Summary: Sentiment bounced back in the US yesterday after the weakness of the prior two days, with Japan also staging a comeback overnight. Yesterday, the Bank of Canada sharply brought forward its anticipated timeframe for a full economic recovery and tapered asset purchases, the first G10 central bank to do so. Today, the ECB meeting is in focus, with little anticipation of strong signals after yield rises from earlier this week have since been tamed.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities bounced back yesterday after the prior couple of weak sessions, with small caps outperforming large caps and with the all-time highs not far away again – just above 14,000 for the Nasdaq 100 and 4,183 in the S&P 500. We encourage a cautious stance despite the strength as the seasonal headwinds of May and the slightly delayed US tax season could offer headwinds in coming weeks.
STOXX 50 (EU.I) - risk-on came back yesterday led by the most speculative segments of the market and STOXX 50 futures are opening higher on the open and have almost erased the losses from two days ago. The earnings season in Europe continues to deliver better than expected operating earnings and our expectation is that it will underpin momentum in the short-term. A close today above 3,945 would be bullish for European equities.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin and Ethereum are in two very different places, as the former continues to struggle after the traumatic sell-off at the weekend and has remained well south of the key 60k level, trading this morning close to 54k after testing below 53k overnight. The 50k area looks important there for staving off lower levels still. Ethereum, on the other hand, is having a go at the all-time highs again, trading near 2,450 this morning.
EURUSD and AUDUSD – EURUSD is trying to hang on to the 1.2000 level ahead of the ECB meeting today and it was offered a helping hand, as was the AUDUSD, by a revival of risk sentiment yesterday, which helped push the USD back lower. Risk sentiment will likely remain the key driver for both pairs, with EURUSD likely trading with lower beta to shifts in sentiment than the more sensitive AUDUSD. The ECB is not likely to provide a new angle, and EURUSD can consolidate as far back as 1.1850 without erasing the implications of the recent rally off the 1.1700 lows, other points of interest include the 1.1925 area, near the 200-day moving average. For AUDUSD, the reversal on Tuesday was tactically bearish, but only insofar as risk sentiment deteriorates again, as yesterday’s bounce showed – tactical resistance is 0.7750-75, with a close above 0.7800 indicating a focus back on the 0.8000+ highs, and a close below 0.7700 now tilting the price action more bearish, especially if 0.7650 eventually falls as well.
USDCAD – The Bank of Canada surprised with its hawkish stance as it became the first central bank to taper asset purchases (from C$4B per week to C$3B) but also brought forward the anticipated achievement of a “full economic recovery” to the second half of 2022 from 2023, which many see as also bringing forward the date of the first rate hike. The Bank also raised growth estimates for this year and slightly lowering them for next year. The boost to CAD was immediate and large, if softened somewhat during the press conference of Governor Macklem, who emphasized that rate hikes will not necessarily arrive immediately with the attainment of key milestones like the 2% sustained inflation. The price action underlines that 1.2600/50 is the key upside break level, while the cycle low of 1.2365 is now the downside focus. The move lower in USDCAD could fizzle and reverse immediately if risk sentiment suddenly deteriorates again and crude oil sells off, but this development could offer sustained support in the CAD crosses (contrast with Australia’s RBA, for example, making AUDCAD downside an interesting angle.
Crude oil futures (OILUKJUN21 & OILUSJUN21) trade defensively amid the risk of another coronavirus flare-up with Asia, especially India, becoming the latest epicenter. An uneven global demand recovery may put into doubt the ability of OPEC+ to proceed with their announced May to July production increases. Despite of these latest developments we see a limited downside risk with Brent crude likely remain stuck in the 60’s for the remainder of this quarter or until vaccine rollouts significantly changes the demand dynamics.
Gold (XAUUSD) at a two-month high is edging closer to the psychological level of $1800, supported by weakness in US dollar and easing Treasury yields, geopolitical developments and fresh momentum after managing to bounce from $1760-65 support area. Total holdings in bullion-backed ETFs have held steady for the past week with longer term trend funds still either holding short or neutral positions at this stage. Next level of resistance beyond $1800 being the February high at $1818. Supported by another strong day for copper, Silver (XAGUSD) managed to reach a five-week high against gold before hitting some resistance at $26.65, the March 18 high.
Doves and hawks’ divergence and growth revisions are key for today’s European Central Bank meeting (IS0L:xetr, TLT:xnas, IEF:xnas). We believe that at today's ECB meeting it will be important to focus on the central bank’s economic forecasts. A stronger-than-expected economic growth is what animates the hawks to say that by the end of this year the PEPP will start to be unwound. An orderly bond market might also support this hawkish stance. Ahead of the ECB meeting Spain will issue 3-, 7-, and 19-year bonds and France will come to the market with 3-, 5-and 7-year OATs.
What is going on?
Grain prices continue to surge higher with the Bloomberg Grains spot index hitting the highest level since 2013. The rally, both in terms of strength and investor participation has been led by corn (CORNJUL21) which broke through $6/bushel yesterday on a combination of cold weather hurting newly planted U.S. crop and declining crop conditions in Brazil. Soybeans (SOYBEANJUL21) reached a seven-year high close to $15/bu while wheat (WHEATJUL21) traded up for a third session. Booming Chinese demand may ease after the government recommended a reduction of corn and soymeal in animal feed. While fundamentals remain bullish the market is overbought and with option expiration on Friday, we may see some additional short-term volatility.
Apple and Alphabet came under bipartisan pressure in a US Senate Antitrust Hearing - for the powers they exercise over the marketplace via their App Store (Apple) and Google Play Store. Spotify participated in the hearing, describing how it paid Apple $500 million for App Store commission fees while competing with Apple’s music streaming service. For more, see coverage from Marketwatch.
Strong earnings this morning from Volvo and Nestle. European companies have come out of the crisis in a good shape and this morning Nestle is reporting organic revenue growth of 7.7% twice of that expected by analysts and driven only by a 1.2% pricing increase and strong uptake in Asia where restaurants have reopened. Volvo reports Q1 operating profit of SEK 11.8bn vs est. SEK 9.4bn on revenue in line with estimates. The Swedish-based carmaker says that the shortage of semiconductors is still impacting production.
What are we watching next?
ECB meeting today – this meeting looks less critical for the ECB than it did at the beginning of this week as sovereign EU yields retreated sharply over the last couple of days. This could render the meeting a non-event, though we should watch for any comments on recent rises in, for example, the Portuguese yield spread versus Germany. More pivotal for the longer cycle is likely the German political situation we wrote about again yesterday, where Green involvement in a new government after the late September election could transform Europe to a new era. As well, the results of the ECB’s comprehensive Strategy Review will be announced at the June meeting.
US President Biden set to officially recognize the Armenian genocide – the move to recognize the systematic ethnic cleansing and killing of Armenians in the Ottoman Empire during the 1915-1917 portion of World War I will anger Turkey and its leader, Recep Erdogan, creating new possible tensions among the two NATO allies.
Earnings reports this week. Q1 earnings have so far been good with S&P 500 showing a 5% revenue surprise and 38% earnings surprise across 83 earnings reports. The biggest revenue surprise has been observed so far in the energy, materials, and financials sectors. Today, our key focus is on earnings from Intel and Snap, with Intel being particularly interesting because of its recent change of strategy mimicking TSMC’s foundry model and because of its decision to ramp up production in the US. Our view is that Intel will benefit over time from national security decisions in the US to limit the country’s dependence on Taiwan for semiconductors. Snap is interesting because it is the first Q1 earnings that will show whether online advertising continues to be robust.
Economic Calendar Highlights for today (times GMT)
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