What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - despite the US 10-year yield is pushing higher towards the recent local highs, equities are in a good mood with Nasdaq 100 futures touching the 15,700 level in early trading. The better-than-expected import and export figures from China overnight have lifted sentiment and deflated the growing worries of China slowing down too much. The broader S&P 500 futures are trading around the 4,540 level pushing higher above yesterday’s close.
EURUSD – consolidation yesterday was insignificant, not surprising given the US holiday, but the action promises to heat up for the balance of the week, potentially over the Fed’s Beige Book (more below), but mostly over the ECB meeting on Thursday, where, no matter how cautiously, the ECB will have to indicate that a taper process is beginning soon (more below) and it may have to send a slightly hawkish message in its staff projections. EU yields have been on the rise of late and this meeting is the chance for EURUSD bulls to show they can challenge 1.2000 and higher if it can be done in the near term.
EURSEK – the Swedish krona is one of the more pro-cyclical currencies most correlated with risk sentiment and the recent bout of Euro strength and a brightened outlook for Europe (reflected in higher PMI’s and higher long yields – do note the waning confidence noted below) has boosted the SEK to the extent that EURSEK is challenging its 200-day moving average again near 10.15, arguably the last support level ahead of the huge 10.00 level, which is not only a psychological level, but also the near the lows from the beginning of this year.
JP225.I (Nikkei 225) - Japanese equities gapped higher yet again overnight but did find resistance this time as they breached the 30,000 level, a significant resistance level that the market couldn’t sustainable take back in February to April of this year after multiple attempts. Recently, the Japanese market has been energized by the resignation of PM Suga, with new LDP leadership set to take charge and possibly bring fresh stimulus in the wake of the election that must take place before November 28. In our equity note yesterday, we looked at Japanese equities and whether the current rally is the start of a longer-term rally and outperformance for Japanese equities. Our conclusion is that Japanese companies are still lacking from a return-on-equity crisis relative to US companies. Unless they close the gap through a change of culture or new market reforms, Japanese equities will continue to underperform as they have done for decades.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – More solid gains for Bitcoin, which traded near 53k overnight before pulling back this morning slightly, while Ethereum seems bottled up ahead of psychological resistance around 4,000, the last round number ahead of the brief highs posted back in May near 4,380. Today El Salvador roll out a new law to make Bitcoin legal tender, and they also announced buying 200 bitcoin yesterday, in addition to the 200 already held by the country.
Gold (XAUUSD) remains stuck below key resistance at $1835 and above its 200-day moving average, today at $1810. Input from outside markets on balance price negative with the dollar a tad stronger while Treasury yields have seen a small uptick ahead of heavy supply of 3-, 10- and 30-year bonds starting from today. The short-term direction still hinges on taper signals from the Federal Reserve and whether the European Central Bank will signal any changes in its cautious approach when they meet on Thursday. Copper trades lower with wage deals in Chile easing supply concerns while aluminum remains bid as the Guinea coup adds to supply worries in an already tight market.
Crude Oil (OILUSOCT21 & OILUKNOV21) extended yesterday’s small rebound after China reported a surprise rise in August crude oil imports to a five-month high. More than a week after hurricane Ida, close to 90% of US oil output remains shut in while refineries are seeing a slow return. Unfortunately, another tropical system is lingering over the Yucatan Peninsula in the Gulf of Mexico and the NHC sees a 30% chance of it becoming an organized storm within five days. Elsewhere, the continued surge in global natural gas prices may trigger increased demand for fuel from countries struggling to afford high gas prices. Tomorrow, the EIA will publish its monthly Short-term Energy Outlook with focus on the US supply and global demand outlook.
High wage inflation leaves US Treasuries vulnerable ahead of high supply week (IEF:xnas, TLT:xnas). Inflation is more important than jobs. That is the message that the bond market sent on Friday as the non-farm payrolls report missed expectations, but wage inflation continues to strengthen. It leaves US Treasuries vulnerable to more selloff especially during a week of heavy supply where the Treasury will issue 3-, 10- and 30-year bonds starting from today. The Beige Book on Wednesday will also be more important than usual as it will shed some light over supply chain disruptions, providing more information regarding whether inflation is transitory or not. Ten-year yields are flirting with their 200-days moving average at 1.33%, if they break above this level they will find resistance at 1.40% next.
