Summary: US equities traded sharply lower as US President Biden outlined a capital gains tax increase proposal that would nearly double previous rates. The vicious new sell-off in the crypto space was likely triggered by this announcement as well, with Bitcoin dropping below 50k overnight. There was limited contagion from this development in the Asian session.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – More choppy action for US equity traders as yesterday’s proposal from US President Biden to nearly double capital gains taxes for wealthy investors spooked the market. This marks the second change of direction in this choppy weak of trading. If the news continues to weigh on the market ahead of Biden’s speech next Wednesday on this tax and other initiatives, technical focus lower would include the 21-day moving averages (currently 4,080 for the S&P 500 and 13,600 for the Nasdaq 100) and a bit lower, the 4,000 level for the S&P 500 and the 13,350 area for the Nasdaq 100).
STOXX 50 (EU.I) - STOXX 50 futures failed yesterday to erase the loss from Tuesday and post Biden’s new capital gains tax plan the market is a bit wobblier with STOXX 50 futures opening lower. The support level to watch today is yesterday’s low at 3,942, and if broken could send European equities much lower today confirming that momentum has stopped for now and a correction could formalize itself.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - crypto currencies came under heavy pressure and Bitcoin broke down through important technical levels (recent low and 50k) on the news that US President Biden is seeking a dramatic capital gains tax that would impact profits from crypto trading just as any other asset. The price action was also very disappointing for Ethereum traders, as it came tumbling lower from new all-time highs just yesterday, correcting nearly 20% in less than 24 hours.
USDJPY – the USDJPY pair has reached a technical crossroads as it traded down to a nearly exact touch of the 38.2% retracement of the huge rally wave off the January lows at 107.79. The key coincident indicator appears to be the long end of the US treasury yield curve, where the recent consolidation of bond yields has boosted the yield-sensitive yen (which is set to stay very yield sensitive on the Bank of Japan’s capping of 10-year yields at 0.25%). A further drop in US yields would see the focus shift to perhaps the 105.75 area 200-day moving average, where the key 61.8% Fibo retracement also sits, although that would require a considerable further US treasury rally.
USDRUB – the ruble rallied sharply on the news that Russia announced an end to its military exercise on the Ukrainian border, which allows a dramatic reduction in the “geopolitical discount” the currency has suffered in recent months. Today, the Russian Central Bank is expected to announce a 0.25% rate hike that would take the policy rate to 4.75%. USDRUB traders near the 200-day moving average just above 75.00 and could be set for a bout of further strength if oil prices stay stable to higher here and the Russian central bank hikes as expected and continues to signal further hikes to come.
Gold (XAUUSD) trades softer after finding resistance ahead of $1800 but still well above the key $1760-65 area of support. The market is finding support from data showing a recovery in physical demand from China and India, the world’s top consumers, while ETF holdings are steady with no redemptions seen for the past week. With gold still in a downtrend since last August, large scale short covering from longer term trend funds has not yet emerged. For that to happen gold as a minimum probably needs to break above $1815.
The European bond market remains in the hands of US Treasuries (IS0L:xetr). Following yesterdays’ European Central Bank meeting, it’s clear that the central will continue to remain accommodative throughout all year, until the bloc is fully recovered from the Covid-19 pandemic. It translates to the fact that European sovereigns will remain vulnerable to rise in yields in the United States.
Sentiment in US Treasuries is about to turn bearish (TLT:xnas, IEF:xnas). Ten-year US Treasury yields fall to hit their 50-days moving average, and momentum is overbought. It is a clear sign that sentiment in the US safe havens can turn negative at any point. As we approach summer, the labour outlook will continue to strengthen, and inflationary pressures will increase putting pressure on US Treasuries, with yields finding their way back to 2%.
What is going on?
US President Biden proposes huge capital gains tax for wealthy - a new proposal from US President Biden would tax capital gains at a rate as high as 39.6% to help pay for the social and infrastructure spending for those earning $1 million or more. Including the 3.8% capital gains tax to pay for Obamacare, this would take the tax rate on capital gains to higher than the highest income tax bracket. President Biden will detail this and other initiatives in his American Families Plan in a address before Congress on April 28.
The European Carbon emissions (EMISSIONSDEC21) contract has broken records every day this week and yesterday it reached a high of €47.36/t to record a 60% gain so far this year. The continued rally came as European lawmakers reached a deal on stricter pollution targets ahead of yesterday’s virtual summit hosted by the U.S. The fact the contract has outpaced the actual implementation of new policies highlights an increased investor/speculative appetite for a market that has shown strong momentum since November when Biden won the U.S. election to signal a change in US policies towards combatting climate change.
Grain prices extended their recent run of gains yesterday with the Bloomberg Grains index reaching a fresh eight-year high after recording an 8% gain this week. Corn (CORNJUL21) jumped by the exchange limit to reach $6.35, soybeans (SOYBEANJUL21) topped $15, and wheat (WHEATJUL21) traded above $7. All these multi-year highs being driven by a combination of already low stock levels due to rampant Chinese demand and a record cold snap delaying U.S. planting while hurting some winter wheat. To top it all up Brazil is recording declining crop conditions due to drought. All three contracts are now well into overbought territory with s/t focus on weather developments
Panasonic is close to acquire AI software firm Blue Yonder. The Japanese technology conglomerate is said to be near a deal to acquire Blue Yonder for $6.5bn following its 20% stake in the company acquired in less than a year. Blue Yonder makes software that predicts product demand using AI.
What are we watching next?
Reception of Biden’s tax proposal and American Families Plan speech next Wednesday – the Biden presidency legacy and the ability of the Democrats to maintain control beyond the 2022 mid-term elections could hinge on whether this kind of program of hefty tax rises for the wealthy and reducing inequality in the US will succeed and pass Congress. Certainly, this plan and the earlier proposed increase for corporate taxes at minimum present hurdles for the kind of equity market gains we have seen in the wake of the Covid outbreak.
Cryptocurrencies are under severe pressure – with Bitcoin trading below 49,000 this morning and Dogecoin down 50% in just three days momentum has reversed and some participants in this market are potentially experiencing margin calls or closing positions to lock in previous profits. Microstrategy which is part of our Crypto & Blockchain theme basket, which was down 5.6% yesterday, is down more than 50% from its highs in February suggesting a lot of repricing. With Tesla, Square and Ark Invest being exposed to cryptocurrencies these stocks could come under pressure today and next week.
Earnings reports this week. Intel Q1 earnings reported after market close were good for the quarter with both revenue and earnings beating expectations. However, the market sent Intel shares down a couple of percent in extended trading as the company’s forecast for Q2 was a negative surprise and investors worried about the company’s falling market share in the important datacenter segment. Snap Q1 earnings were better received with shares up 3% in extended trading as the social media platform said it expected to reach breakeven in Q2 on EBITDA basis.
Economic Calendar Highlights for today (times GMT)
0715-0800 – Euro Zone Flash Apr. Manufacturing and Services PMI
0830 – UK Flash Apr. Manufacturing and Services PMI
1030 – Russia Central Bank Rate Announcement
1345 – US Flash Apr. Markit Manufacturing and Services PMI
1400 – US Mar. New Home Sales
1435 – Bloomberg Climate Panel featuring ECB’s Lagarde, US Treasury Secretary Yellen
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