What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
Friday’s session saw an acceleration of the US 10-year yield declining to 2.88% as market action is increasingly a tug of war between inflation and recession forces with the latter dominating the flows. The rapidly falling interest rates helped S&P 500 futures climb slightly on Friday to close above the 3,800 level, but this morning the index futures are trading below the 3,800 level again with the 3,745 level being the big downside level to watch in the futures. The cash equity market is closed today due to US holiday (Independence Day).
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
Both indices were treading water this morning. Heightened US recession fears and bounce in new locally transmitted Covid-19 cases to 380 yesterday in mainland China dampened sentiments. HKEX (00388) declined more than 3%. Shares of auto makers traded down 1% to 5% and Macau gaming stocks declined 1% to 3%. Chinese developer, Shimao (00813) failed to repay a US$1 billion bonds maturing yesterday. Ganfeng Lithium (01772) fell 4% after disclosing that the Company was being put under investigation by the Chinese regulator CSRC for alleged insider trading in the shares of an A-share company. Meituan (03690), JD.COM (09616) and Bilibili (09626) rose over 3%. In A-shares, pork stocks surged as hog futures traded in the Dalian Commodity Exchange jumped nearly 6%.
USDJPY on its way to test the 134 support
As US Treasury yields remain pressured lower heading into July, that has spelled some relief for the Japanese yen which is off its 24-year lows printed last week. USDJPY is now trading close to 135, with recession fears helping to bring the yen’s safe haven appeal back. Still, Japan’s inflation threat is rising, and the wage negotiation results due this week. Any signs of an uptick may mean further test of the Bank of Japan’s resolve to keep its accommodative yield curve control policy. Key level to watch for the yen is 134, and a break below could threaten the support at 131.50.
Crude oil (OILUKSEP22 & OILUSAUG22)
Crude oil and fuel products have maintained support throughout the current recession-focused storm which has seen metals and agriculture suffer steep declines, and it shows that commodities with tight supply can be supported despite the risk of slowing demand. However, the upside potential for crude oil remains limited with China reporting widening Covid-19 outbreaks and with recession rising recession risks in the US and elsewhere. On Friday, Bloomberg released its OPEC production survey for June, and it showed a 120,000 b/d drop in production to 28.6m b/d. Members with quotas within the OPEC+ group except the UAE all failed to reach their targets with the deficit rising to 1.6 million b/d, thereby highlighting the risk to supply from key producers of oil.
Gold (XAUUSD) finding support ahead of key $1780 level
The yellow metal trades back above $1800 after being caught up in the all-commodity-selling action on Friday, and after India announced an import tax on gold to protect its ballooning trade deficit. The bounce late in the day and ahead of the long weekend on Friday was supported by another set of weak data US data increasingly pointing to the risk of another negative US GDP print for Q2. Focus this week on EURUSD and whether support at €1.035 will hold, US yields as recession looms, Friday’s US job report and copper through its impact on silver. However, with India being the world’s second biggest consumer of gold and China stuck in the mud, gold traders may in the short-term focus on whether the metal can build another base below $1800.
US Treasuries (TLT, IEF)
US Treasuries rose around 1% on Friday as the US 10-year yield fell to 2.88% as safe-haven flows increased as the market is pricing in a higher probability of a recession. The 2.71% level in the US 10-year yield is the critical line in the sand that could make market dynamics flip. Inflation expectations are the key driver right now of US yields.
What is going on?
AUDUSD off 2-year lows, eying RBA decision this week
The dollar and haven FX were bid last week, and the USD reached close to YTD highs despite a turn lower in yields. This has meant pressure for the high-beta/activity currencies and AUD slid to 2-year lows of 0.6764 as Australian bonds rallied. With the expectation of a 50bps rate hike from Reserve Bank of Australia catching up, the room for a hawkish surprise is getting limited and the AUD may only turn higher on a knee-jerk if we see a larger than expected move. AUDUSD is off lows, but still remains below 0.6850 on Monday morning in Asia.
