Summary: Global equity markets posted an indifferent session yesterday and overnight as the market looks forward to the Thursday ECB meeting and US CPI release while earnings reports are at a low ebb. One of the few places there has been some measure of drama over the last 24 hours is in cryptocurrencies, where Bitcoin is trading below its lowest daily close since January, eyeing the key 30,000 support level if the selling continues.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – growth pockets in US equities were lifted yesterday on the Biogen news that the biotechnology giant got its FDA approval for its Alzheimer drug – first commercially approved drug for this disease in history. Nasdaq 100 rallied past 13,800 and has extended momentum in early European trading hours. US 10-year yield getting close to break below the 155 bps. level is also helping growth stocks in the short-term.
Euro STOXX 50 (EU50.I) - STOXX 50 futures finally broke through the 4,100 level yesterday and closed just below. This level is the new anchor for European equities. The value vs growth trade and inflationary pressures lifting cyclical industries such as energy and mining companies are lifting European equities vs US equities. The reopening of the European economies is also still on track for this summer saving the holiday season for the peripheral Europe.
Biogen (BIIB:xnas) - share prices rose over 38% yesterday as the US Food and Drug Administration approved the company’s Alzheimer drug, a controversial move after the drug seemed to have failed two large clinical trials, although it was proven to remove amyloud, a protein associated with neurological decline, and that motivated the FDA’s approval. The company plans to charge $56,000 per year for treatment with the drug, to be called Aduhelm.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin and most cryptocurrencies are suffering a new bout of weakness, with Bitcoin now trading below its lowest daily close since January, with the next key focus the intraday low during the intense sell-off episode in May at 30,0000, while Ethereum is farther from its lows during that sell-off, although it has tumbled far away from the 3,000 resistance – next level of note is 2,000, which it managed to avoid closing below during the May sell-off. One prominent story hitting the crypto market is that US authorities have succeeded in recovering most of the Bitcoin used to pay for the ransomware attack on a major US gasoline pipeline.
USDJPY – US treasuries continue to trade at yields near the lows for the recent cycle in the wake of the disappointing US May nonfarm payrolls change data reported Friday, a development that sent USDJPY tumbling back lower after breaking above 110.00. USDJPY is still trading in a rising channel supported approximately by the 109.00 level and the next key event risk is the Thursday US May CPI release - will markets sell US dollars on a hot number on the declining real value of the US dollar (compared to the JPY in particularly as inflation in Japan remains nonexistent) or buy US assuming that it is bringing forward a Fed guidance shift as soon as the June 16 FOMC meeting next week?
EURNOK – EURNOK is looking heavy again as crude oil prices remain elevated and risk sentiment has never really blinked in Europe. With the opening up across Europe and outlook turning higher for the region and for oil demand in coming months, especially as further EU pandemic spending is set to boost demand in the second half of this year, the backdrop looks positive for NOK to continue rallying as the Norges Bank looks to be the second bank in Europe to raise rates later this year (after Hungary which has essentially pre-declared a rate hike later this month). EURNOK may finally be ready to have a solid go at breaking down and maintaining below 10.00.
Crude oil futures trade lower with WTI (OILUSJUL21) trading back below $69 after briefly touching $70 on Monday. While the news flow remains overwhelmingly positive, the question is how much has already been baked into the price by now. Apart from light profit taking, the price has drifted lower in response to slowing Chinese crude oil imports while also watching any progress between Iran and world powers to revive a nuclear deal. Focus today being EIA’s monthly STEO and weekly stock report from the API. Having found resistance at $70, WTI may look for support towards $66.9 followed by $66.
Gold (XAUUSD) trading near $1900 and it has raised the question of whether last week's shallow 60-dollar correction following a 240-dollar rally was enough to attract fresh buying. However, having lost momentum, but at the same bouncing well ahead of key support at $1842 could indicate a period of consolidation with a break above $1917 needed to attract fresh ‘buy-into-strength' flows. Focus on Thursday’s US CPI data with both the dollar and Treasuries showing signs of pausing ahead.
Today’s Eurozone Gross Domestic Product and Germany 7-year Bund auction might push the belly of yield curve higher (VGEA, IS0L). If the euro area GDP surprises on the upside or bidding metrics at today’s 7-year Bund auction are weak, we might see the belly of the curve underperforming other maturities. Yet, any move will be contained as we need inflationary expectations or yields in the US to rise in order to set direction in Europe, too. The recent increase in European yields has outpaced the pick-up in EUR 10-year swap indicating that rates might be ahead of themselves in terms of tapering fears. Thus, although the long-term trend is for yield to rise, in the short term there could be some limited upside.
Today's US Treasury 3-year auction will show whether money markets demand is spilling to longer maturities (SHY). Following the recent surge in the Fed’s RRP usage, demand for US Treasuries has increased. We have seen a pick-up in demand during the recent 5- and 7-years US Treasury auctions suggesting that investors which are normally invested in the money market space are putting money at work in longer maturities. That’s why we expect strong bidding metrics at today’s 3-year auction, which will pave the way for a solid 10-year Bond sales and 30-year bonds sale tomorrow and Thursday.
What is going on?
Use of the US Fed’s reverse repo facility rose to a record of over $486 billion yesterday - indicating a strong demand for treasuries due to excess liquidity in the US banking system. The use of the facility could spike further into quarter-end as large US banks seek to reduce their balance sheets to avoid regulatory penalties. The excess liquidity in the US is likely suppressing US treasury yields and could continue to do so, although two key dates to watch for from here are whether we are reaching an inflection point soon – first with the arrival of a new quarter on July 1 and then the critical August 1 date, at which point the Treasury will stop drawing down its account at the Fed (its stated goal is to reduce the account to $500 billion by August 1 – currently the level is $800 billion, versus over $1.6 trillion in February.
Efforts in both Chile and Peru, the world’s two biggest copper producers, to secure more of the mining windfall to address inequalities have recently raised concerns that it would reduce producer's ability to increase production enough to meet surging copper demand. This in response to an increased focus on so-called ‘green’ metals as government around the world focuses on the transition away from fossil fuels. However, instead of going straight towards voting on a new tax system, the government has instead called for a broad discussion. A development that will be watched closely in Peru where the result Sunday’s election is still too close to call.
What are we watching next?
EU and UK set for a showdown over Northern Ireland trade issues? The EU is accusing the UK of not living up to agreements for post-Brexit customs agreements in Northern Ireland, where there have been at times violent protests against the border checks and customs red tape. The EU is threatening retaliatory sanctions against UK behaviour, according to an EU official cited in a Bloomberg article. Souring relations are coming at a difficult time for the UK, which is set to host the G-7 summit this weekend.
Earnings reports this week. The quietest earnings week since early March with only one company worth paying attention to this week and that is Inditex (the parent company of the Zara fashion retailer). The Spanish fashion retailer had already been under pressure before the pandemic due to less investments in e-commerce. The focus tomorrow will be on the e-commerce business and whether Inditex is making enough progress.
Economic Calendar Highlights for today (times GMT)
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