Summary: Equity markets largely traded sideways yesterday and overnight, with Europe and the US poised at or near the highs for the cycle. Overnight, China reported that in May, producer prices rose by 9 percent, the most in over a decade. Elsewhere, Biden has abandoned oil prices posted new highs for the cycle and cryptocurrencies staged a comeback after Bitcoin tested a key support level.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – very low volatility as US equities are treading water and somewhat interesting to note that the market is not getting more support from treasury yields falling to new local lows as we await the US May CPI tomorrow and whether this jolts expectations for a firmer message on an eventual tapering of asset purchase from the Fed next Wednesday.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin and most other cryptocurrencies suffered a bout of weakness yesterday that saw Bitcoin testing the key 30,000 level that was the low on the steep sell-off in May, but buyers swooped in late yesterday and took the price well back away from the lows, with Bitcoin trading near 33,500 this morning, but needing perhaps a rise above 35-36k to suggest that the risk of new lows is fading. Likewise, Ethereum bounced, but is in need of a surge above 3,000 to improve the chart technicals.
USDCAD – The Bank of Canada is set to meet today and may want to avoid making much of a splash after the Canadian dollar surged in the wake of their decision to taper government bond purchases at the late April meeting and sharply raise economic forecasts. The Bank is in the same quandary as other central banks, wondering how transitory the current inflation surge will prove, also as the fiscal deficit in Canada is set to fall very sharply this year to a forecasted sub-6% versus the near 15% of 2020. USDCAD has been consolidating in a very tight range for about a month, as 1.2000 is clearly the psychological support and the 1.2150 area has developed as the first resistance level, with 1.2400 the more significant level if a solid rally develops.
EURUSD – the ECB is up tomorrow, but the market doesn’t seem to be “fearing the taper”, I.e., a reduction of the pace of ECB purchases, as demand was strong at an auction of Italian 10-year bonds yesterday, which attracted EUR 65 billion in bids, more than six times the amount offered. The momentum of the EURUSD rally off the April lows has long ago faded, and the US CPI tomorrow and the FOMC meeting next Wednesday are more likely to determine the next move here than the ECB meeting. The 1.2000 is the important local support for keeping the immediate focus higher and looks more likely to be tested than the cycle highs above 1.2250 ahead of the FOMC meeting.
Crude oil trades higher with WTI (OILUSJUL21) settling above $70 yesterday for the first time since October 2018 while Brent (OILUKAUG21) has broken a barrier of resistance at $72. Supported by robust demand in China, US and Europe and easing virus impact elsewhere. In addition, the API last night reported a 2.1 million barrel drop in US crude stockpiles, and if confirmed by the EIA today it will be the third weekly decline. With EIA’s STEO only seeing moderate growth in US shale production, OPEC+ can increasingly control the price, given they are sitting on nearly 6 million barrels of spare capacity which they can release at will. Finally strong investment demand for broad commodity ETFs tend to benefit crude oil the most given the often-high exposure in these to WTI and Brent (see below).
Yesterday’s solid 3-year Note auction paved the way for a strong 10-year Bond sale today (SHY, IEF). Yesterday’s 3-year note sale signaled that money market demand may be leaking to longer maturities as the auction saw the highest demand from foreign investors since October last year. The auction stopped at 0.325%, 0.1bps below from when issued, provoking yields lower across the yield curve with 10-year yields dropping to 1.52%, the lowest since March. Everything indicates the market is set for a solid 10-year auction today, ahead of the CPI readings tomorrow.
Italy's 10-year BTPS received bidsfor six times the amount on offer showing that tapering fears are ahead of themselves (BTP10). Italy received up to EUR 65 billion bids for its 10-year BTPS, which is now offering the highest yield in the euro zone. This is another signal pointing to the fact that the market might have been too hawkish into pricing an ECB taper. Today, Germany is to issue 30-year Bund, and it will be crucial to see if demand for long-term bonds remains supported ahead of the ECB meeting and CPI readings tomorrow.
What is going on?
China producer prices rose 9.0% year-on-year in May, the most since 2008. The basing effects of last year’s price plunge during the worst economic impact of the pandemic outbreak were a known factor, but the data still surprised to the upside as a rise of 8.5% was expected. Consumer prices rose only 1.3% year-on-year, versus 1.6% expected.
US President Biden abandons talks with Republican Senator on stimulus - After weeks of negotiations, Biden has walked away from bipartisan talks with a group of GOP senators lead by Senator Capito, as the latter were unwilling to get anywhere near the $1 trillion in infrastructure spending that Biden wanted. A different bipartisan effort of 20 senators is ongoing and is said to hope to agree on a bill of some $900 billion. Elsewhere, Democratic senator Joe Manchin of deeply Republican West Virginia has vowed he won’t pass any legislation without at least one Republican vote, making it unlikely that the Democrats can go it alone with significant stimulus, as Manchin is a deciding vote in an evenly divided Senate.
Broad-based commodity ETFs continue to see strong demand with an article reporting that $7.3 billion of allocations so far this year has taking assets to $17 billion overall. Providers of these ETFs will typically hedge their exposure in the futures market, thereby providing an underlying bid as long demand continues to grow. An example being the iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT:xnas) which has seen assets more than double during the past fortnight to $2.3 billion. Tracking the GSCI which is more than 50% exposed to energy such inflows create demand, especially for WTI and Brent crude oil. Apart from rising demand for raw materials and inflation hedging, investors have also returned to commodities as the shift in the curve structure to backwardation has seen the return to positive carry after being negative for the past five years.
What are we watching next?
G-7 meeting up this weekend, with the US and Europe expected to show a far friendlier tone than during the years under Trump, with signs of agreement in principle on a minimum tax for large companies and the outlook for a reduction of trade barriers on aircraft (Boeing vs. Airbus) and steel and aluminum. The EU and the UK are suffering tensions, however, over the Northern Ireland border. The final version of a draft statement circulated yesterday for this G-7 calling for “progress on a transparent, evidence-based and expert-led WHO-convened phase 2 study on the origins of Covid-19, that is free from interference” is worth watching for how China responds.
Earnings reports this week. This is the quietest earnings week since early March, with only one company worth paying attention to this week and that is Inditex (the parent company of the Zara fashion retailer) set to report today. The Spanish fashion retailer had already been under pressure before the pandemic due to less investments in e-commerce. The focus will be on its e-commerce business and whether Inditex is making enough progress there.’
Economic Calendar Highlights for today (times GMT)
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