Market Quick Take - June 17, 2021

Macro 6 minutes to read
Saxo Strategy Team

Summary:  The FOMC meeting surprised markets as the median Fed forecast for the rate path drifted well into 2023, while the economic forecasts for inflation were revised sharply higher for this year and only very modestly higher for 2022 and 2023. In reaction, the US treasury market reacted strongly with a steep sell-off, the USD rose sharply, and risk sentiment soured somewhat less dramatically.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – given the supposed interest rate sensitivity of especially the Nasdaq 100 index, yesterday’s sell-off was rather modest compared to the reaction to the FOMC elsewhere. Still, the Nasdaq 100 has slipped back away from the 14,000 level and any add-on rises in yields could continue to crimp sentiment. The next focus lower could be the 21- day moving average, currently near 13,730. For the S&P 500 index, the 21-day moving average has been challenged already overnight at 4,195, with the next level below the 55-day moving average at 4,153 – this MA twice supported the market during May.

EURO STOXX 50 (EU50.I) - the FOMC has shifted sentiment on interest rates causing downward pressure on technology stocks, which is spilling over into STOXX 50 futures this morning opening lower. European equities have overall been more bid relatively to US equities as the they respond better to cyclical and inflationary pressures due to the index composition. The signal from the FOMC yesterday means that we could get a period of momentum fatigue and especially in growth pockets, but the relative performance and flows will continue to favour Europe.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Yesterday's action suggests that the cryptocurrency market is also sensitive to signals from the Fed on the risk of a turn toward tightening policy, as Bitcoin backed a bit further away from the key 40-42k resistance zone, while Ethereum price action has been uninspiring as it limps in the bottom half of its recent range and a local downside pivot near 2,260 is the next downside focus for the risk of testing lower still.

USD pairs the US dollar rose across the board as the US treasury market reacted sharply to the shift in the Fed’s policy forecast in the so-called “dot plot” (more on FOMC developments in What is going on? below). The move has taken the USD to key levels in a number of USD pairs, including the 1.2000 level (and coincidentally the 200-day moving average) in EURUSD, the 1.4000 level in GBPUSD, and even toward a major range support and the 200-day moving average in AUDUSD. If the USD rally extends here, it begins to inflict more significant damage to the USD bearish case on the charts. Next levels pointing to an even more significant breakdown and thus a breakout higher for the USD would include 0.7550 in AUDUSD and 1.1920 in EURUSD.

JPY – very interesting to see the Japanese yen somewhat resilient even if USDJPY rose sharply yesterday as US yields rose sharply. EURJPY suffered a setback, as did CHFJPY (ahead of today’s SNB meeting). The action was inconclusive elsewhere, but given the degree to which the JPY has declined in a number of JPY pairs without notable consolidation, and given the sharp weakening in EM yesterday (popular destinations for Japanese carry trades looking to pick up carry), we’ll be on the lookout for continued JPY outperformance, although if US yields rush to cycle highs, the JPY could remain quite weak against the US dollar, where USDJPY is now up close to the cycle high this year of 110.97.

Gold (XAUUSD) got dumped after the FOMC signaled it would speed up its expected pace of policy tightening. The biggest drop in five months saw it slice through several key support levels and options strikes before bouncing from just above the $1800 level, with 1,796 marking the 50% retracement of the recent rally. With RSI’s are getting close to oversold territory and most of the recent longs around $1900 have likely been cleared out, so the market may look for a small recovery. Key support-turned-resistance remains the 200-day moving average, now at 1,838.

Inflation outlook is back in play and any surprise may drive US treasury yields higher (TLT, IEF). With the Federal Reserve acknowledging that inflation is rising and that there might be tapering discussion ahead, the bond market is going to be sensitive to any data that show that inflation may not be transitory. Yesterday, 10-year yields closed around their 50 days simple moving average at 1.59%. If yields break above this level, they will find resistance next at 1.70%. Yet, this level will most likely not be breached until the central bank engages more actively on tapering discussions.

European sovereigns are waking up to a harsh reality this morning (VGEA). EU sovereign yields have fallen together with US Treasury yields last week but they might revert their losses today. Our focus remains on Germany, which yields is back at 0.15%. If they break above this level, they will find resistance at –0.07% putting them dangerously close to 0%.

What is going on?

FOMC produced surprisingly large shift forward in the "dot plot” of Fed policy forecasts. The largest takeaway from this meeting was the median forecast of the 18 forecasters at the Fed showing that the Fed now expects to hike twice by the end of 2023, a shift from March, when the median forecast was for no lift-off until 2024. There is some risk of over-interpretation (especially as Fed Chair Powell clearly disdains the dot plot), as the dots don’t differentiate where the Board of Governors voted. Still, a generally higher set of forecasts suggests a significant number of Fed members are getting uncomfortable with the scale of the recent inflation spike. Elsewhere, the changes in the statement were virtually non-existent. In the inflation forecasts, the core and headline numbers were adjusted sharply higher for 2021 relative to March forecasts, while core and headline inflation forecasts were raised by 0.1% for next year, with no revision to the core 2023 inflation reading for 2023, suggesting that the Fed still thinks current inflationary pressures will prove transitory. Adjustments to GDP and unemployment forecasts generated little attention. Fed Chair Powell broached the subject of asset purchase tapering in the press conference and indicated that at tapering of purchases will be discussed in coming months, with no specifics. Finally, the Fed hiked the interest rate on excess reserves by 5 basis points, a technical measure to ensure that recent overwhelming USD liquidity pressures don’t see money market yields dipping into negative territory.

Australia May jobs report comes in strong, with the country reporting a rise of +115k in jobs (with 97.5k of that full-time) and the unemployment rate dropped sharply to 5.1% from 5.5% in April, even as the participation rate rose 0.1% for the month.

New Zealand Q1 GDP rose far more than expected at +1.6% QoQ and +2.4% YoY vs. 0.5%/0.9% expected.

Lennar shares were up 1% on strong earnings and outlook. FY21 Q2 revenue and EPS beat expectations and new orders also beat expectations by 3.5%-points. The most impressive thing about the earnings release was the fact that the US homebuilder is raising its guidance for FY gross margin to 26.5-27% from previously 25% despite a sharp rise in input costs. This shows that the buying power among US households is enormous and able to absorb the current inflationary pressures.

What are we watching next?

Does the reaction to the Fed stick? If so, any further rise in yields could quickly become quite uncomfortable for many markets and require significant adjustments in sentiment, from equities and emerging markets lower and the US dollar higher, depending on how sharply yields continue to rise.

Earnings reports this week. Today’s earnings focus is on Adobe which is expected to deliver 19% y/y revenue growth and 24% y/y earnings growth driven by expanding margins. The software maker is enjoying a close to natural monopoly in its business category and has hit an inflection point of massive economics of scale translating into rapidly expanding operating margins.

  • Today: Adobe, Kroger

Economic Calendar Highlights for today (times GMT)

  • 0730 – Switzerland SNB policy rate
  • 0800 – Norway Deposit rate
  • 1100 – Turkey Central Bank rate decision
  • 1230 – Canada May Teranet/National Bank Home
  • 1230 – ECB Chief Economist Lane to speak
  • 1230 – US Jun. Philadelphia Fed Survey
  • 1230 – US Weekly Initial Jobless Claims
  • 1430 – US Weekly Natural Gas Storage Change
  • 2330 – Japan May National CPI

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