Summary: Equities have pulled sharply higher in the wake of fresh comments from Fed Chair Powell yesterday on his view that the inflation spike will prove transitory. This reassurance helped take some more of the sting out of the reaction to the hawkish perceived shift at the FOMC meeting last week. Elsewhere, oil prices are pushing on the cycle highs as the US shale production comeback seen too weak to interfere with the ability of OPEC to manage prices.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – VIX is down below 17 on the close yesterday and US 10-year yield is stabilizing below 1.5% underpinning a more confidence in equities taking Nasdaq 100 futures to an all-time-high on the close yesterday. Nasdaq 100 futures are extending the rally this morning in early European trading touching the 14,300 level. The broader US equity market measured by S&P 500 futures are also pushing into the highs back from 15 June.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Cryptocurrencies survived a test of critical cycle support yesterday, after Bitcoin dipped well below 30,000 and Ethereum dipped very briefly under the prior major low from May of 1,732 before bouncing. Some of the negative attention on the space has been down to Chinese official pressure on Bitcoin mining and usage in the Chinese financial system, with yesterday’s comeback providing a fresh pivotal level of support that will be important to maintain for the bulls.
EURUSD and GBPUSD – the EURUSD bounce continues to look modest as the growing theme of tightening central banks globally sees little anticipation that the ECB is about to send any strong message on that front. The 1.2000 level is key psychological resistance for that pair, while 1.2100 or higher would be needed to begin suggesting a reversal of the recent sell-off wave. GBPUSD, meanwhile, is also about the Bank of England meeting tomorrow, where the market is leaning toward the hawkish side on the potential for guidance indicating a tapering of asset purchases. 1.4000 is the key resistance there.
JPY pairs – the key USDJPY rate has crept back close to the 111.00 resistance and currencies positively correlated with risk had a strong session yesterday on the theme of normalizing of rates as many economies emerge from the pandemic. JPY crosses were the biggest movers yesterday, with EURJPY having bounced to over 132.00 this morning from the low near 130.00 on Monday morning as risk sentiment has rebounded strongly and safe haven yields have risen.
Crude oil futures remain bid with Brent holding above $75 and WTI above $73 after an industry report pointed to another decline in US crude stocks. More importantly, the API also saw another big stock draw at Cushing, the massive storage hub where WTI futures contracts are exchanged for physical oil. Strong Midwest refinery demand and a slow recovery in US shale production has left Cushing stocks trailing their five-year average. Besides today’s EIA report, the market will increasingly be focusing on next week's OPEC+ meeting and through their actions see whether the group is seeking higher prices or stability at current levels, which are more than 20% above the five-year average.
Copper (COPPERUSSEP21) has bounced after correcting 38.2% of the October to May rally. This in response to improved risk sentiment following Fed Chair Powells comments (see below), and after China in their first release from state stockpiles only made 20,000 tons available. The response by the market may trigger even bigger future releases, but for now the market has stabilized following a 16% correction from the May peak. Investor involvement remains important at this stage where copper has been supported by risk appetite more than fundamentals, which are yet to show a price supportive mismatch between supply and demand.
Today’s 5-year US Treasury auction will test market appetite following Powell confusing remarks in front of Congress (SHY, IEF, TLT). Although the Fed Chair said that the central bank is nowhere near hiking interest rates, he sounded uncertain regarding the transitory nature of inflation. Thus, the belly of the curve remains vulnerable and today and tomorrow’s 5- and 7-year auctions might be catalyst for more volatility ahead of the personal consumption expenditure numbers. We expect demand to be weak considering yesterday’s average 2-year US Treasury auction which has seen the yield tailing 0.05bps despite liquidity in front part of the yield curve remains high.
What is going on?
Fresh Fed chatter on guidance: US Fed Chair Powell helps offer market reassurance with comments that offered no surprises, as he said the recent inflationary spike has been a surprise, but is something he sees likely will fade. The Fed Chair also said that the Fed will be patient before considering hiking rates. Pricing for a late 2022 Fed rate hike dropped a couple of basis points. Perhaps more interesting were comments from the San Francisco Fed’s Mary Daly, who said that the shift to greener technology could impact jobs and prices and that climate risks could lower the neutral rate. This could be a strengthening theme going forward – lower growth and higher prices (a kind of stagflation) as a results of the green agenda.
Hungary’s central bank hikes rates 30 bps as the consensus expected, but with guidance surprisingly hawkish, in that the central bank said that it will likely tighten further on a monthly basis. This helped EURHUF drop sharply from the 356.00 area highs of yesterday to just above 350.0 this morning. For the front end of the Hungarian yield curve, it appears the market was less surprised, with 2-year rates not shifting notably in the wake of the decision. The hike was a first in over ten years.
Median US Existing Home Price rose 24% year-on-year in May to above $350,000 for the first time and the largest year-on-year increase since the National Association of Realtors began tracking prices in 1999. Low supply of homes for sale is a key factor driving prices higher, as the survey showed that typical homes for sale only spent 17 days on the market.
What are we watching next?
Earnings this week. Today the earnings focus is on IHS Markit, the financial information company and behind many key benchmark indices on the economy and credit, with analysts expecting 11% y/y revenue growth. The company was hit a bit during the pandemic but resumed growth in the previous quarter. IHS Markit reports before the US equity market open. In Europe this morning Pernod Ricard is raising its fiscal year organic profit growth rate to 16% y/y.
Czech central bank to follow in Hungary’s footsteps today? The Czech central bank meets today and will likely hike rates by 25 basis points to a policy rate of 0.50% to become the second bank in the EU to hike rates after Hungary yesterday. Inflation has risen to the top of the “tolerance range” of 1-3%. Guidance on future hikes will be the chief driver of any notable moves in the Czech koruna, which had strengthened to a new post-pandemic breakout low below 25.50 in EURCZK before that pair rose sharply in the wake of the FOMC meeting last week.
Economic Calendar Highlights for today (times GMT)
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