What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – two quiet trading sessions with very low intraday volatility as energy has been sucked out of equities from a long pause in interest rates and a wait and see mode on inflation. S&P 500 futures are trading slightly lower in early European hours with the 4,179-level likely being a key support level. Nasdaq 100 futures look a bit stronger here given the recent decline in bond yields.
Euro STOXX 50 (EU50.I) - European equities are weak this morning looking to extend negative short-term momentum taking STOXX 50 futures back to the 4,000 level with the first support key support level coming in at 4,018. The news flow is neutral at the moment as all market action has slowed down so for Europe to move higher, we need the German 10-year yield to begin rising again lifting European banks.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). No major news out on cryptocurrencies in the last 24 hours, but yesterday’s attempt in Bitcoin to push above the 40,000 level was rejected and XBTUSD is trading around 38,000 in early European trading hours with the 37,646 level potentially being the trigger point for another selloff. Without mentioning a specific coin, activist investor Carl Icahn said he eventually may put more than $1 billion into an alternative currency.
EURUSD – trades lower after finding resistance at 1.2250 too hard to break after European bond yields have reversed lower. During the past few days negative German 10-year yields has fallen back to -20 bp after almost reaching zero last week. Support around the 21-day moving average at 1.2135 with resistance at 1.2250 followed by the 1.2349 high from the beginning of the year.
Gold (XAUUSD) may face a period of consolidation as the next big level of resistance at $1923 looms. However, an improved technical outlook during the past couple of weeks have finally started to see longer term trend funds calibrate their positions through constant bidding in smaller lots, hence the lack of major setbacks so far. Focus on the dollar which has strengthened since yesterday together with silver and platinum’s inability to keep up with gold’s recent rally. The XAUXAG ratio has risen to a one-month high at 68.8 while platinum’s discount to gold has exceeded 700 dollars for the first in four months. Gold support at $1890 and $1870 followed by the big one at $1843.
European sovereigns clearly at risk as yesterday’s 15-year Bund sale struggled to find bids for the total amount (XGLE, VGEA, IS0L). Bidding metrics for yesterday’s 15-year Bund auction were the weakest on record with the bid-to-cover ratio at 1.06x after the German finance agency retained part of the initial target amount. Germany was able to allocate only €1.73bn Bunds versus €2.5bn targeted amount. The market reaction was muted and yields on 10-year Bunds closed 4bps tighter on the day. The rally in European sovereigns is focusing on the dovish message of central bankers and falling rates in the US. However, all elements are pointing to higher yield in the Eurozone, especially for those bonds that are offering negative or near zero yields. Tomorrow’s 10-year BTPS auction will be key to understanding whether investors are attracted to Italian government bonds, which now that they offer a higher yield than Greece.
Tsunami of cash in money markets may be starting to leak to longer US treasuries maturities(IEF). Yesterday 5-year Treasury auction drew strong demand with the highest bid-to-cover ratiosince September and the highest foreign investors demand since August. We believe that this may be a sign that the tsunami of liquidity in the money market may be leaking to longer US Treasury maturities. Today the Treasury is to issue 7-year notes, we don’t expect demand to be as strong that far in the yield curve. However, if it is it may be a sign that pressures in the money market are now keepingyields in check.
What is going on?
The prospect for higher oil prices over the coming years, before de-carbonization finally starts reducing demand, could be the result following a day of turmoil at some of the world's biggest oil companies. Exxon Mobil Corp was forced by shareholder activists to diversify beyond oil and fight climate change. The shareholders of Chevron Corp meanwhile voted in favor of a proposal to reduce emissions from the company's customers while ConocoPhilips lost a contest on adapting more stringent emission targets. Finally, over in Europe Royal Dutch Shell was ordered by a Dutch court to slash its emissions harder and faster than planned.
GlobalFoundries is considering an IPO at $30bn valuation as the global semiconductor industry is running hot with Nvidia saying yesterday on its earnings conference call that bottlenecks will persist for at least 2-3 quarters, and potentially longer. GlobalFoundries is competing with TSMC and Samsung Electronics and is clearly looking to take advantage of the strong profit outlook for the industry to increase capital and expand production capacity. Tesla is also struggling with the constraints in semiconductors with rumours suggesting that the company is exploring to acquire a foundry itself, although this type of vertical integration is probably too costly in the long run for Tesla.
What are we watching next?
Signs that Fed QE is creating distortions widening – when does the Fed surrender? As recently as Monday we have seen a prominent Fed official out expressing the belief that inflation pressures will prove transitory, suggesting little pressure for the Fed to shift its guidance, but its QE is creating clear market distortions from excess liquidity in the system that are becoming rather too large to ignore, from a rapidly swelling reverse repo facility to the strong 2-year treasury auction yesterday and incredibly compressed credit spreads and high equity prices. This is all fine for risk-takers, but at some point, a change in direction from the Fed (advance warning of taper, etc.) will likely cause a rather volatile reaction. If recent pressures continue to build into mid-June, the June 16 FOMC meeting will likely prove a pivotal event risk.
Earnings reports this week. Strong Q1 result from Xiaomi, also called Apple of China, showing blistering rebound in net income. The smartphone maker has just recently been removed from US sanctions list and thus is being included again in many global indices. Pinduoduo, the fastest growing e-commerce platform in China, beat expectations growing revenue 239% y/y although gross margins are coming down which could be a function of higher logistics costs. Snowflake, which is part of our bubble basket, delivered mixed results with short-term beat on product revenue but lower FY revenue guidance which spooked investors in extended trading. Nvidia showed strong results yesterday with a beat on both revenue and net income, and a Q2 revenue guidance of $6.3bn vs estimated $5.5bn.
- Today: Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Salesforce, Medtronic, Costco Wholesale, Dell Technologies, VMware, Autodesk
- Friday: Meituan
Economic Calendar Highlights for today (times GMT)
- 0600 – GfK Consumer Confidence Jun (Germany)
- 0730 – Sweden Trade Balance Apr
- 0800 – Italy Consumer and Manufacturing May
- 0945 – ECB Guindos Speech
- 1200 – ECB Weidmann Speech
- 1230 – US Durable Goods Orders Apr P
- 1230 – US Initial and Continuing Jobless Claims
- 1230 – US Q1 GDP and Core PCE q/q (S)
- 1400 – US Pending Home Sales Apr
- 1500 – US Kansas City Fed Manufacturing Activity May
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