Summary: The major US equity indices surged to a new record level yesterday, with the Nasdaq 100 finally making a full comeback from the May sell-off. The strength in equities suggests a low level of fear that the Fed will come out with hawkish guidance at the FOMC meeting tomorrow. US May Retail Sales are on tap today as investors watch the degree to which pent-up demand from opening up offsets a comedown from the March stimulus check high.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities leaped to new all-time highs, a remarkable sign of confidence that the Fed is not set to rock the boat at tomorrow’s FOMC meeting and a relative sign of strength, given that US treasuries sold off rather heavily yesterday (recently we have seen signs of positive correlation in US treasuries and especially the Nasdaq 100 index). The earnings calendar in the US is thin, although a few interesting companies are reporting this week, including Oracle today.
EURO STOXX 50 (EU50.I) - momentum is still strong in European equities with STOXX 50 futures pushing above 4,150 for the second try after failing to sustain the highs in yesterday’s session. The momentum is a bit surprising given that German yields have fallen for three weeks, and the commodity market seems be cooling off. Also, the Covid-19 Delta variant has postponed the reopening of the UK society for four weeks as the country has seen a recent surge in new cases.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin has pulled higher into the key 40-42k resistance area ahead of an FOMC meeting that may also have implications for cryptocurrencies from the angle of “store-of-value" if the Fed fails to adjust its guidance in light of recent high inflation data. Famed investor Paul Tudor Jones said in an interview yesterday that he likes Bitcoin “as a portfolio diversifier” and said that investors should go “all in on the inflation trades” if the Fed continues to ignore high prices. Ethereum also extended its recent rally, but is more embedded in the range, well below 3,000 resistance, trading near 2,600 this morning.
USD pairs – nearly across the board, traders have pressed the pause button on the US dollar, most likely wanting to get tomorrow’s FOMC meeting out of the way before making new trading decisions. In many pairs, the USD is poised close to key local resistance, but trading ranges have been very compressed – will be looking for the dam to break either way for the greenback as noted in the EM currencies section below.
EM currencies. – As highlighted in yesterday’s FX Update, EM currencies are likely to prove the most sensitive if the FOMC meeting tomorrow evening produces more hawkish than expected guidance and triggers volatility across markets. Some of the currencies that have seen more notable gains recently and could be at risk of a sharp correction on a surprisingly stern Fed – these included ZAR, MXN and RUB (with the added aspect there that Biden and Putin are to meet tomorrow. On the other hand, a failure by the Fed to flag inflationary concerns and/or failure to shift inflationary and policy forecasts or tout eventual plans to taper asset purchase could merely see EM currencies notching broad new gains.
Gold (XAUUSD) dropped to a four-week low yesterday before bouncing ahead of key support at $1640, the 200-day moving average. The combination of failing to rally during the recent drop in yields and Friday’s close below the 21-day moving average signaled a loss of momentum. However, with no major input from stable dollar and yields, traders instead chose to reduce exposure ahead of the FOMC meeting, where the market will be looking for signals on a timeline for paring down emergency stimulus (see below). Resistance: $1874 and $1880.
Copper (COPPERUSJUL21) remains at risk of a deeper correction following the overnight move below the 50-day moving average and a series of recent lows around $4.44. Despite being predicted a great future with increased demand for copper as part of the decarbonization drive, current data points to a market with ample supply. The cash to 3’s contango on LME has reached a one-year high while in China local premiums over LME has sunk to the narrowest in more than four years. The loss of momentum during the past month has triggered a reduction in speculative longs to a one-year low. First support $4.36 followed by $4.2.
Today’s 20-year US Treasury auction might provide useful insights ahead of the FOMC meeting (IEF, TLT). Yesterday, US treasury yields rose amid uncertainties surrounding tomorrow's Federal Reserve meeting. Yet, today’s 20-year auction might give them a reason to fall once again if bidding metrics show the same resilience seen during last week’s US treasury auctions. If there is an increase in indirect bidder's demand, it may imply that rotation from lower yielding government bonds to US treasuries has started. Therefore, further pressure will be applied to yields if the Fed keeps its stance dovish tomorrow, pushing 10-year yields to test 1.4% and finding support at 1.20% next.
