Market Quick Take - March 15, 2021
Saxo Strategy Team
Summary: US equity markets tried to close last week on a positive note, but while the broader indices managed to post a new marginal all-time high, speculative stocks and big tech companies remain divergently weak. Overnight, the Asian session was mixed. This week could prove a volatile one as markets weigh the impact of US stimulus checks, the FOMC meeting Wednesday and Bank of Japan policy review on Friday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) –the US 10-year yield is starting the week higher at 1.63% which could extend the relative weakness in US technology stocks. Nasdaq 100 is trading at levels below 12,900 with the big support level down at 12,700 which means that we could easily see a fast down if interest rates continue higher. While Nasdaq 100 is still down 6% from the highs the S&P 500 is still fresh at its highs signaling the market rotation. For this week the key events are trajectory of US interest rates and the FOMC on Wednesday.
STOXX 50 (EU50.I) - the move into cyclical and commodity exposed companies were so big last week that it drove European equities into green and one of the best equity markets globally. This move was even despite increasingly negative news of the AstraZeneca vaccine, and several countries suspending using the vaccine over troublesome side effects such as blood clots, which has been planned to be one of the main pillars of fighting the pandemic. The UK pharmaceutical company has defended its vaccine, but in any case, it will slow down the rollout as thus also jeopardize the important summer months for Southern Europe. If Interest rates and commodity prices continue higher this week it should extend Europe’s momentum.
Bitcoin () and Ethereum () - once again, Bitcoin chose the weekend to move aggressively to the upside, as it traded above former 58.35k all time high and poked above 61.7k on Saturday before easing back lower and trading below 60k overnight. Ethereum is trading below last week’s highs and is still nearly 10% below its all-time high from February. Some consider it likely that some of the US stimulus check money will go to speculative destinations in the equity market and in the crypto space.
EURUSD – a key week for EURUSD after last week’s ECB meeting failed to provide much ammunition for any upside arguments, or directional arguments in general, leaving the USD in the driving seat ahead of an important FOMC meeting on Wednesday, where signals that move rate expectations higher could boost the US dollar, while sticking to the original “dot plot” and/or any measures addressing Treasury market liquidity and other signals that result in a significant consolidation of US long treasury yields could provide a headwind for the US dollar. For now, the bears are in control EURUSD remains south of 1.2000.
USDJPY and JPY crosses–the very weak yen of late has been driven by a rise in global bond yields globally, widening the spread between those yields and the lower yielding long end of the Japanese yield curve, which the market suspects the Bank of Japan is not willing to allow to rise after recent signals from governor Kuroda. This Friday’s Bank of Japan meeting will deliver the conclusions of a policy review that should make position on how much it wants to control yields. As well, the JPY is moving lower into the end of the Japanese financial year at the end of this month. Historically there have been a few notably JPY direction with the transition to the country’s new financial year. The next key level in USDJPY is 110.00.
Gold (XAUUSD) - managed to close higher on Friday, thereby at least temporary managing to break its otherwise close inverse correlation with rising real yields. This correlation, the dollar and Wednesday’s FOMC meeting (see below) will be the focus this week. In the week to March 9 hedge funds cut bullish gold bets for a sixth straight week to a two-year low at 41.9k lots, some 85% below the February2020peak. A clear sign of gold’s current lack of direction but also an indication of the potential amount of buying that could hit the market should the technical and/or fundamental outlook change. For now, goldremains stuck in a downtrend with key support being the area between $1670 and $1690 whilepotential buyers are in no rush as long it stays below $1765/oz.
Decisive week for US Treasuries amid 20-year auction, FOMC meeting and 10-year TIPS auction (TLT, EIF). This Federal Reserve week is starting with the daunting certainty coming from last week’s auctions that foreign investors are still not increasing US Treasuries purchases at current levels. On top of that the 5-year Breakeven rate has hit a new record rising to the highest level since 2008. Bearish sentiment in Treasuries is going to continue until the FED meeting. Watch out for 1.65% in 10-year Treasuries which many believe could trigger another convexity episode in the Mortgage-Backed Security (MBS) market, putting yields on a fast rise towards 2%.
