Market Quick Take - September 15, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - despite a victory for investors believing in transitory inflation yesterday denting the US 10-year yield, Nasdaq 100 futures are not very bid this morning in early trading. This suggests that sentiment overall is weakening and investors are worried about China, global growth, and rising commodity prices which are soon hitting an all-time high. Nasdaq 100 futures are trading around the 15,400 level this morning, but if risk-off kicks in again the next support level is at 15,266.

Hang Seng (HI50.I) - today’s macro figures from China, the news that Evergrande will not pay interest due 20 September, and the ongoing technology crackdown, are driving Hang Seng futures down 1.5% trading just above the 25,000 level. The next big support level is around 24,682 seen as pivotal for the rebound in August.

EURUSD – EURUSD trader might have been surprised at the reaction to the US CPI release, which came in lower than expected and saw US treasuries rally – EURUSD tried to rally back toward 1.1850, but surrendered the day’s gains and rolled back over toward 1.1800, a choppy performance that represents the third day in a row of intraday moves finding rejection in a market lacking conviction. Given the important of yesterday’s US data, this move may carry more weight in terms of sentiment and suggests the risk of a probe of the 1.1770 area lows, a break of which could open for a run to the range lows below 1.1700.

GBPJPY – yesterday looked like a potential key reversal day for many FX pairs aligned along the axis of risk, especially JPY pairs that are sensitive to US long treasury yields. With the release of the lower-than-expected US CPI data and rally in US treasuries, the JPY strengthened and GBPJPY reversed back hard to the downside after attempting an upside break above 152.65. Now the focus shifts to the 200-day moving average near 149.50, which is also close to the neckline of a well-defined head and shoulders formation.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Bitcoin and Ethereum are trading near the highs for the last week but need to show further gains to dig the price action out of the shadow of last week’s sell-off, arguably starting with a move back above 50k for Bitcoin and perhaps 3,800 for Ethereum.

Gold (XAUUSD) trades above $1800 in response to lower Treasury yields after the US CPI print turned out to be lower than expected (see below). The FOMC meets next week with the market still expecting the bank could start tapering towards yearend. Gold’s inability to find a path higher despite the tailwind from sub –1% real yields have left potential buyers sidelined waiting for a change in the macroeconomic outlook or a break above key resistance at $1835. With silver (XAGUSD) underperforming again, and with platinum’s (XPTUSD) discount surging to 870 dollars following a near 10% drop, the prospect for gold to shine seems limited at this stage.

Crude Oil (OILUSOCT21 & OILUKNOV21) trades near a six-week high with the API reporting an across-the-board reduction in crude and fuel stocks last week, as post-hurricane Ida disruptions continue to impact production and refinery activity. China’s latest attempt to curb prices by releasing 7.4m barrels of crude oil into the market on September 24 was shrugged off as small change, given the +30m barrels cut from temporary US production disruptions. However, the lack of fresh momentum following the break higher could indicate traders are in no rush to enter the market at current levels. Focus on today’s EIA report with next resistance level in Brent at $76.15/b.

US Treasuries rally amid US CPI miss, yields might fall further amid retail sales drop on Thursday (IEF, TLT). The yield curve bull flattened with the 5s30s falling below 106 bps, a level previously seen almost a year ago. Ten-year yields fell as much as 6.4bps, while 30-year TIPS touched -0.40% a level previously seen in September 2020. Bullish sentiment was spurred by expectations the Federal Reserve will not taper until the November FOMC meeting. Also, strong demand for US Treasuries keeps yields compressed as this week coupon supply lacking, resuming only next week with the 20-year auction. Despite retail are expected to show another drop on Thursday, we don’t expect yields to drop below 1.20%. It is more likely that the 10-year remain rangebound between 1.25% and 1.35% until next week’s FOMC meeting.

European bond yields drop amid falling US Treasury yields (VGEA, BTP10, IS0L). Heavy bond supply led yield curves to steepen yesterday morning, but a strong 30-year BTPS auction caused yields to reverse their gains. The drop in yields in the euro area accelerated as yields began to drop in the US following the CPI miss. We can conclude that the dovish-taper delivered by the ECB last week was successful in limiting hawkish speculations, therefore sovereign bonds with a high beta benefit the most. Additionally, the correlation between Bund and US Treasuries continues to be a prevalent theme.

