Summary: The S&P 500 and Nasdaq 100 both reached record highs yesterday with solid earnings outweighing current virus concerns. Also ahead of today's key job report, the market took comfort from a second weekly decline in unemployment claims which helped send the dollar and yields higher while gold touched support. Crude oil found a bid following its biggest weekly loss this year while Bitcoin trades slightly below $41k. Asia traded mixed overnight with Chinese stocks weighed down by the delta coronavirus strain, Beijing's ongoing regulatory crackdown and concerns about the world's most indebted property developer.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – yet again new all-time highs in US equities across S&P 500 and Nasdaq 100 on the back of good macro figures such as initial and continuing claims yesterday. Today’s Nonfarm Payrolls for July could extend the rally into the weekend. The 15,134 level in Nasdaq 100 is the critical support level to watch today if sentiment shifts on technical grounds or a miss on NFP.
AUDUSD – was the weakest performer among the G10 currencies after Lowe, the RBA governor said a lower exchange rate from monetary stimulus was welcome. With around two-thirds of the population in lockdown he said policy makers are prepared to act in response to further bad news on the health front. For these reasons the RBA expect a growth contraction of at least 1% in the current quarter, before bouncing back strongly, not least after the jobless rate hit a decade low in June.
EURUSD pushing lower with €1.1800 in sight ahead of today’s US job report. A break below the 21-day moving average, currently at €1.1825 may signal further loss of momentum and raised risk of another attempt to challenge support at €1.1750.
Gold (XAUUSD) trades precariously close to support at $1792 while heading for its lowest weekly close in five. Traders have been rattled by golds strange behavior in recent weeks when falling yields failed to boost the price, while this week’s small turnaround in yields triggered an immediate negative response. It highlights gold’s short-term challenge, especially if today’s job report delivers the expected strong outcome. With gold drifting lower, silver (XAGUSD) is once again underperforming while the hardest hit of the semi-industrial metals is platinum (XPTUSD). The white metal has seen its discount to gold widen to near 800 dollars from an April low at 300. Reasons being the current chip shortage which has curbed auto production, rising sales of EV’s and the current spreading of the delta variant. Key resistance in gold at $1834 with support at $1792 and $1782.
US Govt Bonds (SHY:xnas, TLT:xnas, IEF:xnas) - The US 10-year yield is pushing higher as the latest comments from Fed’s Clarida have given some ammunition back to the inflation camp of traders. The latest leg down has likely also emptied for now short position in Treasuries and thus our view is that US yields have bottomed out for now. The next big level is the 1.28% level in the US 10-year level which is the likely gravitation point if NFP or hourly earnings look strong.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - After the Ethereum upgrade yesterday, the price was initially steady but started rallying after around an hour, indicating a successful rollout of the update. Ethereum is currently trading around USD 2.800, while Bitcoin has rallied to the USD 41k level.
What is going on?
U.S. jobless claims fell again by 14,000 to 385,000 in the week ended 31 July. Insurance unemployment was at 2,930,000 for the week ending 24 July. This is a drop of 366,000. At the same time, layoffs dropped to their lowest level in just more than 21 years in July as companies held on to their workers amid a labor shortage. Despite the spread of the Delta variant, so far there is little evidence that it’s made a big dent in employment.
In France, the Constitutional Council – the highest constitutional authority in the country – ruled in favor of the health passport and mandatory vaccination for health workers. It opens the door to a new extension of the health passport for cafes and trains from 9 August.
Chinese technology stocks are again in focus. Kuaishou Technology which runs one of China’s largest community and social platforms is down again 5% today as China’s leading newspaper is arguing that the government should tighten regulation of online content. Alibaba is also warning investors that the company will likely experience higher taxes as it losses preferential tax status in some business units.
Novavax delays submission for Covid vaccine. The company’s shares declined 10% in extended trading on the news. Novavax now expects to apply for emergency approval in the US in Q4 and many countries are eagerly awaiting approval as the recombinant protein-based vaccine is 90% effective in a 30,000-person trial with few side effects. The CEO also said that getting the raw materials for the shot is a challenge indicating that supply chain disruptions are everywhere.
US earnings after yesterday’s close. The two most notable earnings releases came from AIG and Beyond Meat. AIG delivered Q2 EPS of $1.52 vs est. $1.20 and said it would begin buying back shares worth $6bn as the business delivers good growth and has reached adjusted return on equity of 10.5% which was much higher than the estimated 8.2%. AIG shares rose 2% in extended trading. Beyond Meat delivered better than expected revenue in Q2 of $149mn vs est. $141mn while losses (EPS) were bigger than expected at $-0.31. But the most disappointing for investors was the low guidance on revenue at $120-140mn vs est. $153mn driven by uncertainties over restaurant demand given rising Covid-19 cases due to the Delta variant. Beyond Meat shares were down 5% in extended trading.
What are we watching next?
US July job report is key economic release today. The consensus economists look for a 900k gain in non-farm payrolls versus prior 850k, a decline in unemployment to 5.7% versus prior 5.9% and a pick-up in average earnings growth to 3.8% yoy in July. On the downside, we continue to see little scope for a major trend reversal in labour force participation. It is expected to hover around 61%. Even if tapering is not immediately around the corner, it is getting clearer that the Fed is preparing for it. A good July job report would further fuel tapering expectations. As a note of caution, July is historically a seasonally weak month for hiring. But in this unusual period, everything can happen.
Monthly oil market reports from EIA on Tuesday, IEA and OPEC on Thursday will be watched closely for any signs of changes in the demand outlook. This in response to surging cases of the delta coronavirus variant which has triggered renewed lockdowns, especially across the heavy fuel consuming region of Asia. A development that has driven oil towards its biggest weekly loss this year, with the focus temporarily shifting back to demand from supply and OPEC’s ability to keep prices supported by keeping supplies sufficiently tight.
Earnings to watch this week. This week’s earnings season has come to an end with Allianz and AP Moller – Maersk being the two most interesting earnings of importance. Allianz recently flagged a profit warning tied to a class action lawsuit against the firm over certain funds that did poorly during the chaotic weeks at the beginning of the pandemic in early 2020. AP Moller – Maersk lifted their guidance the other day ahead of the Q2 earnings report which have likely taken some steam out of the earnings release. The key is Maersk’s view on container rates over the next 12 months as they lead into a better understanding of inflationary pressures.
Economic calendar highlights for today (times GMT)
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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