Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: US equities traded sideways yesterday in an unremarkable session despite the ongoing blitz of major earnings reports rolling in. Price action was similarly uninspiring. A jump in US treasury yields later in the session was the most notable development, as the FOMC meets today and will release its latest monetary policy statement, likely trying to keep a low profile as it will take some time to determine if the coming inflation spike will prove transitory.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US markets traded largely in sideways fashion, with the more yield-sensitive Nasdaq 100 Index fading a bit more later in the day, likely due to the spike in US treasury yields in the wake of a 7-year US Treasury auction. Technical weakness is a bit more easy to come by there after recent sideways trading, and the 21-day moving average has crept above the local 13,700 pivot, now at 13,757. Likewise, the S&P 500 Index looks a bit more vulnerable technically if the new highs above 4,185 fail to sustain – first focus lower is the local 4,110 pivot low and 21-day moving average, currently 4,114.
STOXX 50 (STOXX50E.I) - momentum looked solid on top of strong European earnings yesterday, but equities failed to push through and instead closed below the close from the day before. This could have been an ugly technical reversal, but STOXX 50 futures have opened above yesterday’s open and will likely try again to push higher. The strong outlook from Delivery Hero and good earnings from Deutsche Bank could lift sentiment in the DAX Index and wider European equities.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). The Bitcoin bounce-back showing signs of fading this morning, ahead of 56k and the 61.8% retracement of the sell-off from the 64.9k to, which comes in near 58k. Ethereum managed to hit a new highs above 2,644 late yesterday and followed through briefly overnight before running into resistance, in what has proved a very choppy performance since the mid-April high was posted.
AUDUSD – a much weaker than expected Q1 CPI report out of Australia (Headline QoQ at 0.6% vs. 0.9% expected and “Trimmed Mean at 0.3% vs. 0.5% expected) saw the currency lurch into a broad, if restrained, sell-off overnight. The RBA has insisted on keeping a dovish outlook on policy, with an upcoming decision later this year needed on whether it will roll forward the yield curve control (it aims to keep the yield for the April 2024 Australian Government Bond capped at 0.1%). The release came just after AUDUSD was testing key resistance toward 0.7825, with bulls more than ever needing a close above this level to prove their point and set expectations higher, while a close below perhaps 0.7700 after the FOMC meeting suggests the pair will stress the range lows. US yields are worth tracking after a sudden rise yesterday, as the USD has tracked the direction of US yields this year.
USDJPY – USDJPY jumped higher in response to the rise in US treasury yields, as JPY traders seem to be ever-sensitive to the direction in long US yields, which makes some sense, given the Bank of Japan’s recent capping of 10-year JGB yields at 0.25%. Any further directional moves in either direction triggered by this evening’s FOMC meeting will set the tone. The recent support zone just below 108.00 is critical if this latest yield spike fades, while an extension higher in US yields could see 110.00 swinging back into view.
Gold (XAUUSD) and silver (XAGUSD) trade softer ahead of today’s FOMC meeting and after failing to find fresh buyers, both metals are increasingly at risk of another correction. Failure to find buyers despite the recent dollar and Treasury yield softness can be seen in ongoing ETF redemptions and lower open interest on COMEX. In addition, U.S. 10-year yields look ready for a technical rebound. While resistance at $1800 looks firm, failure to hold the $1760-65 area could see it drop towards $1735. Following a week of strong gains, copper (COPPERUSJUL21) trades softer, targeting support at $4.36, the recent high. Goldman Sachs in a note repeated its $5/lb (LME: $11k/t) six-month price target with inelastic supply struggling to meet surging demand as the green transformation gathers pace.
Crude oil (OILUKJUN21 & OILUSJUN21) reacted very calmly to the OPEC+ decision to proceed with plans to add more barrels from May and onwards while a surprise 4.3-million-barrel increase in oil stocks reported by the API was offset by equally large reductions in fuel stocks. Despite a virus resurgence in Asia, led by India, OPEC+ has raised its global demand forecast for this year with Goldman Sachs seeing the biggest ever jump in demand over the next six months. Brent is currently trading within a four dollar upward trending channel between $64 and $68 with today’s focus on EIA’s weekly stock report and the FOMC meetings potential impact on the dollar.
US Treasuries’ momentum remains bearish ahead of the FOMC meeting (TLT; IEF). Yesterday’s 7-year note auction showed that demand for Treasuries continues to lag as both bid-to-cover and indirect bidders remain well below the five-year average. We expect the Federal Reserve to stick to their Average Inflation Targeting framework and to remain accommodative as inflation continues to rise. This exposes the market to a policy mistake which the bond market is not willing to overlook. The Fed’s economic outlook is going to be in focus, and it will be important to look for any guidance regarding inflation. The big question is whether the Fed is considering scenarios in which it will start to taper its quantitative easing. Overall, we remain bearish US Treasuries as we believe that 10-year US Treasuries will stabilize around 2% in yield.
What is going on?
US proposal for global minimum corporate tax called a “breakthrough moment” by Canada’s finance minister Chrystia Freeland, a tax mostly designed for large tech companies. This, after the country recently implemented its own “digital services” tax based on revenues, set to start at the beginning of next year if no new international accord was agreed. France and German yesterday also voiced support for the idea. This could go a long way to alter profit margins for large companies that currently employ accounting tricks to stuff global revenue in lower tax districts.
Delivery Hero Q1 result knocks the ball of the ballpark. Europe’s largest on-demand food delivery service beat on both revenue and operating income with total gross merchandise value in Q1 of €7.8bn vs est. €4.54bn. The company says it expects to reach revenue in 2021 around €6.6bn which is much higher than current estimate of €4.9bn.
Charlie Munger’s the Daily Journal Corp has bought shares in Alibaba. The company says it has placed this bet as an alternative to cash equivalents. This is an unusual argument for Charlie Munger, but it maybe hints of more buying and that he sees Alibaba having value relative to the market.
What are we watching next?
FOMC meeting tonight – the Fed would likely prefer to not even be meeting tonight, so it will likely say as little as possible at tomorrow night’s meeting as its conviction will be tested in coming months on whether the coming bump in inflation numbers proves “transitory”. Given that we won’t see the Fed refresh its macro-economic and policy rate forecasts until the June FOMC meeting, the only chance to get a sense that the Fed’s confidence in its current course is in the monetary policy statement itself and Chair Powell’s press conference, and Powell has been insistent on waiting for outcomes to be well established before reacting with guidance adjustments, and not anticipating them.
Earnings reports this week. Yesterday’s US earnings were mixed with negative reactions across Amgen, Pinterest and Microsoft, while the market liked Alphabet’s (Google) results sending the shares up 4% in extended trading. Alphabet beat on both revenue and earnings with the latter being extremely strong vs consensus and added $50bn more to its buyback programme. Pinterest vs Google had two very different quarters despite both being in the online advertising industry highlighting that Google’s ads business is more broad-based and still the preferred venue for businesses. Today the focus is on Shopify, Apple, and Facebook, with the former being part of our e-commerce theme basket and have enjoyed incredible growth in 2020 as demand was pulled forward as businesses had to adapt to more online sales.
Economic Calendar Highlights for today (times GMT)
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