Summary: The S&P 500 touched another record in yesterday's trading while the interest rate sensitive Nasdaq 100 lost ground ahead of US inflation data - the other part of the Fed's mandate - which will be watched closely following last week's strong job report and a growing taper call from Fed officials. Crude oil has stabilized, supported by shrinking US stockpiles and confidence demand will hold up despite current virus setbacks. Gold remains fragile ahead of CPI with focus on its impact on dollar and yields.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – fluctuates ahead of US CPI with the focus on the continued rise in US 10-year yield which yesterday helped send the tech-heavy Nasdaq 100 down while the S&P 500 climbed to an all-time high.
EURUSD – trades near, but so far holding above the March 31 low at €1.17, a level if broken could trigger an extension towards €1.16, the double bottom from Q4-20. Driven by a rising yield spread on a divergence in the timing of tapering between the Fed and the ECB with the latter still expected to be on hold until 2023 while the Fed could signal a change at the Jackson Hole symposium. To the upside, we focus on support-turned-resistance at €1.1760.
Gold (XAUUSD) remains fragile as it continues to trade below key support-turned-resistance in the $1750-60 area. Ahead of today’s important US CPI print (see below), a small bid emerged in Asia with improved physical demand seen following the recent slump. So far, no support from the dollar which is still threatening to break higher and real yields which trades at a two-week high. Silver (XAGUSD) meanwhile continues to struggle with the XAUXAG ratio trading near a seven-month high. Platinum (XPTUSD) is doing relatively better and since Friday its discount to gold has dropped by 75 dollars to the current $725. Trading will be nervous with the direction eventually determined by CPI, the most important data print before the late August gathering of central bankers at Jackson Hole, a forum often used to announce pivotal changes.
Crude oil (OILUKOCT21 & OILUSSEP21) has stabilized after the weekly API report pointed to another drop in US stocks, and a belief that the recovery in demand will not be derailed by the delta coronavirus variant which continues to spread around the world. Goldman Sachs, one of the biggest oil bulls, predicts the demand impact will be transitory before another surge towards yearend. The market will be watching closely the monthly oil market reports from the IEA and OPEC on Thursday for any signs of changes in their demand outlook. Focus today the CPI print and its potential via the dollar as well as the weekly stock report from the EIA.
What is going on?
The $550 billion US infrastructure bill was passed by a bipartisan 69-30 vote last night and now the battle for a much bigger $3.5 trillion package of social spending and tax increases begin. The infrastructure bill however may still face hurdles in the house where progressive Democrats may opt not to pass the bill without getting their priorities addressed, a development that led House Speaker Pelosi to declare that she will not allow a vote on the bipartisan package until the Senate has passed the broader economic plan.
Bitcoin and Ethereum - The passed US infrastructure bill contains the originally proposed broad definition for a "broker" when it comes to crypto tax reporting requirement, despite several attempts from lawmakers and the crypto industry to have the definition changed.
Big acquisition in the cyber security industry. NortonLifeLock is acquiring Avast in a deal valued at $8.1-8.6bn in a cash and shares deal. The combined company will have dual headquarters in the US and Europe. This acquisition could fuel a wave of acquisitions in the industry and potentially be a driver for higher valuations in the industry over the coming months.
Coinbase Q2 revenue beat expectations with Q2 revenue at $2.23bn vs est. $1.85bn driven by volume of $462bn vs est. $382bn. Q2 adj. EPS was $7.76 up from $7.50 in Q1. Monthly active users hit 8.8mn up 44% q/q and Ethereum overtook Bitcoin in terms of volume. Shares were unchanged in extended trading. Our crypto & blockchain basket is up 24.1% month-to-date and Coinbase’s strong earnings could easily extend the rally.
Robinhood buys Say Technologies for $140mn. The acquisition is adding a crucial shareholder voting and communication tool to Robinhood’s ecosystem, which seems to be a positive move towards being more oriented towards investors than the short-term options and crypto trading that has fueled Robinhood’s success.
What are we watching next?
July US CPI is the big macro release today. The consensus expects it will hover around 4.9% YoY after a jump at 5.4% YoY in June. It was the largest gain since August 2008. If the headline figure is higher than anticipated, which is likely, the market might seriously question the concept of « transitory » inflation used by the Federal Reserve. What worries us the most is that more and more firms are now inclined to increase prices in order to cope with higher wages and soaring transportation costs. In turn, this could make inflation run uncomfortably high in coming months.
WASDE - The grains market trade mixed ahead of a monthly supply and demand report from the US Department of Agriculture on Thursday. The report will provide estimates for yields and production levels following what so far has been a volatile growing season caused by adverse weather. However, the short-term weather outlook has now turned less price favorable with temperatures moderating while rains have brought much needed moisture across key growing areas in the northwest and central areas of the US. The report is expected to show a decline in corn yields leading to a lower production estimate while the outlook for soybeans look less price supportive.
Earnings to watch this week. Q2 earnings have been strong we expect earnings releases this week to reflect this. Today, Vestas and NIO are the key earnings releases to watch with both being part of the green transformation and enjoying a massive tailwind from regulation and policy trajectory. NIO has recently disappointed a bit on deliveries and with VW and other carmakers ramping up EV production the pressure is on NIO to deliver against high expectations. Thursday is the big day with Orsted on the green transformation in Europe, Walt Disney on video streaming and its attack on Netflix with its Disney+ offering. On Thursday, we also have earnings from Baidu and iQIYI which are currently in the middle of the Chinese technology crackdown.
Economic calendar highlights for today (times GMT)
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2024: The wasted year
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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.
