Summary: The US equity market posted a weak session across the board, with the major averages eyeing important local support and elsewhere, small-cap stocks are in a nosedive. The mood stabilised overnight. US treasury yields were stable after an indifferent 5-year treasury auction and the US dollar remained firm after EURUSD broke to a new four-month low.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities turned sharply lower and across the board yesterday (contrasting with the divergences noted yesterday) led lower by e-commerce, bubble stock and biotechnology. This took the Nasdaq 100 Index close to the local pivot low of12,681 that could open for a test of 12,200 if broken, while the tactical downside focus for the S&P 500 of 3,875 (also a recent low as well as the 21-day moving average) a break there could lead to a test of the last important Fibo retracement (61.8% at 3,813)
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - It has been a volatile 24 hours for Bitcoin, which rallied sharply yesterday to above 57k, possibly on the news that Tesla announced that customers could pay for cars in Bitcoin, before falling again overnight as far as almost 51.5k. The 50k area on the chart looks important technically and likely also psychologically. Ethereum price action mimicked that of Bitcoin – with the next key chart area lower 1300-1400.
USDJPY – the consolidation in USDJPY has been very shallow and has largely tracked the consolidation lower in US treasury yields. The yield-sensitive JPY bears watching over US data today (weekly claims) and the 7-year US treasury auction as a new rise in US yields could see USDJPY popping the top on new highs and making a run at the critical chart (and psychological) level of 110.
EURUSD – the big USD pair has now broken lower below the prior 1.1835 low and thus has traded to four-month lows, with the chart area toward 1.1600 now opened up. The market brushed off the strongest ever Manufacturing PMI reading out of Germany yesterday, and the USD may continue to outperform as long as growth expectations continue to stretch in favour of the US.
Gold (XAUUSD) continues to trade sideways while silver (XAGUSD) remains at risks of a deeper sell-off on a break below $25/oz as HG Copper (COPPERMAY21) fundamentals weaken with exchange-monitored inventories up 80% from last month’s more-than decade-low. The metals have struggled all week with the tightest (inverse) correlation being that against the dollar which has broken higher (see above). Yields meanwhile have behaved favorably with 10-year real yields trading at –0.70%, but not enough to halt the outflows from ETF’s which for gold has been ongoing for the past 27 days. We remain short-term neutral below $1765 with the risk of additional weakness below $1720.
Crude oil (OILUKMAY21 & OILUSMAY21) bounced strongly yesterday before running into fresh selling overnight in Asia. The Suez blockage, now in its second day, is currently disrupting flows of oil and products, estimated to be around 2 million barrels/day. The bounce from Tuesday’s low near $60/b also a reflection of a growing unease that OPEC+ may add further measures to support prices when they meet on April 1. Friday’s COT data from the CFTC will show how much money managers cut longs during the latest correction. For now, the market remains on the defensive with a break above $65 needed to improve the short-term outlook.
What is going on?
UK Bank of England Chief Economist suggests UK could see “rip-roaring” recovery as he pointed to the savings UK consumers put away during the pandemic as the government rolled out an unprecedented fiscal response. This is the key question for this economy and the US economy, the two large economies that were both the most aggressive with fiscal stimulus and that lead the race to vaccinate their populations.
SEC opens inquiry into SPAC frenzy. SPACs have become a popular method to list new companies in the US. A SPAC is a shell company listed on the stock exchange with only cash on the balance sheet and intentions to do an acquisition within some defined industry. Read the entire SEC inquiry here.
Container ship still blocking Suez Canal – halting close to $10 billion a worth of ship traffic daily and currently a total 185 ships are waiting to transit. While the oil and fuel market has received most of the attention, the bulk and container markets are likely to see the biggest impact. Container freight rates from Shanghai to Rotterdam surged during Q4-20 and has stayed elevated at 4 times the normal rate, and it could go even higher in the short term.
What are we watching next?
U.S. growers may plant their largest area since 2014 this coming summer. During the past year the Bloomberg Grains index has jumped by more than one-third with soybeans (+58%) and corn (+45%) trading at their highest levels in seven years. While it may take 5-10 years for mining companies to raise production in response to higher prices, farmers can respond from one year to the next. The U.S. Department of Agriculture will release its plantings outlook on March 31, and weather permitting, a bumper crop is expected with surveys pointing to increased acreage allocation for soybeans and especially corn. Speculators hold a near record long so expect increased volatility before and after the release.
US Treasury Yields and 7-year US Treasury auction today. Yields were almost unchanged yesterday after the 5-year Treasury auction proved rather indifferent, with a slight pick up in the rather low bid-to-cover ratio of the prior auction of this maturity, while there was little change in foreign interest. The 7-year auction up today could receive even more focus as it was a disorderly market around the last 7-year auction result that sparked a significant rise in US yields. Quarter-end portfolio rebalancing is seen by some as a possible support for fixed income through March 31.
EM currencies after Russia cancels bond auction, South African auction sees weak demand - some are tempted to draw a line of association to Turkey, where President Erdogan’s firing and replacement of the central bank head has triggered a meltdown in the lira, but there are no signs of strain in EM credit spreads in general here. The Ruble move lower does look quite large and could be linked to concerns of eventual US sanctions. The South African rand is only slightly lower after weak demand at a sovereign bond auction yesterday, and the Reserve Bank of South Africa meets today.
Earnings to watch - another batch of earnings announcements out of China today and tomorrow as we watch whether mainland Chinese equities and the Hang Seng Index can find more support after their recent significant correction.
Economic Calendar Highlights for today (times GMT)
South Africa Central Bank Rate Announcement (no time given)
0830 – Switzerland SNB Deposit Rate Announcement
0830 – Sweden Feb. Household Lending
0900 – ECB President Lagarde, other ECB officials speak at BIS conference
0930 – UK BoE Governor Bailey to Spek at BIS Conference
1230 – US Weekly Initial Jobless Claims
1410 – US Fed Vice Chair Clarida (Voter) to speak on Economy and Monetary Policy
1430 – US Weekly Natural Gas Storage Change
1500 – US Mar. Kansas City Fed Manufacturing
1700 – US 7-year Treasury Auction
1900 – Mexico Central Bank Rate Announcement
2300 – US Fed’s Daly (Voter) to speak
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