What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the story for US equities for much of last week was a series of days in which intraday sell-offs were brushed back, but nevertheless, equities generally slumped lower after posting all-time highs last Tuesday. Long US yields spiking higher are a notable concern if the yield rise continues at anything resembling the current pace. The S&P 500 index has so far avoided a test of its 21-day moving average just below 3,860, a close below which could mark the beginning of a larger consolidation. The Nasdaq 100 has been somewhat more technically weak (and is likely more yield sensitive) and trades near its 21-day moving average near 13,500 this morning after surviving a test of this moving average last week.
- Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - after sprinting higher for a strong new record close on Friday for both of the largest crypto currencies, the action led higher still at the weekend for Bitcoin, which traded north of 58,000 before settling back near the Friday close around 55,500 as of this writing. Ethereum found it harder to maintain altitude as Friday’s spring higher and close just short of 1,945 yielded to an overnight sell-off back well below 1,900 overnight.
- AUDUSD - the Aussie is one of the highest flyers among commodity currencies and launched a torrid new rally against the US dollar on Friday, closing clear of the cycle highs and adding to gains overnight that took AUDUSD above 0.7900. The chief driver helping the move higher is a strong bid in commodities, particularly metals, with copper heading almost vertical over the last two sessions and iron ore poking to a new cycle high overnight before pulling back. With this move to a new high for the cycle, the old high of 0.7820 and perhaps down to 0.7800 becomes the important local trend support.
- EURGBP and GBPUSD - sterling has been trending higher recently and nothing looks particularly amiss with the trend, as GBPUSD notched gains all the way above 1.4000, while EURGBP dropped below 0.8650, with some of the enthusiasm possibly due to the UK readying to open up soon on its aggressive Covid vaccine rollout (more below). However, if the recent rise in global bond yields begins to spook risk sentiment more profoundly, there could be a risk of a consolidation in GBPUSD in particular, given the achievement of the round 1.4000 level.
- EURCHF – the Swiss franc has not been on traders’ radars for a long time, on the assumption that the SNB is defending it from any significant rise against the Euro – but what about the risk of CHF downside, especially given its negative 0.75% policy rate in a world of sharply rising yields. As of this writing, EURCHF Is trading at 1.0885, above the highest daily close yields since 2019, with 1.0900+ touched briefly intraday since then.
- Gold (XAUUSD) - has managed to bounce after finding support at the important $1765 level last week. Gold’s struggle to put up a defense against rising real yields, up 25 bp this year to –0.80% has also started to negative impact stocks, thereby inadvertently creating a small safe-haven bid. Hedge funds have cut their net-long in New York futures to at a 15-month low at just 84k lots, down more than 200k lots from a year ago. This development has become one of gold’s potential tailwinds once the technical and fundamental outlook improves. Focus this week on Fed chair Powell’s testimony before Congress, his first during the Biden era, and the bond market after ten-year yields climb to a one-year high. Resistance at $1800 followed by $1810.
- Coppers near vertical ascent continued overnight in Asia with High Grade (COPPERUSMAY21) jumping 3% to $4.22/lb with the 2011 record high at $4.65/lb ($10,000/t on LME) now within striking distance. Latest developments driving the surge come from China which has published its first official statement regarding economic priorities during the next five years. It sets the tone for accelerating the agricultural and rural modernization over the next five years. It includes strengthening the construction of rural public infrastructure. News that will only add to the markets increased worries about a copper supply shortfall.
- US Treasuries continue to fall with 10-year yields hitting 1.39% (TLT, IEF). US Treasuries opened the week downbeat, with yields hitting a new high amid the selloff of Australian bonds and higher commodity and crude prices. The issue that the Federal Reserve is facing is that also real yields are rising pointing to the fact that rising capital costs might become a concern. The market is impatient to hear what Powell has to say at the Senate Banking Committee when he delivers the Semi-Annual Monetary Policy Report tomorrow. There is the risk that if he downplays the rise in yields, he could spur even more bearish sentiment in Treasuries.
