three years got rejected. Lower prices driven by weaker than expected U.S. consumer confidence numbers, worries about high prices reducing demand, an intraday ten percent tumble in natural gas, and not least the API reporting a surprise 4.1m barrel stock build. If confirmed by the EIA later today, it would be the first increase in US crude oil stockpiles in eight weeks. Apart from the EIA report, also focus on the direction of global gas prices. Below $77.85 Brent will be looking for support at $76 next.

Gold (XAUUSD) succumbed to selling yesterday after Federal Reserve officials talked up the prospect of tapering. US 10-year yields spiked to a three-month high, thereby supporting a rally in the dollar to near a 10-month high. The impact on real yields from surging nominal yields was somewhat reduced due to inflation expectations (breakevens) rising as well. The stock market tumble probably helped cushion the drop, but overall, the metal remains in a downtrend, and currently some 50 dollars away from relative safety above $1790. Focus on EU CPI, US PCE as well as US debt ceiling and infrastructure talks.

EU and UK gas prices both surged by around 12% to fresh records in early trading yesterday before pairing most of those gains. German electricity prices also pulled back from record levels while coal prices fell from a 13-year high. It highlights an energy market which is currently driven by fear about supply shortages ahead of the coming winter months, and not least, also a market where a very poor liquidity situation can create these massive price swings. Tight market conditions are likely to keep prices elevated until a firmer view of supply and weather developments can be assessed.

Italy to sell 10-year Bonds amid bond market selloff (BTP10). Yields in the European sovereign bond space continue to rise amid fears of sustained inflation and early monetary policy tightening. Despite Lagarde tried to calm markets saying that the ECB should be careful not to withdraw stimulus too quickly, the selloff continued. Italian BTPS yields rose the most with the BTPS-Bund spread widening to 5bps to 105bps. Today Italy will sell €2.5bn of 2031 bonds and it will be crucial to monitor whether bond issuance from the periphery remains supported as yields rise. Weak bidding metrics have the potential to add to the bond market’s bearish sentiment.

US yields bear-steepens amid Fed’s tightening expectation, but a solid 7-year auction fails to deepen the selloff (IEF, TLT). The 7-year US Treasury auction was not ugly enough to spark a deeper selloff in bond markets. It tailed roughly 0.8bps, but its bid to cover was slightly below the past six auction bid-to-cover average and indirect bidders were stable at 60.1%. Yet, the bond market selloff continues, and the yield curve is steepening fast with 30-year yields leading the way. In the meantime, higher yields are failing to attract buyers. Indeed, US Treasuries have been falling during Asian hours, showing that Japanese investors are waiting on the sideline for higher yields before buying the US safe haven. The next important data that may move the bond market are the PCE figures and the University of Michigan survey coming out on Friday.

What is going on?

US Fed’s Bullard said Fed likely to taper at early November meeting As he said that “Barring a major shock, I think we will go ahead with the taper in November” and that “We’ll have to be in a position in the spring to keep inflation under control” A plethora of Fed speakers are out in coming days and will likely chime in on their thinking on the issues of tapering and inflation as well.

US Sep. Consumer Confidence dropped to 109.3 vs. 115.0 expected and 115.2 in Aug. The drop in this Conference Board survey was similar in direction to the recent sharp drop in the University of Michigan Sentiment survey, although the level is well off the lows last year below 90, while the U. Michigan survey posted a 7-year low in August and was nearly as low in September. The Expectations component of the survey was the chief drag on the survey result, near the low of the range since 2016.

Japan’s LDP leadership race sees Fumio Kishida emerge victorious. The race overnight had narrowed to Taro Kono (far and away the popular favourite) and Fumio Kishida, the favourite among party leaders. Kono had spoken against BoJ negative rate policy and against Abenomics, while Kishida represents continuity. Kishida will become the next prime minister, with polls suggesting the opposition has no chance to win the coming snap election.

ASML lifts 2025 revenue forecast to €24-30bn. Semiconductors were the worst hit segment of the equity market yesterday, but this morning ASML is announcing a positive long-term guidance on 2025 revenue including gross margin guidance of 54-56%. The semiconductor equipment maker is expecting 11% p.a. revenue growth through 2030.

What are we watching next?

US Senate set to vote today on stop-gap bill for temporary debt ceiling suspension until Dec. 3 - this time, the bill will not be attached to an increase in the debt ceiling, but would still leave unanswered whether Congress can manage to eventually raise the debt ceiling and pass the two outstanding spending bills – the smaller infrastructure packaged passed by the Senate but not by the House and the larger $3.5 trillion social- and climate package.

Fed Chair Powell to get the boot in favour of Brainard for new Fed Chair in February? US Senator Elizabeth Warren, in a pointed speech yesterday, spoke powerfully against the reappointment of Fed Chair Powell yesterday, effectively arguing that he has been sleeping on the watch and that he is “a dangerous man” who is “making our banking system less safe”. It is uncertain how much sway Warren carries in the nomination process as former Fed Chair and current US Treasury Secretary Janet Yellen has spoken favourably of Powell. Lael Brainard, long-time Fed Board of Governors member, is seen as the likely alternative, should Powell be passed over for renomination.

Economic calendar highlights for today (times GMT)

0900 – Euro Zone Sep. Confidence Surveys
1200 – ECB's Guindos chairs ECB forum session
1300 – US Fed’s Harker (non-voter) to speak
1430 – EIA's Weekly Crude Oil and Fuel stocks report
1430 – ECB Chief Economist Lane chairs ECB forum session
1545 – US Fed Chair Powell, BoE Governor Bailey, ECB President Lagarde, BoJ Governor Kuroda in ECB forum panel session
1700 - US Fed’s Daly (voter) to speak
2350 – Japan Aug. Industrial Production
0100 – China Sep. Manufacturing and Non-manufacturing PMI
0130 – Australia Aug. Building Approvals
0145 – China Sep. Caixin Manufacturing PMI

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