Shimao defaults on $1bn bond
The Chinese developer missed a payment on one of its USD bonds yesterday extending the weak credit developments in the Chinese real estate sector from Evergrande and Sunac to now Shimao. The default has had no impact Chinese equities which traded mostly higher in today’s session.
US data is pointing to a sharper slowdown
Headline ISM manufacturing fell to a two-year low of 53.0 in June from 56.1 in May, coming in below expectations. Atlanta FED GDPnow model is predicting Q2 contraction of 2.1% after disappointment from ISM manufacturing survey last week. So there is a greater chance that the U.S. will be in a technical recession, or two quarters of negative GDP growth. Jobs data for June is out later this week and will be key to watch as well to look for any indication on challenge to the ‘robust labor market’ rhetoric.
Commodities mixed bag
Agriculture and industrial metals face headwinds and energy remains supported. Bloomberg Commodity Index (BCOM) trades 14% lower than its record high and faces further selling from recessionary fears, and the extra layer of selling may come from China’s COVID situation worsening. Metal bulls hope could fade with demand not likely to pick up. As such the Iron Ore (SCOA, SCOQ2) reacted in APAC today falling 4.4% to $109.60, which further pressures earnings in BHP (BHP), Rio Tinto (RIO) and Vale (VALE). Across the board; wheat, Copper, Cotton, Iron ore, soybeans and oil are lower, yet Coal Newcastle futures remain in record territory as Australia grapples an icy winter. Also consider Australia’s east coast is experiencing partial flooding, while the US deals with drier conditions, meaning supply issues could grip the wheat market once more.
Tesla Q2 deliveries disappoint
The EV-maker delivered 254,695 units in Q2 against expectations of 261,181, the first decline q/q in more than two years as Covid outbreaks in Shanghai disrupted its factory output in China which is its most important market and production hub.
What we are watching next?
US data is pointing to a sharper slowdown
Headline ISM manufacturing fell to a two-year low of 53.0 in June from 56.1 in May, coming in below expectations. Atlanta FED GDPnow model is predicting Q2 contraction of 2.1% after disappointment from ISM manufacturing survey last week. So, there is a greater chance that the U.S. will be in a technical recession, or two quarters of negative GDP growth. Jobs data for June is out later this week and will be key to watch as well to look for any indication on challenge to the ‘robust labor market’ rhetoric.
Holiday spending may be curtailed on the July 4 weekend
US travelers were warned of flight chaos for the July 4th holiday weekend with a spate of summer cancellations and delays. This may mean curtailed holiday spending, suggesting the strength of the services sector may not be enough to offset the weakness in US manufacturing as reported by the ISM survey index last week. The ISM services index for June is due this Wednesday and will be the next key to watch as recession concerns continue to pick up.
Reserve Bank of Australia (RBA) set to raise rates tomorrow
The Reserve Bank of Australia (RBA) is widely expected to rise interest rates by 0.5% on Tuesday taking the cash rate to 1.35%. At Saxo, we believe the RBA will be forced to hike rates by 0.75% which will be the biggest hike since 1994. We think this drastic could be done as the RBA has so far been getting inflation forecasts wrong, with Australia’s Federal Treasurer himself conceded the RBA’s inflation forecast of 7% YOY inflation is ‘widely off the mark’. If the RBA hikes by 0.75% the AUDUSD will likely move up off lows. If the RBA is more dovish, the AUD’s could be pressured and move lower to the next level support 0.6500.
Earnings WatchIt happens rarely but this week has no important earnings but the Q2 earnings season start next week with companies such as PepsiCo, Fastenal, Delta Air Lines, JPMorgan Chase, Morgan Stanley, Conagra Brands, PNC Financial Services, UnitedHealth, Well Fargo, Charles Schwab, US Bancorp, BlackRock, State Street, and Citigroup.
Economic calendar highlights for today (times GMT)
- US Markets Closed for 4th July Celebrations
- 0630 – Swiss June CPI
- 0830 – Eurozone Jul Sentix Investor Confidence
- 0900 – Eurozone May PPI
- 1330 – S&P Global Jun Canada Manufacturing PMI
- 2300 – South Korea Jun CPI
From our APAC team:Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
Saxo Spotlight: What’s on investors and traders radars this week?