Market Quick Take - June 11, 2021

Market Quick Take - June 11, 2021

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Those fearing a new inflationary era are rubbing their eyes this morning as the hottest US core CPI print in decades saw US treasuries first sell-off only to rally and see yields close at new lows for the recent cycle. Equity markets seemed to cheer the fresh dip in yields as the S&P 500 rallied and closed at a new all-time high, with momentum stocks outperforming. Today the focus could switch to geopolitics as we await a G7 statement from the summit convening today.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – despite a worse-than-expected US May CPI print the US 10-year yield continued to decline lifting sentiment across the board in US equities with especially US technology stocks and growth pockets rallying. The market is currently betting on the transitory inflation regime, which if becomes true, could deliver another year of strong equity returns. Nasdaq 100 futures are the most sensitive to the inflation bet and rallied over 1% yesterday trading around 13,960 level in early European trading. Watch the big 14,000 level for a potential upside breakout.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin and other cryptocurrencies are still digesting the decision by the international banking association that Bitcoin will have the highest regulatory capital requirements due to its excessive volatility. The proponents say it is a sign of its adoption and antagonists are saying it is a sign that cryptocurrencies will have difficulties scaling because it will be too expensive. Bitcoin has bounced back from the 31,000 level three sessions ago trading around the 37,000 this morning in Europe.

EURUSD The ECB meeting came and went with little to-do yesterday as members of the governing council differed over the necessary pace of bond purchases over the summer, when markets are thin. And despite the huge surprise in the US CPI and big drop in US treasury yields, the US dollar was relatively stable in what looks an impressive performance for the US dollar. Given all of the signs of excess USD liquidity (especially the Fed reverse repo account and other factors noted below), the US dollar is doing remarkably well, although now the focus will be on the FOMC meeting next Wednesday and to what degree an asset purchase taper is flagged as a policy option soon. EURUSD is indecisive trading exactly mid-range between the upside pivot of 1.2266 and downside pivot at 1.2104.

USDRUB – the Russian central bank meets today and observers are split on whether the central bank will hike 25 or 50 basis points, with a strong majority now believing the larger hike is likely as a way for the central bank to improve the purchasing power of the ruble as food prices have risen sharply this year. A 50-bp hike would be higher than previous guidance had suggested, so traders will also look for any shift in focus in the guidance after today’s decision. USDRUB broke down through a big range low near 72.60 earlier this week, a level that is now resistance.

Crude oil (OILUSJUL21 & OILUKAUG21) trades softer with WTI continuing to bounce around $70. While prompt timespreads, especially in Brent highlight a current tightness, the market is asking whether the recovery in western hemisphere demand has already been priced in. Yesterday algorithms that controls a high percentage of daily trading volumes briefly choked after misreading news regarding the US lifting sanctions on one Iranian and not the country, it drove a +2% price drop which may have stopped out several recently established longs. Focus today on IEA’s Oil Market Report for June.

Gold (XAUUSD) and silver (XAGUSD) both found a bid following the strongest CPI print in decades, but instead of being supported by inflation hedges, the metals bounced as Treasury yields eased to a new low for the recent cycle, as the market concluded that inflation is transitory, and that Fed will not taper early. With next week’s FOMC unlikely to trigger any increased taper focus, the attention will instead turn to Jackson Hole in late August for any announcement about a change in direction. Ten-year real yields dropped to a one-month low at –0.94% with silver outperforming to see the XAUXAG ratio touch a one week low. Once again bullion traders will be looking at resistance levels, probably $1904, and then $1916.

The bond market doesn’t care about inflation; it cares only about monetary policies (IEF, TLT). Yesterday CPI numbers surprised on the upside but failed to push yields higher. Bond yields did the opposite, closing even lower by the end of the day, with the 10y closing at 1.44% for the first time since the beginning of March. Demand for 30-year notes at the US Treasury auction was also strong. Foreign investor bids were well above the five-year average, showing that investors abroad prefer US Treasury over their countries’ government bonds offering near-zero returns. Although the CPI increased 5% YoY, the high yield at the 30-year auction ended up be 2.172%, down 20bps roughly from May’s auction.

