What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - with the VIX Index and US interest rates remaining low there is not much that can jolt US equities. Nasdaq 100 futures delivered a lower high and low session yesterday suggesting weakness and in our view Nasdaq 100 must remain above yesterday’s lows (16,256) in order not to kick into extended selling mode. S&P 500 futures look more robust but still sort of topping out, so today’s trading session is critical for maintaining momentum or whether we will experience a minor correction. Look at the USD and interest rates for clues to where motion is going.
EURUSD – the EURUSD supermajor confirmed the tactical bullish reversal from Friday, but the rally yesterday was modest in scale and the price action needs to vault the 1.1650-1.1700 area to suggest that the US dollar is under broader pressure and to open up the range toward 1.1900. Not sure what the catalyst for such a move could be, given how much support USD bears have already seen recently from the backdrop of strong risk sentiment and weak US long yields. A close back below 1.1550, meanwhile, sets up pressure on the cycle lows ahead of 1.1500. The US CPI data tomorrow is perhaps the next catalyst for a USD move.
USDJPY – USDJPY broke the range lows and below 113.00 overnight, led in that direction by the recent rally in US long treasuries and as real yields in the US have plunged back toward the cycle lows after considerable recent volatility. The pressure lies to the downside for the pair as long as it remains below perhaps 113.25-113.50 and if US real yields continue to drop, with the US CPI tomorrow a potential catalyst for next steps. The chart area between that resistance and perhaps 111.25 (61.8% retracement of the recent rally) is somewhat of a “limbo” area due to the scale of that rally from the September low of 109.10.
Gold (XAUUSD) trades within 10 dollars of an area of resistance around $1835, a level that was rejected six times between July and August. Silver (XAGUSD) meanwhile trades 1.5% below the double top around $24.85. Despite rising prices, ETF investors show no letup in their selling with total holdings in gold falling to a fresh 18-month low. Instead, support continues to be provided by an ongoing drop in US Treasury yields primarily benefiting real yields which in the ten-year area fell to –1.14 percent overnight. Focus is now turning to upcoming inflation data on Wednesday from the US and China, as well as speculation Biden may dump Powell and choose Brainard as the next Fed chair. The market likes the fact she is considered the most dovish of the nominees (see below).
US treasuries (TLT, IEF, SHY). The recent bond rally does not seem to resonate with investors. Yesterday’s 3-year note auction tailed by 1bps, the most since April 2020, despite it was offering the highest yield since February 2020. It was enough to provoke a bear flattening of the yield curve, which was short-lived as later in the evening, news hit the market that, last week, Lael Brainard was interviewed for the Fed’s chair, pushing yields back down. Today the US Treasury will sell 10-year bonds. Ten-year yields continue to trade below 1.50%, and they are close to testing their 200 days MA, if they break this level, they will find support next at 1.39%. The overall focus remains on tomorrow’s inflation readings, however, it’s very unlikely that they will disrupt markets unless it exceeds expectations by much.
German Bunds (IS0L). Following the recent bond rally, 10-year Bund yields dropped once again below –0.25%. Today, the focus is on the ZEW survey which should show a further deterioration in sentiment from the previous month. Although a weak ZEW will support low rates, we cannot forget that inflation continues to strengthen and that a new German government will soon be formed bringing about more fiscal spending. Hence, we remain of the opinion that Bund yields will inevitably resume rising and might approach 0% by year end.
UK Gilts (IGLT). On Thursday, growth, industrial and manufacturing data will be released for the UK. If numbers are weak, we could witness another rally in Gilts. Despite last week’s dovish Bank of England meeting, the market is still pricing four interest rate hikes in 2022, giving investors plenty of room to scale back rate hikes expectations.
What is going on?
US Fed Financial Stability Report mentions meme stocks and Chinese real estate sector as possible sources of financial stability risks: On meme stocks: “To date, the broad fi nancial stability implications of these developments have been limited, with bursts of retail-led trading volatility that have rapidly subsided. Still, the evolution of the effects of these changes warrants continued monitoring.” On China’s real estate sector: “In addition, stresses in the real estate sector in China caused in part by China’s ongoing regulatory focus on leveraged institutions, as well as a sharp tightening of global financial conditions, especially in highly indebted emerging market economies, could post some risks to the US financial system. The 85-page report was issued yesterday. China’s high yield dollar bond index has risen beyond 25% this week.
PayPal shares turn around on Q4 guidance. The initial reaction to PayPal Q3 earnings was good with shares rising in extended trading driven also by news that the company has struck a deal with Amazon to let customers pay with their Venmo app. However, investors quickly shifted their attention to the Q4 revenue guidance which was $6.85-6.95bn vs est. $7.24bn showing that the market for payments is cooling down faster than expected.