European government bonds rose as investors scale back tapering fears (VGEA:xetr, BTP10:xmil, IS0L:xetr). Yields fell slightly yesterday afternoon as the market realizes that the risk of a hawkish ECB is slim this Thursday. Although the central bank reduces purchases under the PEPP program, it will be a slight adjustment in light of its approaching deadline. The mini-rally in European government bonds provides favorable conditions for this week's bond issuance. Spain has mandated banks for a 20-year green bond while Austria is selling 0% 2031 bonds today.
What is going on?
Australia’s RBA follows through with taper plan that was pre-announced at the August meeting, with a reduction in purchases to AUD 4 billion a week now from AUD 5 billion previously, although it extended the horizon for the purchases to at least mid-February, after promising a mid-November review in the August guidance. The Aussie traded in both direction as some were surprised that the RBA went ahead with the taper, while the extension of the horizon is somewhat dovish.
UK Prime Minister Boris Johnson planning possible tax hike on national insurance (payroll tax – to be hiked 1% for workers and 1% for employers) to pay for social programs, a move that would renege on prior promises to not raise taxed. His intent is already inciting outrage within the party as Parliament reconvenes this week. Another back-pedaling on prior promises is against the “triple-lock” policy of promising indexing of pension to the highest of inflation, wages or 2.5% after wages rose nearly 9% over the last year.
Supply bottlenecks and price pressures continue to impede the construction sector in Europe. In the euro area, the August construction PMI index was out at 49.5 versus prior 49.8. In Germany, the drop was significant at 44.6 versus prior 47.1. In the United Kingdom, the construction sector is still in expansion territory with an index out at 55.2 versus prior 58.7. Expectations regarding year-end outlook remain positive.
Confidence is evaporating in the euro area. The Sentix Index, which is a survey among 1600 financial analysts and institutional investors, dropped to 19.6 in September versus 22.2 in August. The overall index is declining for the fourth time in a row. It now stands at its lowest since April 2021. The expectation index is also down, at 9 – the lowest since May 2020. The drop partially reflects inflation concerns, market risks related to tapering and, to a lesser extent, fears the pandemic could intensify this fall.
China's exports unexpectedly grew at a faster pace in August thanks to solid global demand, helping take some of the pressure off the world's second-biggest economy as it navigates its way through headwinds such as the delta coronavirus variant causing temporary shutdowns and severe port congestions after one major export terminal was closed for two weeks. Exports from neighbouring countries also showed encouraging growth last month, with South Korean shipments accelerating on strong overseas demand.
What are we watching next?
ECB meeting on Thursday. Expect the ECB to revise its staff projections upward, given the positive economic momentum in the Eurozone this summer. The Governing Council will also probably announce a slower pace of asset purchases in Q4, from €80bn per month to €60bn per month – with little market impact. The pace of asset purchases would be similar to that of January-February 2020. Looking ahead, we believe ECB hawks will push further in favor of an exit strategy from emergency monetary policy measures. Initially, we expected the debate about the future of the PEPP to happen in December/early next year. But it might happen earlier. Unless the pandemic revives in the coming months, it is unlikely the PEPP will be extended beyond March 2022. Two options are on the table: a transitory accommodative asset purchases program (which has been mentioned by ECB President Christine Lagarde earlier this summer) or an increase of the APP.
Fed Beige Book - The Fed Beige Book (the latest set for release late tomorrow) is a long survey of the US economy undertaken by the Fed system and gives a sense of what actors in the economy are telling the Fed about conditions “on the ground”. It is not traditionally a release that moves markets, but given the intense debate about the inflation situation and supply chain disruptions, this release could prove one of the more interesting ones and could be worth a look for how banks, businesses and other market contacts are experiencing conditions in the US economy.
Earnings to watch this week. The earnings season slows this week with most major Chinese earnings releases out of the way, so we will see little impact from earnings going forward.
- Today: Coupa Software, Partners Group
- Wednesday: Lululemon Athletica, New Oriental Education, Copart
- Thursday: Sun Hung Kai Properties, Zscaler
- Friday: Oracle, Kroger
Economic calendar highlights for today (times GMT)
- 0900 – Germany Sep. ZEW Survey
- 0900 – Euro Zone Sep. ZEW Survey
- 0930 – South Africa Q2 GDP Estimate
- 1700 – US 3-year Treasury Auction
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