Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: US Stocks found a small bid overnight following yesterday's weak session on renewed concerns the economic recovery from the pandemic is losing momentum. Lower than expected US manufacturing data helped drive the ten-year Treasury yield down below 1.2% with real yields close to a record low. China's threat to clampdown on private industries continue after Tencent Holding slumped on fears the authorities will move their focus to online entertainment next. Copper dropped and oil plunged on weaker US and China data and continued worries about the spreading of the delta coronavirus variant while gold seems to have gone on holiday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures gave up yesterday’s gains as the US 10-year yield continued to decline signaling investors are increasingly worried about growth. Despite weakness among Chinese technology stocks today, Nasdaq 100 futures are bouncing higher from yesterday’s close trading just below the 15,000 level. S&P 500 futures are also rebounding in early trading, but traders should note the double support area around the 4,378 level should US equities swing back into selling mode.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin is under pressure for the third straight session trading just above the 38,000 level in early European trading hours. It is likely comments from the SEC Chair Gensler on Bloomberg TV, that most digital tokens should be viewed as securities and that SEC is planning many enforcement actions and that the regulator is in no hurry to approve a Bitcoin ETF. He also said that crypto will not reach its growth potential without rules indicating that Gensler also sees the industry in a positive light.
AUDUSD – trading just above the 0.7400 level this morning as the RBA sticks with its communicated tapering plans. The current levels just above 0.7400 have been tough resistance levels twice over the past week, but if the currency can push through and close above 0.7413, then there is a scope for further gains in the near term.
Gold’s (XAUUSD) head scratching inability to respond to favorable macro-economic developments continue after weaker US and Chinese economic data and another drop in Treasury yields combined with a steady dollar failed to move the needle. After once again finding resistance last at $1833, the 50% retracement of the June sell-off, the metal has been languishing around $1800, this despite a stable dollar and ten-year real yields dropping to a near record. A development that inadvertently has increased the short-term downside risk with a rebound in yields potentially weighing on gold. A larger allocation into gold from investors is unlikely to materialize unless growth assumptions continue to deteriorate, thereby reducing the risk of central bank action. Focus on Friday’s U.S. job report.
Crude oil futures slumped yesterday with Brent hurdling towards $70 in response to weaker US and Chinese economic data while investors have once again been forced to weigh the risk to consumption given the continued spreading of the delta coronavirus variant. Not least in China, the world’s largest importer and key buyer from the OPEC+ group of producers, where the biggest outbreak since late 2019 has seen the virus reach nearly half of China’s 32 provinces during the past couple of weeks. With OPEC+ currently increasing production, the market once again fret whether demand growth will follow the expected upward trajectory forecast by the IEA and OPEC.
US Govt Bonds (SHY:xnas, TLT:xnas, IEF:xnas) - The US 10-year yield is trading around 1.18% this morning as the key benchmark yield was pushed lower yesterday on Chinese growth concerns and a weaker than expected ISM Manufacturing reading for July. The US real yield a new fresh record low yesterday. Japan’s public pension fund also announced yesterday that it has reduced its holdings of US Treasuries favouring European bonds despite a higher yield in the US.
What is going on?
EZ manufacturing growth remains strong in July. The EZ PMI was out at 62.8, with the unemployment subindex reaching an all-time high. Except for Germany, there was a broad decrease across the national manufacturing PMIs last month. But the indexes are still elevated (France at 58.0, Spain at 59.0, Italy at 60.3). What worries us is that inflation rates hit new highs. Widespread shortages of materials and poor transport availability pushed up manufacturing input prices in July at a survey-record rate, with the strongest increase seen in Austria, Germany and the Netherlands.
For the first time in six months, the rolling seven-day average of new Covid-19 deaths is back under the threshold of 1000 people in Brazil. It can be partially explained by the acceleration in vaccination, which has eventually taken off: around 50% of Brazilians have received at least one dose of vaccine and around 20% are fully vaccinated as of 1 August.
Tencent drops as much as 11% in Hong Kong trading. Tencent shares dived on a Chinese newspaper article suggesting the government views gaming as ‘spiritual opium’ and ‘electronic drugs’ indicating that gaming could be the next big target in China’s crackdown of private industry. The newspaper has later removed its story online.
The Covid19 Delta variant is showing up in China. Despite aggressive measures to keep the virus at distance the more virulent Delta variant is showing up in multiple places in China. This could potentially add further supply chain constraints as China is the world’s factory and given the country’s aggressive measures when new cases are found it could impact production in several regions. Recently one of the large ports in the south got impacted adding further pressure to global shipping rates.
RBA keeps rate and stick to tapering plan. The AUD was bid on RBA’s decision as some had speculated that RBA would soften its language given the new lockdowns of Sidney and the potential for the economy to go into a new recession. However, the RBA expressed confidence that the virus was under control and that the current softness in the economy would be short lived.
What are we watching next?
Earnings to watch this week. The earnings season has been good so far with companies exceeding expectations across the board. The three most important earnings releases today are from Alibaba, BMW, and Infineon Technologies. Alibaba will be a good initial test of how Chinese technology companies are impacted in the current regulatory environment but also given the slowdown we are observing in China. BMW and Infineon Technologies will provide more insights into the car industry with BMW interesting from deliveries of EVs, while Infineon Technologies being the biggest supplier of semiconductors to the industry will provide valuable insights into the current bottlenecks.
Economic Calendar Highlights for today (times GMT)
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