What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US markets staged a strong comeback on Friday from the one-day sell-off the prior day on Biden’s announcement of new capital gains tax increases, perhaps figuring that any eventual hike will be more modest than his first proposal and is already baked into expectations. The S&P 500 just missed a new all-time high, while the megacap heavy Nasdaq 100 was a bit further back from its respective high, closing below 14,000 on Friday. This week, the market is hoping to find additional support from strong earnings releases and a Fed that will reiterate a wait-and-see stance at this Wednesday’s FOMC meeting.
STOXX 50 (STOXX50E.I) - the European STOXX 50 Index had a very volatile week last week, suffering both a sell-off and a solid comeback that erased much of the damage. The choppiness suggests that the sharp one-way gains of prior weeks may be harder to come by and the EURUSD moving aggressively above 1.2100 is a headwind for big European exporters. The key levels are the pivot low of last week around 3,942 (note extremely steep trend-line) and the cycle high at 4040.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - crypto currencies staged a strong comeback into this morning, likely in part because Turkey has changed its messaging around last week’s seeming total ban of crypto trading that saw two Turkish crypto exchanges collapse late last week. While considerable damage has been done, Bitcoin avoided a test of the key 42-43k area, even if it has quite a wall to climb to fully neutralize the recent sell-off. Ethereum has regained its footing far more quickly and is already back close to the key 2,500 area.
EURUSD – The EURUSD rally has seen remarkably little consolidation on the way higher and has now poked at a key level overnight, the 61.8% Fibo retracement of the entire sell-off wave from the 1.2350 area high to 1.1700 area low at 1.2107. Key for cementing this comeback and the status of the US dollar this week will be the Wednesday FOMC meeting, although few are expecting more beyond an extension of the Fed’s “wait-and-see" approach.
AUDUSD – with metals prices back on the rise (copper at record highs overnight and another strong session for iron ore), the AUD is on the rise again versus a weak US dollar, though one wonders a bit why the AUD has not performed even better, given the backdrop. The follow-on action in commodities and risk sentiment this week (note heavy earnings calendar as well as FOMC meeting on Wednesday) will be crucial for whether the budding rally attempt finds better confirmation with a solid close above 0.7800. A failure to do so would be a distinct disappointment for AUDUSD, which has been rangebound all year, save for a brief spring to 0.8000 that was quickly rejected.
Gold (XAUUSD) trades rangebound after losing momentum ahead of $1800 while support in the $1760-65 area remains firm. Copper (COPPERUSJUL21) and Iron Ore (SCOc1) meanwhile jumped to the highest since 2011 and 2013 on expectations supply will tighten further as the global economic recovery gains traction. Copper remains an integral part of the green-energy transition and expectations are pointing to years of mismatch between inelastic supply and growing demand. Above all individual drivers, the focus will be on Wednesday’s FOMC meeting and its potential impact on the dollar and yields which have both been trading softer recently. In gold, lack of enthusiasm in ETF’s and speculators an indication that large scale short covering from longer term trend funds and renewed momentum buying has not yet emerged. For that to happen gold as a minimum need to break above $1815.
Crude oil (OILUKJUN21 & OILUSJUN21) trades softer as the dramatic virus flare-up in India may cut its fuel demand by 20%, thereby offsetting a continued recovery in demand from U.S. and China, the worlds’ top two consumers. However, despite the prospect for additional OPEC+ barrels hitting the market next month, a firming backwardation in Brent, the global benchmark, still points to a market that can absorb additional supply as fuel demand continues to grow into the second half. Technical levels in Brent are $68 to the upside while support is being defined by the 21- and 50-day moving averages just below $65.
Five and seven-years US Treasury auctions today and tomorrow will set the tone ahead of the FOMC meeting (TLT:xnas, IEF:xnas). We expect today and tomorrow’s US Treasury auctions to go smoothly. However, it will be important to check whether there are changes in foreign bidders. Long-term Treasury funds continue to suffer outflows, pointing to more bearish sentiment. Thus, a selloff in US Treasuries remains imminent and could be provoked by weak demand at this week’s auctions, by the FOMC meeting or by a surprise in inflation numbers on Friday.
What is going on?