Gilts look vulnerable as inflation rises at the strongest pace in more than nine years (IGLT, GILS). UK inflation data this morning might turn the Bank of England hawkish at next week's monetary policy meeting. Yearly CPI rose 3.2% in the UK versus 2.9% expected, the highest pace in more than nine years. The MPC is already divided regarding whether the economy has reached economic conditions that warrant more aggressive policies, and this week strong jobs data and inflation numbers might lead the BOE to consider less accommodative policies. Within this context, ten-year Gilts trading at 0.74% look mispriced, and we expect them to rise above 0.80% ahead of the BOE next week.

What is going on?

U.S. August CPI lower than expected, but still uncomfortably high. CPI was out at 5.3% y/y versus prior 5.4% y/y. Excluding food and energy it was down more than expected at 4.0% y/y versus 4.2% y/y. The cost of used cars, which has attracted a lot of market attention in recent months, was down 1.5% m/m. It is too early to know whether this is a win for the transitory camp, in our view. Increased travel caution due to Covid-19 partially explains the slowdown in inflation (airline fare -9.1% m/m and car rental -8.5% m/m, for instance). The cost of living remains high. There are still a lot of concerns regarding transportation costs. And wage inflation is on the rise. In some U.S. states, McDonald’s proposes a minimum wage of $18 per hour versus a federal minimum wage of $7.25 per hour. This is something to monitor closely.

China’s Xi Jinping declined summit proposal from US President Biden - that was floated during a 90-minute phone call between the two leaders last week. Observers note that Xi Jinping has not left China for more than 600 days, the longest stint of any G20 leader.

China retail sales disappoints in August. Retail sales in the world’s second largest economy came in at 2.5% y/y vs est. 7.0% y/y as mobility restrictions related to outbreaks of Covid-19 impacted consumer sentiment more than expected. Construction spending for the first eight months of the year showed a contraction which is related to both Evergrande and also the government’s wish to curb leverage in the system.

China instructs banks that Evergrande will not pay interest due 20 September. Despite this announcement, Evergrande shares are down only 3% in today’s Hong Kong session. With this news the restructuring process of Evergrande has begun. The crisis around Evergrande has caused the Chinese real estate market to slow down with home sales turning negative y/y in August which puts pressure on banks and credit formation in the Chinese economy. A spokesperson for the National Bureau of Statistics said today that other real estate developers are experiencing some level of stress and that the government is monitoring the situation.

Inditex reports 1H earnings. Revenue for the first six months (ending 31 July) of the fiscal year was €11.9bn up 49% y/y and in line with estimates and EBIT at €1.7bn was also in line with estimates. However, online sales grew only 36% driven of course by the huge pickup in stores reopening after the pandemic but some investors would like to see online sales growth to be above the overall sales growth to firmly believe in the transformation towards a more digital fashion brand.

What are we watching next?

Risk sentiment for US equities into this Friday’s options expiry – the sell-off in US equities over the six sessions has been of a different nature than the monthly dips of the past four months, each of which was short and sharp and appeared related, in terms of timing, with the expiry of options on S&P stocks on the third Friday of the month (for this month, the options expiry this Friday is for futures and single stocks as well). This sell-off has been more of a grinding affair, with yesterday’s close near an important trend-line in the S&P 500. It will be interesting to see if the market has proven too complacent if this trend-line breaks and if options-related leverage generates volatility as Friday’s expiration approaches.

Economic calendar highlights for today (times GMT)

• 0900 – Euro Zone Jul. Industrial Production
• 1230 – ECB’s Schnabel to speak
• 1230 – US Sep. Empire Manufacturing
• 1230 – US Aug. Import Price Index
• 1230 – Canada Aug. CPI
• 1300 – Canada Aug. Existing Home Sales
• 1315 – US Aug. Industrial Production / Capacity Utilization
• 1430 – EIA's Weekly Petroleum Status Report
• 1500 – ECB's Lane to speak
• 2245 – New Zealand Q2 GDP
• 2350 – Japan Aug. Trade Balance
• 0130 – Australia RBA Bulleting
• 0130 – Australia Aug. Unemployment Rate / Employment Change

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