Gilt yields can fall further as lockdown restrictions are extended for another month (IGLT). Since the beginning of the year, yields in the United Kingdom rose on the promise of a fast economic recovery. However, the recent extension of lockdown restrictions together with falling yields in the US may cause Gilt yields to fall testing their support at 0.70%. The Debt Management Office today will issue 7-and 30-year gilts. Yet, real direction will be set by the CPI, PPI and retail price index tomorrow as it would show whether the recovery is stalling or not.
What is going on?
US President Biden and EU officials to meet today, lifting of Boeing-Airbus dispute on tap. Today, the trade dispute on state subsidies for the two aircraft manufacturers, the US’ Boeing (BA:xnys) and the EU’s Airbus (AIR:xpar), is expected to largely clear after 17 years of confrontation.
US grains currently in a very weather driven market tumbled yesterday on the prospect of beneficial rains after a hot, dry start to June. Corn led the decline with CORNDEC21 diving 4.7% as funds continued to reduce exposure. Soybeans (SOYBEANSNOV21) also traded lower led by Bean Oil’s two-day 10% tumble following a report that the Biden administration will act to provide relief to US refiners on biofuel blending mandates, a decision which ultimately could reduce demand for edible oils towards biofuel production. In the week to June 8 speculators cut bullish bets on six grains and soybean contracts to a September low.
H&M Q2 revenue out at SEK 46.5bn vs est. SEK 47.6bn. Revenue in Q2 (ending in May) is up 75% from the same period last year and up 16% q/q with e-commerce sales looking strong despite more and more physical stores are opening.
What are we watching next?
Important FOMC meeting up tomorrow: how does the Fed guide on tapering and in forecasts? Tomorrow’s meeting includes a new set of policy and economic forecasts that could send as important a message as any changes to the statement, although Fed Chair Powell’s press conference will also be closely watched for signs that the Fed is getting uncomfortable with the current inflation spike. The prior set of forecasts in March showed that the Fed expecting a mild inflationary surge this year of 2.4% in the core PCE inflation followed by a drop back towards the 2.0% level for 2022 and the longer run. But April core PCE inflation rose to 3.1% YoY, with the May number not yet available, while the May CPI ex-food-and-energy, was out at 3.8%. In March, the Fed forecasted the unemployment rate to drop back to the pre-pandemic level of 3.5% by the end of 2023 but recent signs suggest that there are as many open job positions as their unemployed – a problem not addressable through monetary policy. Finally, the March forecasts of the Fed policy rate showed a few more Fed members pulling forward the anticipated timing of raising rates, but the median forecast remained for lift-off in 2024. Any new language on the eventual tapering of asset purchases will be monitored closely as well.
US May Retail Sales, US PPI up later today – is an interesting check-in on the state of the US consumer, as April and May should have been the months with the largest removals of Covid restrictions, unleashing pent-up demand on the one hand, but on the other we will watch for the degree to which spending has dropped due to the March stimulus check effect fading in the rear-view mirror. Month-on-month, Retail Sales expected at –0.7% and 0.0% ex Auto and Gas. Elsewhere, the US May PPI data is expected to show a fresh high for the cycle for producer prices.
Earnings reports this week. Earnings not following the standard quarterly calendar are still being released, but we are down to only five releases this week with the most important being Oracle, Lennar, and Adobe. The US housing market is red hot and thus any comments from Lennar on whether the market is rolling over or continuing at full speed will be interesting to watch. Adobe is part of the SaaS business model cluster within the software industry and is expected to report strong growth figures, but valuation remains stretched so we expect the risk-reward ratio over the earnings release to be tilted to the downside. But today the earnings release in focus is Oracle that has struggled for more than five years to find a growth path with no end in sight.
Economic Calendar Highlights for today (times GMT)
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