The models are broken
The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.
Chief Investment Officer
Summary: The US equity suffered a rather weak session and failed to take heart from a number of strong US data releases, including a fresh new low for the cycle in the weekly jobless claims and a private survey showing nearly a million jobs were added in May. While the adjustment to Fed expectations and the in US treasuries was modest, the US dollar firmed sharply, and gold dropped heavily. The US May official payrolls and earnings report today could add to the negative sentiment, if the market begins pricing in the Fed bringing forward an eventual policy tightening.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – whether it was the better-than-expected ADP number for May or the chaos in meme stocks, sentiment on bubble stocks (down 3%) and more broadly Nasdaq 100 tanked yesterday. Nasdaq 100 futures are holding just above the 13,500 level in early European trading hours with the 13,462 being the intraday support level over the past two sessions so watch that if downside pressures persist.
Euro STOXX 50 (EU50.I) - European equities were under pressure yesterday due to the setback in commodities but recovered throughout the session in another sign that bids are present, and flows are supporting European equities. The inflation narrative continues to benefit European vs US equities. STOXX 50 futures are higher this morning and could make another attempt at the 4,100 level unless some adverse news hits the market.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). The cryptocurrency comeback attempt peaked yesterday before reaching key resistance levels like 40-42k in Bitcoin and 3,000 in Ethereum and a rather steep sell-off has materialized overnight, taking the prices considerably lower from yesterday’s high.
EURUSD and GBPUSD – the USD firmed sharply yesterday on the release of the very strong May ADP payrolls release as the data point suggests that the weak official April payroll report was misleadingly weak. The USD rally was the largest move in weeks and suggests that additional strong data out of the US, from today’s May jobs report to next Thursday’s May CPI release, could prompt expectations that the Fed will shift guidance to the hawkish side at the June 16 FOMC meeting. A key coincident indicator to watch in that regard is the US treasury market and Fed rate expectations, which did not react nearly as strongly as the US dollar yesterday. The next key levels are the big round ones at 1.2000 in EURUSD and 1.4000 in GBPUSD. Significant moves through these levels would begin to suggest more than just a consolidation of the recent USD sell-off.
AUDUSD – this currency pair is finally showing signs of life on the combination of the USD rally prompted by yesterday’s strong US data and as a key commodity like copper came under significant pressure yesterday. The sell-off took AUDUSD well below the absurdly tight recent range support near 0.7700 and the next focus is the 0.7600 area and the low for the year at 0.7532, just below the 200-day moving average. AUDUSD could prove more sensitive to USD strength and weak risk sentiment than the bigger DM currencies within the G10 like EUR, JPY, etc.
Copper (COPPERUSJUL21) reached a five-week low yesterday and came close to our correction target around $4.40, the 50-day moving average and February high. Just like other metals, copper dropped on worries about tighter U.S. monetary policy following the strong ADP number (see below) with all eyes on today’s U.S. job report. While we see further upside for copper due to rising demand and inelastic supply, the metal has been losing momentum for the past month following the Chinese clamp down on speculation signs of slowing demand in China. Global exchange-monitored stocks meanwhile have stabilized near a ten-month high while speculators have cut their net-longs by 63% since December.
Gold (XAUUSD) dropped the most since February after the inevitable correction arrived with a vengeance following the very strong May ADP payrolls release, which lifted the dollar and yields. Ahead of today’s monthly job report the report have raised concerns over a potential pullback in central bank stimulus. Just like silver (XAGUSD), gold broke through its 21-day moving average, a sign that the short-term positive momentum has paused. The key downside support levels which will determine the underlying strength of the market is the 200-day moving average at $1842 followed by $1825, the 38.2% retracement of the rally from April.
Reflation or stagflation, the bond market will need to be concerned about inflation (TLT, IEF). Today's nonfarm payroll might revive the reflation trade or hint at stagflation ahead. Either way, the real problem for bonds remains rising inflation. Yesterday’s ADP report beat estimates pointing to a strong jobs report today. Ten-year US Treasury yields however were mostly muted rising only 3.6bps on the day and closing at 1.62%. The belly of the curve cheapened slightly more with yields rising by 5bps. Ten-year US Treasury yields remain rangebound trading between 1.5% and 1.70%. If they break below 1.5%, they will find support at 1.2% next, but if they break above 1.70% they will find resistance at 2%.
What is going on?
A trio of strong data releases out of the US yesterday included the lowest print for the cycle for weekly initial jobless claims at 385k, a huge rise in the May ADP payrolls to 978k, far higher than the 650k expected. Finally, the ISM Services survey came out at 64.0, slightly higher than expected and the highest reading in the nearly 25-year history of the survey.
The US will bar its investors from 59 Chinese companies. This move follows up on confusing measures during the Trump administration, making clear which companies are off limits and giving investors a year to sell shares in the company after the measure goes into effect on August 2, with any activity after that requiring the permission of the US treasury. The companies are those deemed to have connections with Chinese defense and that make surveillance technology.
Russia announced that it will dump all USD assets in its sovereign wealth fund. The fund is worth some $186 billion and the shift will affect an estimated $119 billion in liquid assets (according to Bloomberg), with Russian finance minister Siluanov claiming that the shift could take place within a month.
Global food costs surged to a fresh decade high in May. The UN FAO's Global Food Price index surged 4.8% last month to record a year-on-year increase of almost 40%. The index covering 95 price quote showed a rising trend in all five food groups led by sugar, oils and meat. Drought in South America, record purchases by China and soaring demand for biofuel has left the agriculture market ill prepared for any additional production shock, hence the current intense focus on weather conditions in key growing regions across the northern hemisphere. The pain of these increases will just like a decade ago hurt the most some of the poorest import-dependent nations at a time where most are still grappling with the economic fallout of the pandemic.
What are we watching next?
Are Fed expectations set for a further jolt over today and next week? Yesterday’s trio of strong data points noted above saw the US dollar jolting higher, but the reaction in terms of Fed rate expectations has so far been quite modest – a couple of basis points higher through early 2023, according to interest rate futures. The next key data ahead of the June 16 FOMC meeting and whether the Fed may begin to open up its guidance for possibly earlier rate hikes will be today’s May Nonfarm payrolls change and next Thursday’s May CPI release, which may show net multi-decade high for headline and core inflation levels. Andy sharp adjustment to the Fed outlook will be felt across markets, possibly negative for especially richly valued equities and risk sentiment generally and supportive for the US dollar.
Can Tesla or the bubble stocks cluster hold the line? Tesla shares are down 10% from the recent highs amid a string of bad news including that Elon Musk has overstated the capabilities of its Autopilot. More signs in Europe are also showing that Tesla is losing ground to other carmakers such as Volkswagen. If Tesla closes below 550 today it could set the stock up for a volatile week ahead and the falling sentiment in bubble stocks is not helping Tesla shares.
Earnings reports this week. No earnings releases today, but Lululemon Athletica earnings yesterday surprised to the upside and the yoga apparel maker raised its fiscal year forecast. CrowdStrike FY22 Q1 revenue grew 70% y/y and cash flow generation was strong. The cyber security company also revised its fiscal year numbers a bit higher from previously mentioned.
Economic Calendar Highlights for today (times GMT)
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