What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – a very quiet session yesterday with a tight trading range, but one that underlined the tactical importance of the 13,600 low in the Nasdaq 100 as the first key downside level ahead of the 21-day moving average at 13,475. For the S&P 500 Index, there is a sticky area near 4,190 that has supported and the 21-day moving average is 4,168. At times yesterday, the Nasdaq 100 and the US treasury market were moving in complete lock-step, a worrying sign of a positive correlation between treasuries and stocks, although the co-movement was less tight later in the session.
Euro STOXX 50 (EU50.I) - sentiment on European equities remains strong driven by rising commodity prices and flows into Europe amid more attractive valuations relative to US equities. STOXX 50 futures are opening above yesterday’s close with the 4,100 level in sight unless we get some adverse macro figures. European equities have both more weight on cyclical industries, but also lower duration which insulate them more from rising inflation expectations.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Crytpocurrencies are gunning for resistance now, with Bitcoin pushing toward the highest levels in nearly a week and above 38k as it eyes the key 42k level and Ethereum has poked closer back to its key resistance since the traumatic May sell-off at 3,000.
EURUSD – the EURUSD super-major has been bottled up in a range since moving above 1.2182 resistance more than two weeks ago and will likely have to choose a direction by the end of the week, given the important data releases up today (US May ADP Payrolls change and May ISM Services survey) and tomorrow (May US Nonfarm Payrolls Change) that could begin to tip Fed rate expectations more forcefully than we have seen in a while. See more below in What are we watching next?
EURNOK – with risk sentiment quite strong in Europe and Brent crude pushing to new multi-year highs this week, NOK could find support for a run at the hugely important 10.00 level in EURNOK, which was briefly crossed back in April and early May, but the price action was not sustained. Norway’s central bank has flagged a possible rate hike later this year.
Copper (COPPERUSJUL21) trades lower for a second day, and the recent loss of momentum has raised the prospect for a prolonged period of consolidation or perhaps an even deeper correction. Bloomberg reports the Yangshen copper premium of LME has fallen to a four-year low, and in London the spread between spot copper and the three-month contract has traded in contango (oversupply) for the past three weeks. Global exchange-monitored stocks have stabilized near a ten-month high while speculators have cut their net-longs by 63% since December. Downside focus the 50-day moving average and February high, both close to $4.40/lb while a break above $4.72 would likely trigger renewed upside momentum.
Gold (XAUUSD) trades quietly around $1900 and with forex and yields not doing much either these key markets have all adopted a wait-and-see approach ahead of Friday’s U.S. job report. Following the strong run up since April gold's ability to withstand correction/consolidation pressures highlights the return to the buy side of long-term trend following funds, many of which build up short positions following the August peak. Still the risk of a deeper correction remains in our opinion the biggest short-term risk. Support: $1890/65/42 and resistance $1916/24/40
Crude oil (OILUSJUL21 & OILUKAUG21) trades higher ahead of today’s delayed EIA stock report. The market found a fresh bid overnight after the API last night reported a bigger than expected drop in crude stocks while fuel stocks rose. The bullish demand outlook presented by OPEC based on strong demand in Europe, China and the US has triggered renewed upside momentum, and from a technical perspective, today’s focus is whether Brent can break the four-time rejected area just below $72. If successful, the technical outlook points to $75 as the next target.
France government bond issuance will test investors’ appetite for duration (IFRB). Today, France will issue 10-, 20-, 30- and 50-year OATs. It’s crucial to see if there is any hiccup in these auctions following last week exceptionally weak demand for 15-year Bunds. The 50-year OATS issued in January have already fallen 20% percent in value. We believe that investors are looking to cut duration rather than adding it, creating the perfect storm for a technical failure at today’s French government bond auctions, which has the potential to leak to other European sovereigns.
What is going on?
Another Fed voice wants to talk taper – yesterday, Philadelphia Fed chief Patrick Harper said it “may be time to at least think about thinking about” slowing asset purchases, while also cautioning against the risk of a “taper tantrum” like the one that occurred in 2013 when then Fed Chair Ben Bernanke flagged the need to taper QE purchases. Harker is not a voter, but his comments show how difficult the Fed’s task will prove of withdrawing support from markets that have been so inflated on its extreme policy accommodation since the pandemic lows last year.
The EU is planning to assess tariffs on cement, steel and aluminum imports based on the greenhouse gas emissions required to produce them to put them on equal footing with the emissions levies assessed on domestic production based on the EU Emissions Trading System. Proposals for this will be revealed next month.
European government bond yields fall as Lagarde reassures market of continuous support (VGEA, BTP10). Sovereign bond yield in the euro zone fell yesterday as Lagarde highlighted the commitment of the central bank to “preserve favorable financing conditions”. Yet the 5-year BOBL auction showed that demand for German government bonds continue to fall with a bid-to-cover of 1.21x, the weakest since April 2020, and well veloce the 5-year average. Everything points to a dovish ECB next week which could push 10-year Bund yields below -0.20% where they would find support at -0.40% next.
BlackRock CEO Larry Fink says potential for ‘big shock’ on inflation. Personal income has never risen as much as it has done the past year since the time series began during WWII. The bottlenecks in the global supply chain combined with extraordinary increase in personal income will drive inflation much inflation and more permanently change inflation dynamics. Larry Fink’s key view is that if we go all in on a green world then it will mean much higher inflation and interest rates.
What are we watching next?
Are Fed expectations set for a jolt over US data in coming days? Key US data may begin to unseat the market’s confidence that the Fed will continue to look through signs of a white-hot economy and especially inflationary pressures here, especially if May payrolls surge again after an April disappointment in the NFP change survey. On the other hand, while we pointed out yesterday that the ISM Manufacturing employment sub-index came in surprisingly low at 50.9, the anecdotal evidence from that survey was that supply disruptions were holding back many company’s ability to expand production, and difficulty in finding labor was also a key factor holding back hiring plans. This could mean we need to be careful how to interpret payrolls change if similar evidence shows up in the ISM Services survey or if the payrolls growth is slower than expected. Today’s May ADP payrolls change expected to show +615k jobs added in May.
Earnings reports this week. Given the latest cyber security attacks on the North American meat producer JBS CrowdStrike earnings and outlook will be in focus. The company has grown revenue 82% the past 12 months and is expected to grow 51% this fiscal year underscoring the high demand for cyber security solutions-
- Today: Lululemon Athletica, Cooper Cos, Broadcom, CrowdStrike, DocuSign, Slack Technologies
Economic Calendar Highlights for today (times GMT)
- 0715-0800 – Euro Zone May Final Services PMI
- 0830 – UK May Final Services PMI
- 0900 – UN FAO’s May Food Price Index
- 1215 – US May ADP Payrolls Change
- 1230 – US Weekly Initial Jobless Claims
- 1345 – US Final May Markit Services PMI
- 1400 – US May ISM Services
- 1430 – US Weekly Natural Gas Storage Change
- 1500 – US Weekly DoE Crude Oil and Product Inventories
- 1600 – US BoE Governor Bailey to Speak
- 1905 – US Fed’s Quarles (Voter) to Speak
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