What is going on?

Join the Saxo Euro 2020 football fantasy league - we have set up a fantasy league and a SaxoStrats team participating in the league on the UEFA website. See more details here if you are interested in joining in the fun.

The US Treasury General Account dropped over the last week by $139 billion to reach $674 billion. The Treasury has set the goal of reducing the account to under $500 billion by August 1 and the drawdown of funds increases USD liquidity and pressures US Treasury yields lower, particularly at the very short end of the curve. In a somewhat related story, the Fed’s reverse repo account, in which the Fed lends out treasuries to a market that needs a place to park liquidity, rose to a new recent high of $534 billion.

US May CPI rose 5.0% year-on-year, the fastest since 2008, with core inflation running +3.8%, the highest since 1992. The month-on-month figures were also higher than expected at 0.6% and 0.7%, respectively, and annualized 3-month core inflation is running at 8.3%. A major contributor was a +7.3% rise month-on-month in used car prices, which was responsible for a third of the rise.

Intel is in talks to acquire semiconductor company SiFive. According to news reports Intel has reportedly bid $2bn for California based SiFive, which is a chip design company based on the RISC-V architecture attempting to bring open-source standards to the semiconductor industry. This is part of Intel’s new strategy to also offering a foundry model meaning that customers can come with their own designs and get Intel to manufacture those chips. SiFive is a competitor to Nvidia which is trying to acquire chip designer Arm from Softbank.

GameStop drops 27% on Q1 earnings. The original meme stock that took the world stage this year dropped 27% yesterday as investors digested better than expected Q1 results, that is still showing operations balancing at break-even. But the company’s decision to issue more shares and its strategy presentations had investors disappointed. At this point, it is difficult to see how GameStop can ever become a profitable enough company to justify the valuation.

Grain markets trading mixed following the monthly supply and demand report (WASDE) frow the USDA. Corn (CORNDEC21) heading for a second weekly gain after the report pegged supplies below expectations due to strong demand from the ethanol and export sectors. Adding to this weather models forecasting more dry weather in key US production region. Wheat (WHEATDEC21) rose on worries that drought would reduce production while Soybeans (SOYBEANNOV21) remained under pressure after the USDA said stockpiles will be bigger than expected with high prices curbing demand for soyoil and soymeal.

China is offering to release state reserves of industrial metals as part of their continued efforts to cool commodities markets and keep a lid on inflation. This after surging costs of imported commodities helped drive China’s factory-gate inflation to its highest level since 2008. The metals that according to sources will be offered directly to end-users include copper, aluminum and zinc. The offer will be monthly and will last through the year. The news having a limited impact on copper (COPPERUSJUL21) which is rising after once again finding support in the low $4.4’s.

What are we watching next?

G-7 meeting up today, with prominent geopolitical risks in play. US and EU countries in the G-7 seem ready to ease confrontation on a number of trade issues that dogged relations during the Trump administration, an important development. But likely more immediately important could be any G-7 statement from this summit that produces strong language on investigating the origins of the Covid-19 virus, as circulated in a draft statement, and/or demands related to China’s activity in the Taiwan Strait or accusations of human rights abuses in Xinjiang. A secondary focus will be on the status of EU-UK relations after tensions over the Northern Ireland/Republic of Ireland border.

Earnings reports this week. Chewy shares were down 1.5% in extended trading post its earnings release despite Q1 EBITDA came out at $77.4mn vs est. $32.3mn and revenue was in line. The outlook was lifted a bit from previous range and that might have been the disappointment given how strong other profit guidance raises have been this earnings season.

Economic Calendar Highlights for today (times GMT)

  • 0800 - IEA's Monthly Oil Market Report
  • 1030 – Russia Central Bank rate decision
  • 1400 – US Jun. Preliminary University of Michigan Sentiment/Inflation expectations
  • G-7 meeting

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
Most of our staff in Singapore are working from home to help limit the spread of the coronavirus. We remain at your service on the details below. Thank you for your understanding.

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.