Summary: Most US indices posted a slightly weaker closing level on the day after a modest intraday rally took out new all-time highs, a sign of nerves ahead of the main event this week: the FOMC meeting and how the Fed will deal with the challenges of any shifts in its forward guidance as well as whether it will extend key emergency pandemic measures enacted last year. The US dollar is firm and US yields from five years and longer are perched near the top of the cycle.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)–arather low energy session for the S&P 500 yesterday, which took out marginal new highs before closing slightly weaker, while the Nasdaq 100 Index showed a bit more energy in posting a larger rally to local highs but retraced much of that advance by the close of trading. That index took out the 21-day moving average, currently just above 13,000, but failed to sustain above the 61.8% Fibonacci level near 13,245. The next resistance level above is the 13,300-350 area. For the S&P 500,the firstsupport of note is perhaps the 3,900-3,875, the lower part of which comes in near the 21-day moving average. Equities will be very sensitive to any guidance from the Fed today.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin and Ethereum are treading water here after Bitcoin recently reversed sharply from new highs north of 61k, a disappointment that needs to be quickly overcome if the bulls want to reassert their case. US stimulus checks are hitting bank accounts starting today and the price action will bear watching through the end of this week on that development.
EURUSD – the big EURUSD major is stuck in rather tight range after breaking below the critical 1.2000 level, almost as if wanting the green light from the FOMC before proceeding lower. That green light, if it comes, would likely be in the form of higher US treasury yields in the wake of today’s FOMC meeting. Meanwhile, many contrasts the EU’s economic malaise and ongoing struggles with rolling out the vaccine compared to a US economy that is stronger and already opening up, with a huge stimulus package just passed on top of that.
USDJPY and JPY crosses – the JPY slowed its descent yesterday and even firmed in places. The JPY will remain highly sensitive to the direction in US long yields in the wake of the FOMC meeting tonight, and then the Bank of Japan policy review up on Friday. At stake on the other side of this week (and arguably on theother side of March 31, the end of Japan’s financial year) is whether the JPY is suffering a comprehensive breakdown or significant one-off adjustment on rising yields and rising yield spreads against the yen’s favour. The first major line on the chart for whether something more profound is unfolding is at 110.00 in USDJPY, followed by the 115.00 area.
Gold (XAUUSD) trades near a one-month high despite seeing long-end yields perched near the top of the cycle. The key event today being the FOMC meeting (see below) and traders across most markets, including gold, will be watching the central bank’s messaging on inflation and rising bond yields. The metal is currently stuck in no man's land but with weak positioning and technicals, the market will be looking for signals today that potentially could reverse those. While a band of support below $1680 has held thereby providing a glimmer of hope, gold needs to break back above $1765 in order to start attracting fresh fund buying and momentum.
Crude oil (OILUKMAY21 & OILUSAPR21) continues to trade in a relative tight range in Brent defined by $67 to $70. It highlights the short-term risk of the market having reached a level from where current fundamentals are not yet strong enough to support further short-term strength. Focus today, apart from the FOMC outcome, being the monthly Oil Market Report from the International Energy Agency and their latest views on global supply and especially demand. Also, on tap the weekly US inventory report from the EIA which will follow industry data from API last night which showed a surprise drop in US crude stockpiles.
Strong 20-year auction and weak retail sales shouldleave Federal Reserve stance unchanged(TLT, IEF). The Fed will most likely remain committed to its interest rates and asset purchases, although economic outlook has improved considerably especially after the passing of the $1.9 Trillion package. The Fed might continue to ignore rising yields however bidding metrics for bond auctions clearly remain volatile with foreign demand not picking up as much as expected. The market reaction to the FOMC meeting today and bidding metric to tomorrow’s 10-year TIPS auction will be key to set sentiment in Treasuries.
What is going on?
Volkswagen sets out ambitious plans on electric vehicles – yesterday the German carmaker announced their Q4 and FY20 earnings which were acceptable given the circumstances. Management surprised the market by launching aggressive ambitions on electric vehicles with a sales target of 1mn EVs in 2021 effectively making the group the largest seller of EVs globally. Volkswagen is also aiming for a 50% global market share by 2030 driven by their large distribution and manufacturing but also lower costs driven by a new standardization of the underlying skate used in their EV models. Shares were up 7% on the announcement.
Italy’s Draghi and France’s Macron may resume authorization of AstraZeneca shot – if they are given the green light from the European Medicines Agency on safety, with an answer expected tomorrow.
Samsung warns of worsening semiconductor shortage – and experts indicate that the shortages for the car industry may not ease until the second half of this year, and the chip shortage is getting worse according to Samsung to the extent where the company is now postponing its new smartphone Note. Honda said it would halt production at most of its US plants because of the shortage. Adding to the chaos originally caused by Covid and forecasts of vastly reduced demand that saw lower production, the storm in Texas knocked production at Texas based semiconductor facilities and Samsung’s own factory in Austin, Texas in the US has yet to even be restarted.
What are we watching next?
Today’s FOMC meeting (note: at 1800 GMT) and policy signaling from the Fed. Today, the market will watch closely for whether and how the FOMC addresses the “SLR”rule for bank leverage ratios that could roil the US treasury market if not extended beyond the March 31 expiry (the issue is political as prominent Democratic senators Warren and Brown are against the Fed extending this rule). As well, the market will be sensitive to the least adjustment in the Fed “dot plot” policy rate forecast, especially now that the possibly inflationary Biden stimulus has been passed.Other messages may be sent in the updates of the December forecasts for unemployment and inflation, as well as, of course, any hints in the monetary policy statement itself and the Fed Chair Powell press conference.
US stimulus checks are delivered to US bank accounts starting today – it is worth looking for divergences in the most speculative names in the US for signs that “retail traders” are putting their stimulus checks to work in the US stock market, as these traders have become a rising force in swaying many stocks with an intensified level of activity and with the leverage available from buying options.
Earnings releases to watch this week:
Strong earnings yesterday from Zalando and Lennar provided a positive outlook for European e-commerce and US housing markets. Volkswagen’s Q4 results were good given the backdrop but the excitement was over the German carmaker’s ambitious on electric vehicles aiming for 1mn sold EVs in 2021 and a 50% global market share by 2030. Today the focus on Pinduoduowhich is one of the fastest growing Chinese e-commerce companies.
Today:Sunny Optical, Verbund, Alimentation Couche-Tard, Snam, Pinduoduo, Cintas
Thursday: CK Hutchison, China Feihe, CK Asset, CGN Power, Audi, Nike, Enel, FedEx, Accenture, Dollar General
Friday: China Mobile, Zijin Mining, Hong Kong & China Gas, Zhongsheng Group
Economic Calendar Highlights for today (times GMT)
0900 – IEA's Monthly Oil Market Report
1230 – Canada Feb. CPI
1230 – US Feb. Teranet/National Bank Home Price Index
1230 – US Feb. Housing Starts and Building Permits
1430 – EIA's Weekly Report on US oil and fuel inventories
1800 – US FOMC monetary policy statement release
1830 – US Fed Chair Powell press conference
2130 – Brazil Selic Rate
2145 – New Zealand Q4 GDP
0030 – Australia Feb. Employment Report
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
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.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