- Today’s Lagarde speech is key amid European sovereign selloff (BTP10, 10YOATMAR21, IS0P). Europe’s sovereign yields continue to rise together with US yields, and we believe that they will soon become a problem for the European Central Bank. Rising yield can tighten the European economy while fiscal stimulus agreed last year still needs to be distributed and no additional stimulus will be agreed this year amid German election. The ECB might need to consider intervening once again reverting the trend that has been established with rising yields in the US.
What is going on?
- Bullish bets on 24 major commodity futures remained unchanged at record levels in the week to February 16, but since the early November vaccine announcements and Biden win, the market has increasingly been pricing in the prospect for higher growth and rising inflation. These developments together with signs of tightening fundamentals in grains, industrial metals and oil have increasingly been raising expectations of a new commodity super cycle. As a result, the speculative length has since early November 2020 surged by one-third and last week it reached 2.8 million lots, a nominal value of $144 billion.
- UK set to send all children back to school soon – sufficiently encouraged by the current level of Covid cases and the aggressive rollout of at least first doses of Covid vaccinations, UK PM Boris Johnson is expected to announce today that all schools in England will re-open on March 8, according to sources, with the resumption of outdoor sports and small gatherings allowed on March 29.
- Crude oil’s mini correction seems to have ended before impacting the overall bullish sentiment. Focus on next week’s OPEC+ meeting where the market will be looking a rise in production, a move supported by Russia but opposed by Saudi Arabia. It highlights the differing opinions between the two with Russia worried that higher prices may lead to rising production from others, especially in the US. Saudi Arabia meanwhile wants higher prices, something that the market expect they will achieve given the outlook for a strong post-pandemic recovery. Goldman Sachs, one of the most bullish forecasters, have increased their 3-6 month's forecast to $75/b, $10 above its previous forecast.
What are we watching next?
- Bond yields are turning up the heat: fallout for markets? – US long yields ended last week sharply higher and followed through higher still in the Asian session to start the week. Elsewhere, other government yield curves are beginning to steepen as well, even in Europe and Japan. The rise in yields is likely behind the more cautious tone in equity markets since early last week, but is there the risk that, given the scale of speculative further in pockets of the market in recent months, that this rise at some point become more destabilizing, particularly for the most speculative assets?
- Fed Chair Powell Testimony this week - The Fed really doesn't want to send any new policy signals at this time, as it hopes that a recovery will broaden in Q2 and beyond on the reopening of the economy, helping especially lower paying service jobs to recover. But we'll watch Fed Chair Powell's semi-annual testimony this week before both the House (tomorrow) and the Senate (Wednesday) for signs of whether the Fed's activities are creeping up on politicians' radars, whether in terms of the Fed underwriting budget deficits on a large Biden stimulus (Republican line of attack?), or in terms of aggravating inequalities and over-pumping asset markets (more likely progressive Democrat line of attack). Also important would be any Powell comments on the recent sharp rise in treasury yields - as even a statement of "unconcerned" is the Fed making a point.
Earnings releases to watch this week – the Q4 earnings season is not over yet and with the big surprise upward revision to net income from Deere on Friday due to strong underlying agricultural prices this week could add more action than initially thought. The companies marked in bold are the ones we will monitor more closely with the week’s highlights being Booking, Nvidia, MercadoLibre, Moderna, and Berkshire Hathaway.
- Tuesday: HSBC, Bank of Nova Scotia, Medtronic, Square, Intuit, Home Depot
- Wednesday: HKEC, Reckitt Benckiser, Iberdrola, Royal Bank of Canada, TJX, Booking, Nvidia, Lowe’s
- Thursday: MercadoLibre, AXA, Anheuser-Busch InBev, Bayer, NetEase, Toronto-Dominion Bank, Salesforce, Autodesk, Workday, VMWare, Dell Technologies, Moderna, Safran
- Friday: Deutsche Telekom, BASF
- Saturday: Berkshire Hathaway
Economic Calendar Highlights for today (times GMT)
- 0900 – Germany Feb. IFO Survey
- 1330 – US Jan. Chicago Fed National Activity Index
- 1345 – ECB President Lagarde to Speak
- 2145 – New Zealand Q4 Retail Sales
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