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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 experienced another steep drop yesterday but again saw support just around 14,930 level and is trading above the 15,000 level this morning. The rally in equities, and especially technology stocks, has stopped for now with increasing worries over growth and supply constraints, but on the positive side interest rates are well anchored at low levels supporting valuations.
USDJPY and JPY crosses – the intense sell-off that marked the beginning of the week in JPY crosses eased up yesterday as US treasury yields stabilized and rose a few basis points on mixed US data. A number of JPY crosses are near or beyond pivotal levels this week – the key 109.00 area in USDJPY is still some ways off from the price action this morning, but EURJPY traded at multi-month lows and just beyond recent lows yesterday, while the classic risk proxy AUDJPY suffered a full breakdown below 80.00. Further JPY strength is a risk if yields drop anew and if we see a repeat in the notable wobble in risk sentiment that unfolded yesterday.
NZDUSD and all NZD crosses – the NZD managed to bounce back after a wild ride both lower and higher overnight in the wake of the RBNZ’s decision not to raise rates at this meeting, specifically linking their decision to the government’s decision to lock down the economy on the first community spread of Covid since February (more on that below). Rates at the short end of the NZ yield curve dipped sharply and recovered to about unchanged, suggesting that the NZD will be very headline driven on the Covid situation from here, as the RBNZ statement made clear that they are ready to begin withdrawing stimulus with rate hikes if the situation clears up quickly. In terms of levels, watching the NZDUSD zone around 0.6875-0.6900, which is near the range- and July lows, while AUDNZD traders will watch the lows since the pandemic outbreak early last year around 1.0420 if NZ gets ahead of its outbreak while Australia continues to struggle with its own significant and widespread outbreak.
Crude oil (OILUSSEP21 & OILUKOCT21) traded higher in Asia following a four-day selloff driven by weak Chinese data and continued concerns about the short-term demand outlook as the delta coronavirus continues to spread. Renewed dollar strength today so far has a limited negative impact on a market that most of all looks rangebound. This on the assumption OPEC+ will step in and reduce supply should the demand outlook deteriorate further, while the latest outbreak has further delayed the prospect for demand rising to levels that could justify a price above $75/b on Brent. In today’s EIA stock report, the market may focus on stock levels at Cushing, after the API reported a 1.7-million-barrel reduction which would take stocks 33% below the average for this time of year.
Copper (COPPERUSDEC21) came close to challenging the lower end of its current $4.2 to $4.4 range yesterday before seeing a small bounce overnight on signs of resilient Chinese demand and continued threat to supplies from disruptions in Chile, with the latest caused by strike action at Codelco’s Andina mine which supplies 1% of the world’s copper. Inventories at warehouses tracked by the Shanghai Futures Exchange meanwhile have dropped to a six-month low, driven by robust demand and potential supply/delivery disruptions caused by the current Covid-19 outbreak.
What is going on?
UK unemployment rate drops to 4.7% in the three months to June. It is down 0.2 percentage points on the previous quarter. Rising optimism through the Spring helped boost employment, especially in the hardest-hit sectors. But with the furlough scheme coming to an end soon, it is likely that the unemployment rate will slightly increase in Q4 this year.
Carlsberg lifts outlook for FY revenue growth. Carlsberg reported 1H organic revenue of 9.6% and now expects fiscal year operating profit growth of 8-11%. Management is also announcing a DKK 1bn buyback programme in Q3, and the brewer is hedging input costs.
U.S. retail sales fell 1.1% in July, more than the 0.3% decline expected. In June, sales were up 0.7%. The “ex Autos and Gas” core sales figure fell –0.7% vs. -0.1% expected. This is another disappointing print on the state of the consumer following the U.S. August University of Michigan survey last week. It can be partially explained by the spread of the Delta variant and the end and the cut off in federal jobless benefits in 25 states in July. But it also appears that consumers are starting to reject higher prices. This could prompt swifter Fed action. On the bright side, U.S. July industrial production came out above consensus, at 0.9% versus 0.5%. The manufacturing output is up 1.4% - about half of the jump is attributable to a 11.2% increase for motor vehicles/parts.
New Zealand finds new Covid cases and confirms that they are of the delta variant – and was able to link the strain specifically to the outbreak in Australia via genomic sequencing. Six new cases, all linked to the first community case in a month discovered yesterday, were confirmed. Places of interest include pubs and nightspots in New Zealand’s largest city, Auckland, and nearby Coromandel.
Australia Q2 wage growth comes in weaker than expected - which will likely help to keep the RBA on the sidelines for longer, as it has specifically linked the timing of rate hikes (currently expected in 2024) with signs of a wage growth in a tightening labor market. In Q2, wages rose +0.4% QoQ and +1.7% year-on-year vs. +0.6%/+1.9% expected, respectively.
UK Jul. CPI comes in lower than expected – with the headline unchanged month-on-month and up 2.0% year-on-year, versus +0.2%/+2.3% expected, respectively and the core dropping to 1.8% year-on-year versus +2.0% expected and 2.3% in June.
Cotton (COTTONDEC21) reached a seven-year high yesterday on strong demand from China, the world’s biggest importer in response to strong demand for fibers and following a weather-related drop in production. Adding to this strong speculative demand from trend following funds which have enjoyed the latest rally that started back in April. Since 2014, the price has been rejected several times within the current area around $0.97/lb. While the risk of profit taking looks limited above $0.88, a break above $1, may trigger headlines the 2011 high above $2.
What are we watching next?
Today’s FOMC Minutes might provide critical signals about tapering, with serious implications on the long part of the yield curve (TLT, SHY). They will be essential to understand how the Federal Reserve’s members discussed in-depth stimulus withdrawal and whether a timeline was mentioned. The report could have implications for bonds ahead of Jackson Hole next week as rates dismiss any possibility of early tapering. Any surprises could be hard felt by long-term US Treasuries, especially the 30-years, which is trading well below 2%. Yet, the reaction to the FOMC minutes is likely to be muted, but it will prepare investors for the Jackson Hole.
Earnings to watch today. Today’s key focus is on NVIDIA which was our main focus in last Friday’s earnings preview for this week. NVIDIA is still growing rapidly driven by strong demand for gaming, cryptomining, and datacenter underpinning smartphone data usage. Tencent is also scheduled to report today and with the ongoing crackdown of technology companies in China investors will scrutinize the outlook. Baidu recently disappointed investors with its outlook.
- Today: NVIDIA, Cisco, Lowe’s, Target, TJX Cos, Analog Devices, Synopsys, Tencent, Geely Automobile, CSL, Coloplast, Carlsberg
- Thursday: Geberit, Estee Lauder, Applied Materials, Ross Stores, Bilibili, CNOOC
- Friday: Deere
Economic calendar highlights for today (times GMT)
- 0900 – Euro Zone Jul. Final CPI
- 1230 – US Jul. Housing Starts
- 1230 – Canada Jul. CPI
- 1430 – EIA's Weekly Inventory Report
- 1600 – US Fed’s Bullard (non-Voter) to speak
- 1800 – US FOMC Minutes
- 2110 – New Zealand RBNZ Governor Orr before parliament select committee on Monetary Policy Statement
- 0130 – Australia Jul. Employment Change
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