Market Quick Take - July 9 2021

Macro
Saxo Strategy Team

Summary:  Asian and U.S. stocks traded lower overnight, thereby extending Thursday's losses on growing concerns that the spread of Covid-19 variants could hamper the global economic recovery. Treasuries traded lower ahead of auctions next week, but yields are still on course for one of the biggest weekly slides in a year. The dollar is heading for its highest weekly close in three months while a deflated reflation trade has helped trigger broad losses across commodities this past week.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – The selloff in equities was halted yesterday by bids coming in during the US session most notably in Nasdaq 100 stocks. There is no clear support level in the Nasdaq 100 futures until the 14,600 level, so for Nasdaq 100 to continue rebounding it needs to hold above yesterday’s close at 14,712.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - The crypto space followed the downwards move in the equity space yesterday, with Bitcoin trading around the USD 33k level and Ethereum around USD 2,135 this morning. According to Reuters, the senator and former presidential candidate Elizabeth Warren has once again raised concerns about the regulatory gap for cryptocurrencies in the US, and the deputy governor of the People's Bank of China has raised concerns about the risks that stablecoins brings to the international monetary system.

USDJPY - yesterday’s decline in USDJPY is reversing together with risk appetite in equities suggesting no wider spillover effects across markets for now - the same move is seen in the US 10-year yield bouncing back above 1.3%. This week’s price action suggests a technical risk-off with a bigger repositioning of reflation trades. If USDJPY continues the rebound today the next level in sight is 110.34 and potentially 110.60 if equities rally into the weekend.

Crude oil trades higher but is still heading for its worst week since April with the OPEC+ feud and not least the continued spreading of the delta virus variants triggering renewed concerns about the pace of demand recovery. The reduced focus on reflation as bond yields slump to a February low together with the loss of price momentum have forced many soon to go on holiday investors to cut their overall very bullish exposure to energy. Supporting the market yesterday was another drop in US stockpiles and data pointing to record gasoline demand around the Fourth of July holiday weekend.

Gold (XAUUSD) remains stuck in neutral as it struggles to find a gear despite this week's drop in Treasury real yields. Headwinds from a strengthening dollar and the bond rally driving a reflation rethink and the surging virus variant raise doubts about the global growth outlook. Support at $1795 with resistance at $1815 ahead of $1835.

What is going on?

ECB president Christine Lagarde presented the results of the institution’s strategy review. It was broadly in line with expectations. In details, the ECB has changed its inflation target and will tolerate from now a «transitory period» when inflation «moderately» exceeds its new 2% target. All things being equal, a symmetrical inflation target should allow the doves on the council to argue for the institution continuing with ultra-accommodative monetary policy. In addition, the ECB is asking Eurostat to include «user cost of owner-occupied housing» (OOH) in the HICP. This is unlikely to have much impact on inflation and monetary policy. Depending on how it is measured, it has not increased much at all over the past years. On average, the ECB estimates that OOH are likely to push inflation higher by only 10-20bp. Finally, there is a lot of focus on greening monetary policy. But the overall climate strategy is not that ambitious – at least less ambitious than Bank of England’s. The ECB will mostly look at financial risks from climate change – which is basically common practice.

The French economy is rebounding. According to the OECD weekly GDP tracker, economic activity is now close to bridging the gap with the pre-Covid 19 trend. But risks are looming. The delta variant is spreading fast, notably among young people. It represents about 40% of new Covid cases against 20% one week ago. Next Monday, the government is expected to announce new restrictions to limit the spread of the virus, potentially reinforcing border controls especially for travellers coming from Spain and Portugal.

The commodity sector has faced a challenging beginning to a new quarter and the second half of 2021, with all sectors apart from precious metals trading higher. Losses being led by grains where corn and wheat have both suffered losses of close to 10%. During the first half physical as well as investment demand for raw materials surged on the prospect for a strong growth comeback, rising inflation and governments stepping up their efforts to combat climate change. During the past few weeks, however, the rally started to stumble, with improved weather developments sending the prices of key crops sharply lower, OPEC-fueled uncertainty hurting bullish oil bets, and signs the post-pandemic recovery in China has started to cool, thereby hurting the short-term prospects for China-centric commodities such as copper, iron ore and steel.

What are we watching next?

G20 meeting on Friday and Saturday in Venice. A new global corporate tax plan on the agenda. The French Minister says to Reuters that he expects the global tax deal to be accepted by G20 as 130 countries last week backed the US-led tax plan to harmonize corporate taxes on multinational companies with a set minimum tax of 15%. The tax plan is expected to take effect in 2023. The US is not pleased about the EU Commission’s plan to iron out an EU digital tax levy on digital companies which will hurt US interest as according to the US is not aligned with the tax plan idea.

U.S. debt limit ceiling focus: Short-term look rates traders are getting ready for volatility ahead, as the U.S. debt ceiling looks poised to return on August 1, while Congress so far has not clear plan to increase it.

Earnings to watch next week

The Q2 earnings season starts next week with the usual US financials starting the season. Our expectation is that companies will continue to deliver upside surprises against a consensus that is still too pessimistic on the rebound on revenue growth and profitability. The theme of margin squeezes from higher commodity prices are more likely a Q3 or Q4 story.

  • Tuesday: PepsiCo, Fastenal, JPMorgan Chase, Goldman Sachs, Conagra Brands
  • Wednesday: Wells Fargo, BlackRock, Delta Air Lines, Citigroup
  • Thursday: US Bancorp, UnitedHealth, Cintas, Morgan Stanley
  • Friday: Charles Schwab, State Street

Economic Calendar Highlights for today (times GMT)

  • 0600 – UK May Industrial Production
  • 1100 – UK May Visible Trade Balance
  • 1230 – CAN June Job Report

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