Industrial metals traded higher on Monday in response to the US infrastructure bill which will support demand for industrial metals such as copper and aluminum. The sector, recently under pressure from Chinese growth concerns also received a lift from growing risk-on sentiment, a record monthly Chinese trade surplus, lower bond yields and a weaker dollar. In addition, the market remains concerned about dwindling copper stocks monitored by the world’s three leading futures exchanges in NY, London and Shanghai. Following seven weeks of withdrawals stocks are heading for the lowest level in 13 years, a development that has seen spot to futures spreads blow out.
The grain market trades mixed ahead a monthly supply and demand report from the US government. Soybeans trades near the lowest since December on the prospect for record production and China’s October imports dropped to a 19-month low. The 2021 corn and soybean harvests are moving closer to the finish line with completion rates now in their high 80’s. Wheat meanwhile remains the most supported of the key crops as the report is expected to trim the global supply outlook. Adding to the short-term uneasiness was last week’s COT (Commitment of Traders) update which found speculators in the week to October 2 had boosted their grains exposure by the biggest amount in a single week since September 2020.
What are we watching next?
Who will Biden nominate to head the Fed in February? - Fed Chair Powell is still favoured to be renominated for a second term starting next February, but current Board of Governors member Lael Brainard is considered a possible alternative, in part as she is a Democrat and as powerful Democratic senator Elizabeth Warren has come out loudly against the Republican Powell’s renomination. Brainard was apparently interviewed for the job on Friday by President Joe Biden, who is likely to make his nomination decision very soon. A significant minority believe that Powell will be made to pay for the trading scandal that happened under his watch at the Fed, one that included Vice Chair Clarida and two regional Fed presidents. Brainard is nominally considered the most dovish of the likely nominees, although Powell has proven quite dovish himself since a pivot in early 2019.
China Oct. PPI and CPI readings tonight- the Chinese PPI is widely regarded as an important global inflation indicator and is expected to show a new post-1994 (China’s renminbi devalued that year) record of 12.5% year-on-year, beating the record from September of 10.7%.
US October PPI and CPI data today and tomorrow – the US October PPI is up today and October CPI is up tomorrow as investors are clearly seeking inflation hedges, even as the nominal US yields remain quite low. The October PPI later today is expected at +0.6% month-on-month and +8.6% year-on-year at the headline and for the “ex food and energy” category at +0.5%/+6.8%. This after the two readings posted YoY readings and multi-decade highs of 8.6%/6.8% in September. Tomorrow’s US October CPI number is expected at 5.9% at the headline and 4.3% at the core.
Earnings Watch – today’s earnings focus is on releases from Coinbase, NIO, and Palantir. Coinbase is the biggest company in our Crypto & Blockchain equity basket and serves as the biggest and most liquid way to get equity exposure to the industry. Cryptocurrency trading activity has recently been quite strong, so we expect a strong Q4 guidance on revenue and earnings. NIO is the equivalent of Tesla in China but has had troubles scaling production and we do not expect a major jump in Q3, so everything comes down to their delivery guidance for Q4. Palantir is much traded stock among retail investors with a unique exposure profile to the data analytics industry with a focus on the intelligence work in the US government.
Tuesday: National Australia Bank, Bayer, Munich Re, Alcon, Coinbase, NIO, DoorDash, BioNTech, Palantir, Unity, DR Horton, Upstart, Plug Power
Wednesday: Genmab, Credit Agricole, EDF, Alstom, Allianz, adidas, Infineon Technologies, E.ON, Tencent, NTT, Walt Disney, SoFi Technologies
Thursday: Brookfield Asset Management, Siemens, Merck KGaA, Deutsche Telekom, Hapag-Lloyd, Semiconductor Manufacturing, Generali, Nexi, ArcelorMittal, Coupang
Friday: KBC Group, AstraZeneca, Richemont, Pinduoduo, Li Auto
Economic calendar highlights for today (times GMT)
0900 – Norway Norges Bank Financial Stability Report
1000 – Germany Nov. ZEW Survey
1100 – US Oct. NFIB Small Business Optimism
1250 – US Fed’s Bullard (non-voter) to speak
1300 – ECB President Lagarde to speak
1330 – US Oct. PPI
1400 – US Fed Chair Powell to speak at joint Fed, ECB, BoC diversity conference
1530 – UK Bank of England’s Broadbent to speak
1635 – US Fed’s Daly (Voter) to speak
1700 – EIA's Short-term Energy Outlook
1700 – USDA's World Agriculture Supply and Demand Estimates (WASDE)
1800 – US 10-year Treasury Auction
1830 – US Fed’s Kashkari (non-voter) to speak
2330 – Australia Nov. Westpac Consumer Confidence0130 – China Oct. PPI/CPI
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