Market Quick Take - September 17, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - with Treasury yield volatility grinding to a slow pace in recent trading days and recently good regional manufacturing readings for August, US equities are bouncing slightly off the recent lows. Nasdaq 100 futures are pushing higher in early European trading with this week’s highest print so far at 15,557 in sight.

Hang Seng (HI50.I) - the risk-off move has stopped in today’s session with Hang Seng futures bouncing off yesterday’s lows trading slightly above 24,700. The bounce is coming despite shares in real estate developer Evergrande continuing to fall today, but on the positive side, most other developers saw their shares rise. Yesterday’s close at 24,647 remains the key level to watch going into the weekend.

EURUSD – took a sudden dive yesterday that poked just below the 61.8% Fibonacci retracement of the recent rally at 1.1758 and at the psychologically important 1.1750 level. The action looks heavy as we watch how the weekly close shapes up for the pair, with the risk of a test of the 1.1664 low as long as the price action remains south of 1.1800. US yields are a key coincident indicator, possibly providing more upside pressure on the US dollar if the 10-year benchmark clears 1.38%.

USDCHF and EURCHF – whether due to the pop back higher in EU and US yields or due to the anticipation of more fiscal stimulus in Europe after the German election next weekend, the Swiss franc has sold off sharply, yesterday likewise cleared the recent 1.0900 resistance and the 200-day moving average at the same level. This suggests a sentiment shift on the franc that could deepen in particular on further pressure from rising yields. The next area of interest higher in EURCHF is 1.1000 and 0.9473 in USDCHF.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Bitcoin and Ethereum rolled over yesterday after the latter posted a new local high, still trading in the shadow of the key “comeback levels” of at least 3,800 in Ethereum and 50k in Bitcoin.

Gold (XAUUSD) continues to exhibit a troubling behavior; stabilizing on falling yields, only to slump when they rise a bit. Yesterday was no exception with gold and especially silver getting dumped in response to the strong US retail sales number (see below). Higher yields drove a stronger dollar on speculation stimulus could be reduced soon. Gold dropped below support-turned-resistance at $1780 while silver slumped to $22.60, the August low. A fund manager at BlackRock told Bloomberg he had almost cut his exposure in gold to zero, a move that has been replicated by many in recent months, as they bet on an economic recovery and normalizing real yields. Until data proves otherwise the precious metals market will not be at the top on fund managers' buy list.

Crude Oil (OILUSOCT21 & OILUKNOV21) has paused with Brent so far finding resistance at the July 29 high at $76.15. The energy sector, including natural gas, is heading for its fourth weekly gain and highest weekly close in seven years. Tighter market conditions, led by Hurricane Ida disruptions to crude oil and natural gas production, have triggered fresh breakouts and technical buying from funds. Demand is also improving as the Covid impacts fade once again, a development that led to IEA to forecast surging demand into yearend.

European gas (GASNLBASEOCT21) and power (POWERDEBASECAL22) traded lower yesterday after hitting fresh extremes earlier in the week on concerns about winter gas shortages. Having seen a tripling and a doubling of their respective prices this year, punitively high prices are starting to have an impact with energy-intensive industries showing signs of curbing consumption. Also, the supply side has seen some improvements with gas flows from Norway picking up while stronger winds, forecast for the coming days should boost the share of wind energy in the total electricity demand.

What is going on?

PBOC injects liquidity to relieve Evergrande-linked concerns, adding CNY 90 billion of funds in short term repos, the first injection of liquidity this month that more than CNY 10 billion has been added. Calendar effects could prove an additional concern for the financial system, with end of quarter approaching and a one-week holiday in China early next month.

Strong U.S. data. August retail sales beat expectations, at +0.7% on topline and +2% excluding autos and gas. The strongest increases were in online (+5,3%), furniture (+3,7%) and merchandise (+3,6%). The biggest drops were in autos (-3,6%) and electronics (-3,1%). Despite the renewed spread of the Delta variant, the economy is resilient. The September Philly Fed manufacturing index rose to 30.7 from 19.4, similar to the New York survey. There is some improvement in bottleneck measures too. Finally, jobless claims for the week ending September 11 rose slightly to 332K from prior 310K. But the trend remains down.

ECB President Christine Lagarde delivered a speech at the top French university HEC about the state of the eurozone economy. These are the main highlights: "The recovery in the eurozone is being faster than expected six months ago, mainly due to a rapid vaccination campaign (…) We are back from the brink, but we are not out of the woods yet."

Iron ore is experiencing its longest run of daily losses since 2018 as Chinese steel production remains under pressure, dropping to a 17-month low in August, due to the governments clamp down on highly polluting industries but also signs of weakening activity in the property sector. Being a key input to the production of steel, iron ore futures in Singapore has now more than halved since hitting a record in May with the most active contract SCOV1 getting close to single digits after almost losing another 5% overnight.

US Treasuries fell amid stronger than expected retail sales, investors’ focus shifts towards today’s University of Michigan inflation survey (IEF, TLT). Retail sales surprised on the upside, putting in doubt the Federal Reserve’s tapering agenda, once again. Today’s University of Michigan inflation survey might add to investors’ worries if respondents indicate that inflation might be stickier than expected. We expect yields to remain rangebound between 1.26% to 1.35% until next week FOMC meeting, leaving the bond market vulnerable to a taper surprise.

What are we watching next?

Watching US Sep. University of Michigan survey ahead of Wednesday’s FOMC meeting – yesterday's US Aug. Retail Sales number came in more strongly than expected, a rather impressive performance given the “fiscal cliff” since the last stimulus check back in March and the prospects for many of losing their pandemic-related benefits in early September. Today we get a look at the preliminary September University of Michigan sentiment survey which has been interesting as the August number fell to the lowest level in years and below the worst levels during the pandemic outbreak (was this due to the US Afghanistan exit debacle, delta outbreak?). Our special focus this month is on the inflation expectations component, which is a part of the Fed’s survey on inflation expectations and could influence whether the Fed proves more hawkish than expected at next Wednesday’s FOMC meeting, which is our base case. In August, this rose back to 2.9% for the 5-10 year expectations, just 0.1% shy of the more than decade high of 3.0%.

Economic calendar highlights for today (times GMT)

• 0800 – ECB's Hernandez de Cos to speak
• 0900 – Euro Zone Final Aug. CPI
• 1400 – US Sep. Preliminary University of Michigan Sentiment & Inflation Expectations

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