Market Quick Take - June 2, 2021
Saxo Strategy Team
Summary: Markets are rather quiet after a modest rally in US equities fizzled and saw the major indices closing with minor losses on the day. In the US, a major meat supplier was shut down by a new ransomware based cyber-attack. Gold is finally consolidating after its recent steep run higher and a breakout attempt higher in crude levels partially reversed in the wake of an OPEC+ meeting.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – compared to the rest of the equity market the Nasdaq 100 does not seem to like rising commodity prices as it increases expectations of higher interest rates which is bad for growth stocks. If we are right about rising inflation, then we could see for the rest of the year Nasdaq 100 doing much worse than the broader equity market. The 13,600 level in Nasdaq 100 futures is still the key support level to watch on the downside.
Euro STOXX 50 (EU50.I) - European equities were strong yesterday defying signs of more commodity inflation with Brent Crude breaking out higher. This confirms what we have been saying that European and emerging market equities will do better under a new commodity supercycle and inflation due to the index composition relative to US equities which have an overweight of technology and high duration stocks. STOXX 50 futures are trading above yesterday’s close and will in the absence of any adverse news push towards the 4,100 as the news flow and the general sentiment is improving on European equities.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). The latest rally attempt in the crytpo-space fizzled yesterday after the major coins posted four day highs, with volatility in Bitcoin dropping, while the Ethereum rally fell well short of the key 3,000 area that would renew hopes that it is leading a charge back higher toward the cycle highs in May well above 4,000.
GBPUSD and EURGBP – sterling stumbled badly after very briefly poking at the highs of the year yesterday, a sign that USD traders may be unwilling to push the US dollar over the edge for now, and perhaps not until the other side of the FOMC meeting next Wednesday, although much of the move yesterday in GBPUSD was sterling weakness rather than USD strength as EURGBP move sharply higher from range lows. The pattern reversal points to the risk of a consolidation back toward the 1.4000 area in GBPUSD, the current key support.
USDCNH – yesterday, USDCNH rose further from the three-year lows posted at the beginning of the week, as China is sending further signals that it would like to see the CNH at least not strengthen further, if not outright weaken. Overnight, the PBOC told Chinese lenders that they would need to hold more foreign currencies in reserve, a move that allows the bank to push “intervention” onto their shoulders rather than showing up in official reserves. The next key level for USDCNH is 6.400 the cycle low from back in February.
Gold (XAUUSD) trades around $1900 with overbought market conditions and optimism over the economic recovery being offset by focus on inflation, not least following the latest rally in energy prices. Focus remains on Friday’s U.S. job report and its potential impact on yields and the dollar. With RSI’s hovering above 70 for the past two weeks, gold increasingly needs a period of consolidation with key support levels being $1863 followed by $1845. Silver’s (XAGUSD) period of outperformance proved short-lived as it got knocked down after reaching a two-week high.
Crude oil (OILUSJUL21 & OILUKAUG21) trades steady but off the highs reached before yesterday’s OPEC+ meeting. The group, as expected, decided to stick to its planned July increase but in weighing up a continued demand growth and uncertainties about an Iran nuclear deal, the group refused to give any hints about their next move. Improved fundamentals in the U.S. oil market have seen WTI reach a 2018 high and being the leader in the current rally. The market will now turn its attention to the weekly stock report, starting with API tonight, and followed the EIA Thursday. Next key levels of resistance being $70 in WTI (psychological) and $72 in Brent (recent highs).
Ten-year Gilt auction in focus as sentiment surrounding the economic recovery continues to improve in the UK (IGLT). Since the end of February, ten-year Gilt yields have been consolidating within a tight range between 0.70% and 0.85%. However, as the economy reopens and the housing market gets increasingly hot, the Bank of England will start to look at paring back stimulus for the economy. That’s why today’s 10-year Gilts auction will provide an insight into investors' appetite for Gilts at current yield levels, which, although quadrupled since the beginning of the year, remain among the lowest ever seen. The debt management office has announced yesterday’s that it will issue 2071 Gilts next week, putting even more pressure on investors’ demand for duration.
What is going on?
The US grain market marked the official start of the 2021 U.S. growing season by surging higher with the Bloomberg Grains index rising 2.4%, thereby retracing more than half the mid-May correction. A combination of strong export sales and a drier trend in parts of the U.S. growing areas is receiving some attention although it is not yet a worry. At least not compared with the water crisis in Brazil where the worst drought in 91 years has sent prices of key crops and coffee soaring. CBOT corn (CORNDEC21) jumped 4.5% followed by a 4% rally in wheat (WHEATDEC21)
A major US meat supplier shutdown by cyber-attack. The world’s largest meat producer, Brazil’s JBS, saw its US operations completely shutdown yesterday in a ransomware cyber-attack. The company is responsible for processing approximately one fourth of US beef and announced this morning that it is reopening the “vast majority” of its facilities. The attack also affected facilities in Australia and Canada and was traced to a Russia-linked hacking group, according to Bloomberg sources. This attack comes less than two weeks before the Biden-Putin summit mid-month.
The May US ISM Manufacturing stronger than expected, but employment sub-index alarmingly low. The headline looked positive in yesterday’s May ISM Manufacturing release, which registered a robust 61.2 versus 61.0 consensus expectations and versus 60.7 in April, with New Orders at a very strong 67.0 and Prices Paid at 88.0 versus 89.5 expected, still showing extreme inflationary pressures. The one significant weak point in the release was an Employment sub-index reading of only 50.9, vs. 54.6 expected and 55.1 in April.
What are we watching next?
A new tone from China in international relations? Yesterday, China’s president Xi Jinping told officials to create a “trustworthy, lovable and respectable” image for the country, a move that suggests a push-back against the more aggressive stance and language in its diplomatic approach that has developed in recent years and as the relationship with the US, among other countries, has deteriorated. More from Bloomberg.
Earnings reports this week. Investors were relieved that Zoom released strong Q1 earnings with EPS at $1.32 vs est. $0.99 and lifting FY guidance on EPS to $4.56-4.61 from previously reported $3.59-3.65. The video conferencing software maker is showing that it can continue to onboard new large clients despite rising competition from Facebook and Microsoft which should give investor confidence in the company’s future prospects.
- Today: Varian Medical Systems, Splunk
- Thursday: Lululemon Athletica, Cooper Cos, Broadcom, Crowdstrike, DocuSign, Slack Technologies
Economic Calendar Highlights for today (times GMT)
- 0830 – UK Apr. Mortgage Approvals
- 1230 – Canada Apr. Building Permits
- 1600 – US Fed’s Harker (non-voter) to speak
- 1800 – US Fed Beige Book
- 2130 – API Weekly report on US oil inventories
- 0130 – Australia Apr. Trade Balance
- 0130 – Australia Apr. Retail Sales
- 0145 – China May Caixin Services PMI
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