Summary: The US and the UK return from long weekends today after GBPUSD poked briefly to a new high for the year overnight in an otherwise very quiet currency market. Important US data is on tap through Friday of this week, with the May ISM manufacturing in focus today, and especially its Prices Paid sub-index as a gauge of inflationary pressures. Elsewhere, gold and silver are eyeing cycle highs, while Brent crude has topped the key 70-dollar level overnight.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – last week’s price action was about as quiet as we have seen in a long time as markets struggle for inspiration in either making a go at the record highs or in finding any new reason to sell. The VIX measure of volatility tested the post-pandemic breakout lows on Friday. A basic support level like the 21-day moving average is a useful gauge for whether the market will continue to look higher for now. For the Nasdaq 100 this comes in around 13,475, and for the S&P 500 a rather tight 4,165, only about a percent below the current level.
Euro STOXX 50 (EU50.I) - a very negative equity session yesterday took STOXX 50 futures below 4,050 again despite the lack of clear catalysts. European equity futures are recovering this morning with no major macro events in Europe that can swing the market. The 4,050 level is the key resistance level to watch.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Cryptocurrencies found support yesterday after a bout of weakness, with Ethereum once again outperforming in percentage terms with a 15% rally as 3,000 looks like the important resistance there, while Bitcoin is still quite far from the key 42k resistance level.
GBPUSD – sterling rose to a new high for the year versus the US dollar in overnight trading on no real news flow as both the US and UK were out on holiday yesterday and the move looked a bit tentative as it was partially unwound in early European hours today. Still, sterling is interesting to track here after a jolt higher (if still within the last two months’ range) in rate expectations last Thursday after BoE hawk Vlieghe suggested rates could rise late next year. All US dollar pairs bear watching through the June 16 FOMC meeting as the USD has traded near broad cycle lows and as the first hints of Fed asset purchase tapering have begun circulating, though the market expectations for Fed lift-off on rates is actually moved further back over the last two weeks.
USDJPY – as noted yesterday, we are watching USDJPY this week for two reasons: first because the relative lack of inflation in Japan is a strong support for the yen as it shows that the yen offers a far higher real yield than the US dollar, where inflation has broken significantly higher with no urgency to move on raising policy rates. Second: how will important US data this week, like the ISM Manufacturing today and ISM Services on Thursday, as well as the May US jobs report on Friday affect treasury yields, which the JPY remains very sensitive to (negative correlation). USDJPY looks in danger of a tactical reversal back into the range if the 109.25-50 range can’t support.
Gold (XAUUSD) trades higher again in response to a softer dollar and rising oil prices adding to the inflation focus. The recent recovery in ETF holdings and fund positions in futures remain subdued, a sign that many investors remain sidelined and unconvinced about the short to medium term direction. Silver (XAGUSD) is staging a comeback after bouncing from its 21-day moving average, a sign bullish momentum remains intact. Focus this week on oil prices, Friday’s job report and whether gold can break above $1923, the 61.8% retracement of the August to March correction. First level of support at $1890 followed by $1858.
Crude oil (OILUSJUL21 & OILUKAUG21) trades higher ahead of today’s OPEC+ meeting and after Iran nuclear negotiations ended with no deal on the table. Ahead of today’s meeting, OPEC and its allies said inventories will fall sharply this year. This on the assumption the group will stick to its plan, an Iran deal doesn't flood the market and U.S. shale producers will not increase production despite oil moving into the 70’s. Brent topped $70 with the March high at $71.40 the next focus. Higher prices will add to inflation concerns at a time where consumers already pay multi-year high prices at the pump. The ministerial OPEC+ meeting begins at 14:30 Vienna time after the JMMC meeting has finished.
Eurozone CPI numbers are in focus today as it may add on tapering fears, provoking a selloff in the bond market (VGEA, IS0L, BTP10). The Eurozone CPI index is forecasted to rise 1.9% YoY, the highest in three years and close to the ECB target. If the CPI surprises, it may provoke the European sovereign space to a selloff that would drive yields higher across the board. Watch out for 10-year Bund yields. They are consolidating within a tight range between -0.20% and -0.15%. If they break above -0.15% they could rise fast to 0%.
What is going on?
Australia’s Reserve Bank keeps policy guidance unchanged for now. The RBA is sticking to its guns for now in keeping its policy guidance unchanged, continuing to point to the July meeting as the time to make a decision on whether to extend the horizon of its yield-curve-control policy (keeping the 3-year and shorter Australian government bond yields at 0.1%) to the November 2024 government bond from the April 2024 bond. The central bank still sees that it is unlikely that conditions for an actual rate rise will be met until 2024 at the earliest. AUD weakened very slightly from levels just prior to the announcement.
Volkswagen is considering an IPO for its battery division according to Handelsblatt. The German carmaker is saying that building out battery capacity will be expensive and sharing the financing and risk with other investors is something the company is considering. Volkswagen is also looking at vertical integration adding raw materials production and recycling to its value-chain. In the interview the company also mentions the outlook for solid-state batteries with a target of 2025-2026 being the years of the first pilot programme. This statement could weigh on QuantumScape (VW own 26% of the battery maker) in today’s trading session.
What are we watching next?
US Fed’s Brainard to speak as market looks for taper hints. Lael Brainard of the Fed Board of Governors, will speak at 1800 GMT today before the Economic Club of New York, a speech that will be followed by a Q&A. Last week, the influential Vice Chair Richard Clarida flagged that discussing a tapering of the Fed’s asset purchases would be appropriate at coming meetings. The market will look for similar rhetoric from Brainard.
Earnings reports this week. This week’s earnings start today with Zoom reporting FY22 Q1 (ending 30 April) with analysts expecting revenue growth of 177% y/y and EPS growth of 865% y/y as the comparable period is still from a low point before the pandemic. The company’s equity valuation is still aggressive and thus a lot is at stake with everything coming down to the outlook.
Economic Calendar Highlights for today (times GMT)
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
