Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: Equity markets are mixed yesterday and overnight after the US session managed to shake off the blow-up of a hedge fund holding large positions, though market breadth was somewhat weak. The focus is back on US long treasury yields as 5-year and longer yields take another look at the highs of the cycle just ahead of quarter-end and the yield sensitive JPY is trading at 110.00 in USDJPY ahead of the end of the financial year in Japan tomorrow.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)–the headlines suggest that US equities managed to shake off the uncertainty of the Archegos hedge fund blow-up, but on closer inspection, freshdivergences show considerable crosscurrents for US equities beneath the surface. The S&P 500 closed about unchanged and about half a percent of the all-time high of 3,978.5, while the Nasdaq 100 remains bogged down below the important 13,300 resistance area. Elsewhere,small-cap stocks posted a weak session on the day.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin and Ethereumrose smartly yesterday and helped dig themselves out of small-scaled consolidation patterns, leaving the all-time highs as the last key resistance. A Coindesk.com market wrap suggests significant flows of cryptocurrency into private wallets or “cold storage” from the exchange is a bullish sign of plans by some market participants to hold for longer-term gains.
USDJPY and JPY crosses – USDJPY hasbeen pushing on the 110.00 level overnight, with both eyes on whether US yields continue to push higher and on quarter-end and theend of the Japanese financial year tomorrow. 110.00 is not just a psychological level, but also the approximate top of the broad, descending channel that has formed in recent years. The next area higher is arguably 114.50-115.00.
USDCNH –China allowed the renminbi to move lower against the US dollar more sharply yesterday (about –0.5%) than it has in weeksand this could lead to a broader US dollar rally, particularly against Asian EM currencies, but also AUD, etc. The next area of interest is up into the 6.68 area prior major low before last year’s slide took out that level.
Spot Gold (XAUUSD) - gold is moving lower again after having been bottled up in a tight range, as the US treasury sell-off resumed with some force yesterday. 1,700 is a psychological level of importance, but the cycle low just below 1,680 is the key support level barring the way for an extension lower, which may unfold if the long end of the US Yield curve posts new highs. The next major area of interest lower is perhaps 1,557, a significant high on the way up.
Crude oil (OILUKMAY21 & OILUSMAY21) crude oil sits atop a consolidation that has approximately cut the recent sell-off in half, but is perhaps struggling for more upside on the continued strength of the US dollar and the uncertainty about how long the rise of Covid variants will restrain demand recovery. The refloating of the ship that was blocking the Suez Canal is a marginal negative for oil as that source of supply uncertainty has been removed, even if some delays can be expected in deliveries as the hundreds of ships backed up are cleared. US demand figures bear watching this week and in coming weeks as a model for how quickly demand rebounds as the US emergence from lockdowns spreads.
US Treasuries care more about inflation than Archegos fallout, and they continue their fall (TLT, IEF). Us Treasuries gained yesterday morning as news of Archegos blowup hit the market. However, by the end of the day they reversed their losses showing that the market doesn’t expect it to be a systematic event for the financial industry. Fixed income investors are more worried about rising inflation expectations despite last week’s PCE miss. More Covid-19 stimulus is coming in April as well as a large infrastructure bill, which can only ignite inflation. On Wednesday, Asian investors will close their fiscal year and might provide much-needed support to Treasuries. If that were not to happen, Biden’s speech might be catalyst for a deeper selloff, which could push yields to test resistance at 1.75%.
Busy primary junk bond market shows corporates fear higher interest rates (HYG).The primary junk bond market volume hit a new quarterly high last week as $139 billion worth of HY corporate bonds priced year to date. Although high yield companies gear up their balance sheet, their spread remain stable showing that investors are more concerned about interest rate risk rather than credit risk. We believe that the honeymoon will soon be over as high yield spreads will start to suffer if rates increase further, especially once 10-year yields break above 2%. The investment grade space is equally busy with twelve companies looking to issue IG bonds for a total or around $20 billion before Good Friday.
European sovereigns put to the test as Italy issues 5 and 10-year BTPs today (BTP10). The European Central Bank has been vocalabout the negative impact of rising sovereign yields in the euro area. However, it may be fighting an uphill battle trying to keep yields low while US Treasury yields are soaring.While the selloff intensifies in the US, it is crucial to see if the demand for European sovereigns continues to be supported. Today, Italy issues 5 and 10-year BTPs, but it will be Thursday OATs auction that will be in the spotlight as yields rose by 20 basis points since the beginning of the year, and they are shy of just 10 basis points to turn positive.
What is going on?
US Treasury yields post new highs in the belly of the curve, long end of yield curve flattens. – US five-year treasury yields posted a new cycle high above 90 basis points overnight, as did 7-year yields, while the 10-year benchmark was just shy of the 1.75% high for the cycle and the 30-year benchmark was several basis points shy of the cycle high above 2.50%. US yields will quickly grab significant attention and likely weigh on risk sentiment if we see a significant new advance higher on treasury market weakness (for example, on a particularly strong US jobs report this Friday – although US markets are closed for a holiday on that day)
Covid cases resurgent in some large countries – The US resurgence is modest, but the 7-day average has risen 11 percent as the race between the vaccines and an aggressive opening upin some states continues. And the recent resurgence of numbers in several EU countries has been noted, but other countries are also seeing major resurgences, including the worst affected major country Brazil, but also India (back above 50k cases per day) and the Philippines, where the daily case count has quickly ramped to some two times of the peak from the first wave.
What are we watching next?
US treasury yields- as noted above after the move to new highs in US treasury yields at the belly of the curve overnight (5-7 years) and noting that this is happening even as some suggested that the upcoming quarter-end tomorrow might see considerable inflows into US treasuries on portfolio rebalancing after a weak Q1.
Today’s vote in Alabama by Amazon.com warehouse workers there on whether to unionize - the vote is to be held today and should be seen as a litmus test of the ability of a unionization drive in a country, and a region of that country, that has shown very low tendency to unionize. The implications for Amazon.com profitability if the unionization drive succeeds will weigh. Amazon.com stock (AMZN:xnas) topped out last September before a long sideways price development ensued.
Earnings reports this week. A number of interesting Chinese names reporting this week, together with a handful of others, before the big US earnings season starts to crank into gear starting in two weeks.
Today: Agricultural Bank of China, Bank of China, China Vanke, BOC Hong Kong, Great Wall Motor, Hansoh Pharmaceutical, CITIC, Weichai Power, China Railway Group, China Communications Construction, LulelemonAtheletica, Chewy, China Resources Land, McCormick, BioNTech
Wednesday: Micron Technology, H&M, Smoore International, CSC Financial, China Evergrande, Nitori, Walgreens Boots Alliance
Thursday: CarMax
Economic Calendar Highlights for today (times GMT)
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