Gilts will be volatile amid the setting of foreign and defense policy and Bank of England meeting (IGLS). Gilts have been tumbling since the beginning of the year amid fast vaccinations and better than expected economic outlook. They are poised to continue to fall as Boris Johnson announces the country foreign policy and the BOE will maintain a dovish stance. Once 10-year yields break above 0.85% they will find the next resistance line at 1%.
What is going on?
In German regional elections, the CDU fared poorly. Is this a preview of the Sep. General election? The CDU had its worst ever results in elections in two of its traditional strongholds, where they lost out to the Greens in Baden- and to the Social Democrats in Rhineland-Palatinate. This after the party chose the centrist candidate Armin to lead the party, and as Chancellor Angela Merkel is set to step down after 16years in power. Internal CDU/CSU coalition polls suggest the more conservative CSU leader Markus Söder would be a more popular candidate.
Speculators cut bullish commodity bets for a second week with rising yields and a stronger dollar triggering some risk adversity. The combined net long across 24 major futures contracts was reduced by 4% to 2.6 million lots, representing a nominal value of $129.2 billion. Once again, the metal sector led by gold and copper saw the biggest reductions followed by several agriculture commodities such as sugar, cotton and soybean oil. Investor demand for crude oil continued to fade despite another strong rally while natural gas longs slumped by 14% on warm weather developments.
Iron ore (SCOH1) traded down to a five-week low on Monday in Singapore as it continued to respond to worries about slowing Chinese demand. Despite surging economic activity during the first two months, the rallies, both in iron ore and copper (COPPERMAY21) have reversed as data pointed to Chinese growth being driven by exports but lagging consumer spending. In addition, iron ore has slumped after Chinese authorities pledged to rein in steel production which accounted for a record 56% of global output last year. This in order to curb pollution which is once a major problem in China’s top steel-making city of Tangshan in the Hebei province.
AstraZeneca’s Covid vaccine is up against mounting EU headwinds - with the Netherland and Ireland the latest two countries to suspend the use of the vaccine on concerns that some patients suffer blood clots from the injection.
What are we watching next?
This week’s FOMC meeting and policy signaling from the Fed. Back during the pandemic outbreak last year, the Fed enacted a special “supplemental leverage ratio” (SLR) rule to allow banks to lower the amount of capital held versus Treasury bonds and deposits they hold at the Fed. The rule is set to expire at the end of this month unless the Fed extends it, and a failure to do so could mean new liquidity issues in the US Treasury market as large US banks unwind treasury positions to reduce their leverage. There are other issues in the US Treasury market and repo market that the Fed may have to address soon if it wants to avoid disruption in money markets and elsewhere. Some of this may be addressed at Wednesday’s FOMC meeting. As well, the market will be sensitive to the least adjustment in the Fed “dot plot” policy rate forecast, especially now that possibly inflationary stimulus has been passed.
The Bank of Japan meeting and policy review results on Friday - as noted above for the USDJPY comments.
Earnings releases to watch this week:
The list below shows the most important earnings releases scheduled for this week with names in bold and red marked as those that can impact overall sentiment in equities or their specific industry. Given the increased competition in electric vehicles and the recent success of Volkswagen in the European market this is our highlight of the week.
Tuesday: Partners Group, RWE, Ferguson, , ZTO Express Cayman, Lennar, Coupa Software, Volkswagen, Zalando
Wednesday: Sunny Optical, Verbund, Alimentation Couche-Tard, , , Cintas
Thursday: CK Hutchison, China , CK Asset, CGN Power, Audi, Nike, Enel, FedEx, Accenture, Dollar General
Friday: China Mobile, Zijin Mining, Hong Kong & China Gas, Zhongsheng Group
Economic Calendar Highlights for today (times GMT)
0830 – Sweden Feb. CPI
1215 – Canada Feb. Housing Starts
1230 – US Mar. Empire Manufacturing
0030 – Australia RBA Meeting Minutes
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