US President Biden labeled 1915 killing of Armenians in the Ottoman Empire a genocide in an event marking its anniversary at the weekend in the US. The move is a first for a US president since Ronald Reagan and alienates its NATO ally Turkey, which could shift its geopolitical alignments in the future. The move evoked a sharp response from Turkey, which said the move was motivated by populism. Late last year, the US imposed sanctions on Turkey for its purchase of a Russian missile system. The Turkish lira was pushing towards the low for the cycle (8.58 in USDTRY) last week even as the USD is quite weak versus EM currencies elsewhere.
Money managers increased bullish commodity bets by the most since October in week to April 20. Responded to a weaker dollar, lower real yields and weather worries they boosted the net long by 6% to 2.4 million lots, a nominal value of $128 billion. The fact the sector experienced this amount of buying despite the drag from the worsening virus outbreaks in nations including India, highlight the current strong price momentum and resilience. Speculators instead chose to look towards a post-pandemic recovery driven by strong growth, the green transformation theme and weather worries triggering the tightest market conditions in a decade.
Speculators finally responded to the recent dollar weakness and in the week to April 20 increased their short position against ten IMM currency futures and the Dollar Index by 51% to $7.8 billion, a four-week high. While lower real yields, one of the recent drivers supporting a weaker dollar, may struggle to fall much further, unless inflation expectations accelerate to the upside, the renewed dollar weakness has also been the result of rate differentials starting to move against the Greenback, as other central banks start to take their feet of the stimulus pedal.
What are we watching next?
FOMC meeting on Wednesday - the equity market is happy that the Federal reserve is likely to continue with no new guidance on eventual tightening of policy as it wants to react to outcomes rather than anticipating them and believes that any inflationary rise in coming months will prove transitory. As long as the long end of the US yield curve remains complacent and rangebound, this offers additional support for global markets as the USD weakens.
Reception of Biden’s tax proposal and American Families Plan speech on Wednesday – the Biden presidency legacy and the ability of the Democrats to maintain control beyond the 2022 mid-term elections could hinge on whether this kind of program of tax rises for the wealthy and corporations and reducing inequality via new social spending in the US will succeed and pass Congress and keep the Democrats in power beyond the 2022 mid-term elections.
Earnings reports this week. The Q1 earnings season has been good so far but this week it gets wild with roughly 30% of the MSCI World Index reporting earnings, and seven out of the 10 largest companies in the S&P 500 reporting. The show starts today with Tesla where expectations are super high following the recently strong Q1 delivery and production numbers. However, increasing competition in EVs and a recent PR disaster in China hint at brewing troubles for the former untouchable EV leader. The five giants in US technology (Apple, Microsoft, Amazon, Facebook, and Alphabet) are also reporting this week making it a hugely important week for the overall equity market but certainly the Nasdaq 100.
- Monday: Canon, Tesla, Philips, NXP Semiconductors
- Tuesday: DSV Panalpina, FANUC, HSBC, BP, Atlas Copco, Novartis, ABB, UBS, Microsoft, Alphabet (Google), Visa, Eli Lilly, Texas Instruments, UPS, Amgen, Starbucks, General Electric, 3M, AMD, Mondelez, Pinterest, Archer-Daniels-Midland
- Wednesday: Shopify, Kone, Sanofi, Dassault Systems, Delivery Hero, Deutsche Bank, China Construction Bank, China Life Insurance, BYD, Sony, Keyence, GlaxoSmithKline, Lloyds Banking Group, Banco Santander, Apple, Facebook, Qualcomm, Boeing, Spotify, Ford Motor, eBay
- Thursday: Orsted, Neste, Nokia, Total, Airbus, BASF, Agricultural Bank of China, Bank of China, PetroChina, Eni, Royal Dutch Shell, Equinor, Wilmar International, Nordea Bank, Amazon.com, Mastercard, Comcast, Merck & Co, McDonald’s, Caterpillar, NIO, Twitter
- Friday: BNP Paribas, AstraZeneca, Barclays, BBVA, Siemens Gamesa Renewable Energy, DBS Group, ExxonMobil, Chevron, AbbVie, Colgate-Palmolive
Economic Calendar Highlights for today (times GMT)
- 0800 – Germany Apr. IFO Business Climate
- 1230 – US Mar. Preliminary Durable Goods Orders
- 1430 – US Apr. Dallas Fed Manufacturing Activity
- 2000 – U.S. Crop Planting Progress Update
- 2300 – South Korea Q1 GDP Estimate
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