Summary: Sentiment is mixed overnight in Asia, as China is trading higher, while Japanese equities were in for rough sledding after a weak session for US equities yesterday. US treasury yields rose yesterday, but the relative move higher in European sovereign bond yields was more notable, with the German Bund yield approaching its highest level in months ahead of the ECB meeting on Thursday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities dropped yesterday, perhaps in part on a fresh rise in treasury yields at the long end of the US yield curve, although we are still far from the cycle high in yields. Key companies will report earnings for the next couple of weeks in the heart of earnings season, including Netflix later today. Short term momentum indicators have rolled over for the Nasdaq 100, where there is considerable room for consolidating some more withouth threatening the recent rally wave, starting perhaps with the 13,500 area. The S&P 500 has already bounced back overnight and only looks a bit tired from a momentum perspective, after a remarkably stretched run higher.
STOXX 50 (EU.I) - STOXX 50 futures dropped yesterday failing to push through the 4,000 level and they are opening lower again today. If STOXX 50 futures fail to close above yesterday’s close, then the technical setup could be a catalyst for a short-term selloff back to the previous consolidation area around 3,925.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin is struggling to feel out a support level centered around 55k after the rather traumatic sell-off at the weekend, while the price action in Ethereum is showing that coin having a harder time finding a support level, with 2,000 an obviously important chart point. The attention on DogeCoin and its recent sharp outperformace is driving considerable distraction in the crypto space.
EURUSD and AUDUSD – the USD burst lower yesterday, taking out 1.2000 in EURUSD without ever really looking back and that pair traded above 1.2050 overnight, with the next major chart resistance at 1.2100 (61.8% Fibo retracement) but not really until the 1.2350 area top. A sharp rise in EU yields yesterday ahead of the Thursday ECB meeting suggests rising sentiment on growth. And the USD is weak across the board, as AUDUSD also continued sharply higher overnight and is poking at the 0.7800 area, with 0.7826 (61.8% Fibo retracement) the last major resistance ahead of the 0.8000+ top. Fresh rises in industrial metals and a recovery in Chinese sentiment have helped stoke the Aussie rise.
GBPUSD – Cable has reattained the 1.4000 level overnight, a major milestone that suggests the top at 1.4237 is the next objective. And sterling has outperformed a strongly resurging euro. Previously, GBPUSD only survived five sessions above 1.4000 before dropping back below and then finding that the big round level continued to provide resistance, underlining the importance of the level.
Gold (XAUUSD) found support at the key resistance-turned-support area at $1760-65/oz overnight, and while the weaker Greenback offered support an abrupt turnaround in bond yields saw gold waver. Despite the much-improved technical picture, it may still struggle unless supported by stable to lower bond yields. Ahead of next week’s FOMC meeting the market will continue to focus on dollar and yields as well as geopolitical developments. Resistance at $1790, $1800 and $1818.
Crude oil futures (OILUKJUN21 & OILUSMAY21) traded higher in Asia supported by a weaker dollar and after China kept is lending rates steady, thereby easing concerns over possible policy tightening. WTI trades $64, some 104 dollars above the level it crashed to on this day last year when global lockdowns and Saudi production hike overwhelmed the global oil market. With global virus cases hitting new records, the prospect for a sustained rally at this stage seems limited, and with this in mind, we see the upside potential in Brent crude limited to $70/b until vaccine rollouts significantly changes the demand dynamics.
Selloff in European sovereign bonds drags US Treasuries with them (IEF, TLT, BTP10, IS0P). The improving European economic outlook might mean higher inflation, and higher European sovereign yields. Strategists from the street highlight there is a risk on Thursday that the ECB will disappoint because the central bank might not be as committed to keeping bond yields in check in light of the improving economic backdrop. We believe that despite the bloc is heading towards recovery, there is yet no sign of a significant pick up of inflation expectations. Hence, the ECB will need to reiterate its message of unconditional support to keep financial conditions easy, and bond yields in check.
What is going on?
The CDU has chosen Armin Laschet as the candidate to lead the party, which means he will likely be the candidate to replace Merkel as German Chancellor in elections in late September, although he must also win approval of the CDU’s Bavarian sister party, the CSU, whose leader Markus Söder is very popular. Laschet polls poorly but received only 9 of the 46 votes in the CDU poll, with 31 going to Laschet. The German green party yesterday nominated one of its leaders, Annalena Baerbock as its candidate for the election.
Chinese President Xi Jinping speaks against US approach, calls for closer global economic integration in a speech at the Boao forum in Asia. Xi criticized countries “imposing their rules” on others and “bossing others around or meddling in others’ internal affairs”, clear references to the shift in US policy in recent years. The Boao conference was held in Hainan, China with global leaders and UN and IMF officials tuning in via video link.
U.S. grain prices remain bid on a combination of weather and strong overseas demand. US corn futures (CORNJUL21) already supported by strong China-led demand trade near an 8-year high in response to forecasts for frosty U.S. weather and a slower planting pace. Soybeans (SOYBEANJUL21) generally planted a bit later also trading higher to reach a 7-year high. We are into the important planting season in the U.S. and weekly planting progress reports, released on Mondays at 20:00 GMT will be watched closely over the next weeks.
Canada budget includes new spending, taxes. Besides heavy new spending of more than C$100B for the recovery, a number of taxes are in the deal, including a 1% tax on real estate owned by foreigners if the property is left vacant, and a tax of 3% of revenues on “digital services” (aimed at US info-tech giants) that would go into effect on January 1, 2022 “until an acceptable multilateral approach comes into effect”. On that last note, US Treasury Secretary Yellen’s recent global minimum tax proposal is likely the kind of international framework that could avoid such a tax.
What are we watching next?
Derek Chauvin trial in US and risk of protests - tough to quantify this, but this closely watched trial of the police officer Chauvin accused of murdering George Floyd could set off public unrest in the US depending on the verdict and sentencing (whether Chauvin is charged of manslaughter or murder, for example and the length of any jail-time). Jury deliberations are set to begin today.
ECB meeting Thursday – looks particularly pivotal as key EU sovereign yields are poking at cycle highs, and given the strength of the global recovery, also for the EU’s manufacturing sector, and eventually adding to that the services rebound for Europe once the vaccination roll-out is more advanced, makes selling a dovish message increasingly difficult.
Earnings reports this week. IBM shares were up 3% in extended trading as Q1 operating earnings solidly beat estimates and the cloud business showing healthy growth rate at 21% y/y. Coca-Cola earnings were not impressive although revenue was better than expected saying that the commodity environment to stay challenging for the next 12-18 months.
Economic Calendar Highlights for today (times GMT)
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