Summary: US indices closed last week near the all-time highs, with Europe poised not far from cycle highs as well as we watch this week whether a solid uptick in US treasury yields on Friday develops into a more significant move after a long period of long yields providing little more than background noise. The macro data focus for the week will be US June payrolls data out on Friday ahead of a long holiday weekend.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities ended last week on a quiet note following a strong rally and new all-time highs. This morning in Europe, Nasdaq 100 futures are unchanged and boxed into a small intraday trading range. Friday’s close at 14,339 is the natural initial support level in Nasdaq 100 futures with the next level at 14,313. On the upside, the first resistance level for Nasdaq 100 futures is at 14,367.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). The cryptocurrency space is dodging a string of negative headlines, for example, the Binance crypto exchange being banned in the UK and a Fed official saying that the stablecoin Tether is a financial stability risk. After poking toward support into trading at the weekend, Bitcoin and Ethereum have lifted well away from the lows, with Bitcoin bouncing as high as 35k this morning and Ethereum having a go at 2,000.
EURUSD – spent all of last week in a very compressed range after the FOMC meeting the week before last triggered a sharp sell-off. Technically, this supermajor of currency pairs is in a limbo as traders watch whether the price action will complete the right “shoulder” of a head-and-shoulders like formation with a neckline just below 1.1800, or reject the sell-off with a steep rally back above 1.2100. Key macro data this week includes June flash inflation data from Germany and the EU and payrolls data from the US (the ADP private payrolls on Wednesday and Nonfarm payrolls on Friday.)
JPY crosses – the Japanese yen is at a crossroads here after coming nearly full circle in the wake of the FOMC meeting that first saw it stronger as US treasury yields at the long end of the curve fell, and then weakened again when that development was reversed. This, despite inflation levels in Japan showing that real yields there are quite stable near 0%, compared with steeply negative real yields in the US due to the spike in inflation. USDJPY managed a modest new high late last week above 111.00 but failed to maintain and the focus there is on the rising channel that has supported the price action since April, with current support near 110.00.
Crude oil (OILUSAUG21 & OILUKAUG21) trades steady near the highest since 2018 with market participants expecting OPEC+ will keep supplies tight enough to support current levels. The group meets on Thursday to decide production levels from August and beyond, and the market is currently pricing in an increase of 500,000 barrels per day. With virus uncertainties due to the highly contagious delta strain (see below) and questions about an Iran nuclear deal hanging over the market, the group may opt for caution, hence the current price strength. Brent support at $74.5 while it would need to break below $72 before signaling risk of a deeper correction.
Gold continues to consolidate below $1800 with a break above $1820 probably needed to attract short-covering and fresh buying interest. Before then the market remains focused on the dollar and its recent price adverse strength and whether inflation is indeed transitory, as signaled by central banks, or becoming more entrenched. Many speculators threw in the towel following the hawkish FOMC meeting on June 16 with the latest COT report showing a 33% reduction in bullish gold bets to a seven-week low. Driven by a combination of long liquidation and rising short-selling interest.
US Treasury yields struggle for direction ahead of the nonfarm payrolls (SHY:xnas, TLT:xnas, IEF:xnas). Hawks will be looking for signs that inflation is not as transitory as the Federal Reserve says. Economists forecast that wages have risen 3.6% YoY, the highest in 12 years showing that inflation might be persistent. If wages surprise on the upside, yields could resume their rise, but will not break above 1.7%. We expect yields to break above this level only once tapering talks accelerate and interest rate hikes are pushed forward. If we see a jobs miss, there is also the possibility that yields fall back below 1.50%. However, we still believe that in the second half of the year the yield curve is meat to shift higher amid more aggressive monetary policies.
European sovereign yields rise amid long-term bond supply concerns (VGEA, BTP10). On Friday, news about long-term government bond issuance from Italy, France and Spain caused a selloff within European government bonds. This week’s CPI report might also provoke volatility, but we expect it to be contained. To see European yields higher we will need to see yields increasing and the European Central Bank being less accommodative. Both are unlikely now, suggesting that European government bond yields will most likely trade rangebound until the German election.
What is going on?
Australia races to get ahead of new Covid outbreaks of the Delta variant that is far more contagious than previous strains and is the driver of fresh outbreak concerns globally. An outbreak in Sydney has found 130 cases and the virus has been found elsewhere, while the vaccination level in Australia is extremely low at under 15%.
Bets on rising commodities prices were cut by 6% in the aftermath of the hawkish FOMC meeting on June 16 which triggered a stronger dollar and lower inflation expectations. According to the latest Commitments of Traders report covering the week to June 22, speculators made big cuts in their gold, silver and platinum exposures, as well as agriculture products such as soybeans, bean oil and sugar. Crude oil meanwhile was almost left unscathed with current fundamentals not warranting any major reductions. In forex futures the stronger dollar helped trigger a 31% reduction in bearish dollar bets to a seven-week low at $13 billion.
What are we watching next?
Flash June CPI out of Germany tomorrow and EU on Wednesday. Inflation data bears watching for any surprises after German headline inflation number of 2.5% year-on-year in May matched the highest levels since the oil price spike in 2008 and after the last six months of month-on-month readings showing inflation running at greater than 7%, annualized. The Euro Zone CPI number is running a bit cooler, not quite reaching its 2018 high with a 2.0% YoY reading in May and expected to dip to 1.9% in June, while the core CPI is expected at 0.9% YoY after 1.0% in May.
In Sweden, Prime Minister Löfven as until midnight tonight to put together a new government coalition or he will have to allow the opposition to form a coalition or call snap elections. The Swedish krona has not been particularly volatile after Löfven lost a confidence vote as political polls suggest low prospects that elections would bring any notable shift in government policy as the blocs remain evenly matched.
Earnings to watch this week. This week’s most important earnings come from Micron Technology on Wednesday which is one of the world’s largest makers of computer memory chips and data storage. Analysts expect Micron Technology to deliver 32% growth on revenue. On Thursday, H&M will report FY21 Q2 earnings which will show how profitability is progressing. Nike showed last week that retailers have reduced inventories and stopped promotions, so our expectation is that H&M will show the same trend.
Economic Calendar Highlights for today (times GMT)
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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.
