Market Quick Take - June 18, 2021

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Equities leaped back higher yesterday as long US treasuries likewise rallied hard on a powerful flattening of the US yield curve, as the market continued to bring forward the timing of the first Fed rate hike after the FOMC meeting jolted those expectations. Elsewhere, the USD remains firm, but a sharp rally in the JPY is trying to steal the spotlight in FX, while commodities were generally lower.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the broader posted a mildly positive session, while the Nasdaq 100 rallied steeply to close at an all-time high on long US treasury yields backing off sharply, a boost to long duration assets like growth stocks. Elsewhere in the market, value stocks came under heavy pressure on the same driver, an interesting sign of turmoil in market breadth. Interesting to see how this shakes out as we have “quadruple witching” of financial futures today (discussed below).

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin continues to settle back in the range below the key 40-42k area, trading near 38k this morning, with the recent weakness possibly on the sense that the US Fed is regaining some credibility on taking inflation seriously after the most recent FOMC meeting. Ethereum is struggling, meanwhile, and is now perched close to the pivot low near 2,260, which is the lowest level in almost a month.

USD pairs the USD is very strong here as the market reprices Fed expectations after the Wednesday FOMC meeting this week. Together with the strong JPY noted below, it is the primary focus in FX right here, as EURUSD has become fully unglued and closed yesterday below a key retracement level that suggests a possible run to the interesting 1.1750 area, a kind of “head-and-shoulders" neckline, AUDUSD has broken below major support around 0.7550, etc. The move looks incredibly sharp and may be overdone very short term, but would take a huge countermove now to shift expectations of more USD strength.

JPY –the interesting sharp rally at the long end of the US yield curve yesterday despite the market continuing to sustain the reaction to the FOMC meeting at the short end of that yield curve helped power dramatic support for the JPY yesterday, with even USDJPY falling sharply on the day, but given the still-strong US dollar, the action in other JPY pairs was the most significant in months, with CHFJPY; EURJPY and AUDJPY worth a look for those looking for this move to extend, provided long US treasury yields remain anchored. The sell-off in commodities is also JPY-supportive.

Gold (XAUUSD) and silver (XAGUSD) are looking for support following a week of heavy losses triggered by an aggressive Federal Reserve causing the market to price lower the prospect for future inflation. Ten-year breakeven yields trade down 25 bp on the week thereby forcing real yields higher. Having sliced through several key support levels, gold is currently looking for support at $1769, a level that represents a 61.8% correction of the April to June rally. The road back to relative safety is currently quite long with focus on $1825 followed by $1,838, the 200-day moving average. Silver meanwhile has bounced ahead of key support in the $25.68-73 area.

US Treasury yields will continue to trade rangebound between 1.5% and 1.7% until the Federal Reserve won’t be actively engaging in tapering talks (TLT, IEF). Ten-year US Treasury yields dropped from their 1.59% high down to around 1.5%. The move has been caused by the market believing that inflationary and tapering fears were ahead of themselves after the FOMC meeting. Yet, the 5-year TIPS auction attracted an unexpected high level of demand showing inflation remains a concern. Foreign bidders demand rose to a record high of 87.3% and 5-year TIPS priced at –1.416% in yield. The results caused 10-year nominal years to stabilize above 1.5% after they dipped below this level. Also, to compress yields remains the extraordinary liquidity in money markets. Yesterday, the Fed’s RRP facility attracted demand for $756bn. These forces will remain into play until the Fed won’t engage actively in tapering talks.

Gilt yields are leading losses as the markets is increasingly more concerned about inflation in the UK (IGLT). Inflationary pressures in the UK will be stronger than elsewhere as Brexit act as a multiplier. Brexit is increasing problems concerning transportation and the labor market that may accelerate inflationary pressures in the country. This factor has been widely ignored by the market until now, but the CPI surprise and the Federal Reserve's meeting on Wednesday forced investors to revisit their strategy. We expect Gilt yields to continue to rise, and the Bank of England’s meeting next week has the potential to drive them higher to test their resistance at 0.85% if the message delivered is hawkish. If they break above this level, they will find resistance next at 1%.

What is going on?

The commodity sector is heading for its biggest weekly loss since the start of the pandemic with all sectors, led by grains and precious metals trading lower. Recent darlings like corn, copper, gold and even fortress crude oil all got dumped after the FOMC signaled it would speed up its expected pace of policy tightening. Inflation expectations as seen through 10-year breakeven rates dropped by 25 basis points while the dollar strengthened. Adding to these continued efforts by the Chinese authorities to reduce inflation through commodity market intervention. Yesterday’s grain market drop was the worst since 2009 with easing supply worries triggering a speculative exodus.

Japan CPI rises, Bank of Japan keeps its policy mix steady but announced an extension of the deadlines for existing programmes and a new plan for funding the fight against climate change that it will launch before year-end. In separate news, one of Japan’s CPI measures rose into positive territory for the first time since before the pandemic as the May CPI ex Food and Energy notched a +0.1% gain year-on-year versus no change expected. The headline CPI was –0.1% YoY vs. -0.2% expected, a remarkable contrast with the inflation spike in the US.

What are we watching next?

Quadruple “witching” and end of month/quarter. Today, futures and options on financial instruments (stocks, stock indices and treasuries and other interest rates) expire, possibly explaining some of the two-way churning in the market in recent days on top of the reaction to the FOMC meeting. As well, the US Fed’s reverse repo facility spiked an incredible 45% in a single day to over $750 billion, possibly on the Fed hiking the interest rate on excess reserves by 5 basis points at this Wednesday’s meeting, but also as US banks are likely rushing to shrink their balance sheets into regulatory reporting ahead of quarter end at the end of this month, a pattern that was well established before the Covid pandemic saw rules related to that activity suspended before their reinstatement a few months ago.

Some macro bets have clearly gone wrong – does volatility spike? The reaction to the FOMC meeting this week has set in motion some clear reversals of recent developments as the US yield curve flattened sharply yesterday (the biggest such move after a long period of steepening and then rangebound behaviour in recent months), value stocks came under significant pressure, commodities were likewise under pressure, and the USD and now even JPY are backing up sharply against commodity currencies, the euro and EM currencies. This could raise the risk of more near-term volatility as these trades have become significant consensus bets on the outlook as we emerge from the pandemic.

Economic Calendar Highlights for today (times GMT)

  • 0830 – UK BoE Inflation expectations survey

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

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)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.