Summary: Asian equities suffered a complete rout overnight, led by what can arguably be dubbed a crash in Taiwan on reports of forced selling and option expiry. The Japanese Nikkei 225 also suffered a deep sell-off that has taken that average below major support. Other markets are showing far less volatility, particularly foreign exchange, although the recent breakout lower in the US dollar is threatening a reversal after the action overnight.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – The US equity market suffered a deep extension of the sell-off, but found strong support on the open of the cash session and managed to erase almost all the day’s losses in the case of the Nasdaq 100, while the S&P 500 index still closed down 0.9% on the day, the action overnight was dragged back lower by a very weak session in Asia. Key levels look like the 4,100 area in the S&P 500, followed by the 4,000 level. Resistance is now perhaps the 21-day moving average near 4,166. For the Nasdaq 100, the next focus point lower if yesterday’s low of 13,065 doesn’t hold is the 61.8% retracement of the rally off the March lows near 12,912, the last notable level ahead of the 200-day moving average, currently at 12,445, and that March pivot low at 12,200. Resistance at yesterday’s high near 13,375.
Euro STOXX 50 (EU50.I) - third straight session of selling in STOXX 50 futures continuing the risk-off mood as the market’s voting machine is slowly tilting more and more in favour in higher and sustained inflation than the transitory narrative by central banks. The range 3,882 to 3,889 is the key support area and if broken to the downside could set in motion a 5% correction in European equities.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin has pulled itself off the mat again, reversing the sell-off that never took it out of the local range and pulling back higher toward the pesky 59k+ area resistance that has held the bulls back for more than two weeks. Ethereum, meanwhile, has dusted itself off after the bout of two-way volatility and has ripped to new record highs overnight above 4,300.
USDCAD and CAD crosses – the recent CAD rally has been one of the most powerful developments in the G10 FX space and has clearly outrun basic fundamentals like yield spreads (the 2-year spread is lower from April highs, but no lower than it was in March when USDCAD was trading 1.24-1.25.) even if the clear motivator for CAD buyers was the Bank of Canada decision to taper asset purchases at the April 21 meeting. Bank of Canada governor Macklem is out speaking tomorrow, a possible chance for him to express some concern at the recent nearly vertical ascent of the nation’s currency that could trigger a correction to the downside for CAD and see USDCAD consolidate back toward perhaps 1.2300.
EURUSD and AUDUSD – watching the US dollar closely here as the combination of higher US long yields and very wobbly risk sentiment are creating headwinds for the USD bears, headwinds that could grow if other indicators of financial conditions also begin deteriorating (credit, etc.). The recent AUDUSD breakout higher is already in some trouble overnight on the rocky Asian session, as it traded back below 0.7800. A further correction there below perhaps 0.7750 puts the chart back in limbo and is arguably tactically bearish. EURUSD is treading water after its move higher in the wake of Friday’s negative US payrolls surprise and would need to punch below perhaps 1.2050 to show a tactical breakdown.
Crude oil (OILUKJUL21 & OILUSJUN21) has struggled to keep up with the blistering pace of other commodities this week. This on a combination of reduced risk appetite spilling over from the equity market slide, the negative demand impact of the coronavirus flaring up across Asia and the Colonial Pipeline on the U.S. east coast cutting supplies of gasoline, thereby forcing refineries to reduce run rates, cutting oil demand. A bigger-than-expected cut in crude stocks was offset by a big increase in gasoline stocks (API). In Brent, the prompt spread has dropped to just 17 cents/b, the lowest since March, a sign of weakening conditions. Trend line support at $67/b with focus on IEA’s Oil Market Report and EIA’s weekly stock report.
The European sovereigns selloff push yields close to test pivotal resistance levels (BTP10, IS0L, XGLE). Yesterdays’ selloff didn’t spare anybody. Italian 10-year BTPS are now offering the same yield as Greek government bonds. French 10-year OATS yields rose to 0.22% for the first time since June 2019 (once excluding the noise from March 2020). Ten-year Bund yields rose to 0.158% getting dangerously close to test the -0.15% resistance level, which if broken could see them rising fast to 0%. The move raises a lot of questions around the ECB’s pledged to keep yields in check by increasing purchases in the PEPP program. Data show that PEPP purchases did not pick up substantially, and seeing the bloc’s yields rising while US counterparts are stable makes the market question whether the measures of the central banks are effective.
US Treasuries are little changed amid the selloff in the stock market - but today’s CPI and 10-year auction might give direction (TLT, IEF). US Treasuries remain flat amid the stock market selloff, indicating that they continue to remain vulnerable in light of inflationary pressures. Today, the focus will be on CPI numbers. We will be looking at any uptick in the monthly data because while the yearly data is transitory, the monthly numbers may not be transitory, and they could spark another selloff in the US safe-havens. Also, important will be the bidding metrics in tonight 10-year Treasury auction and tomorrow’s 30-year bond sale.
What is going on?
Taiwan’s main Taiex index suffered a crash overnight - and was down over 8% at one point before a strong bounce as of this writing had cut losses approximately in half. The recent focus on semiconductor stocks had driven very strong performance since late last year in the heaviest component TSMC and reports of forced selling and options expiry driving the move suggest that bulls had become overleveraged. As of the day’s lows, the index had corrected some 14% in all.
The yield on the German Bund (BUNDJUN21 - 10-year sovereign German debt) closed at new cycle high at –16 bps, leaving only the high-water mark of –15 bps of just before and after the pandemic reaction last spring as a structural high-point. Likely drivers include the anticipation of a surge in inflation and economic growth as the EU opens up from lockdowns this summer and possibly even anticipation of a less fiscally austere government after the September elections, where the Greens may be set to take the helm, with an entirely different attitude on fiscal policy and a more enthusiastic embrace of the EU.
The commodity sector remains on a tear with several key raw materials from copper and iron ore to corn and palm oil trading at or near multi-year highs, thereby adding to the debate over whether rising price pressures will be persistent enough to force the Federal Reserver to tighten policy sooner than currently expected, hence the focus on today’s U.S. CPI data. The rally is impacting all sectors with the Bloomberg Commodity Spot index trading at a ten-year high, up one-third since early November when vaccine news accelerated growth and demand expectations.
What are we watching next?
US CPI release today and Fed Vice Chair Clarida – there is increasingly loud criticism of the US Federal Reserve running excessively accommodative policy, but the Fed seems deaf to this line of thinking, with the latest from the Lael Brainard of the Fed Board of Governors just yesterday suggesting that the Fed remains “far from its goals” as “it will be important to remain patiently focused on achieving the maximum-employment and inflation outcomes in our guidance”. Fed Vice Chair Clarida is out speaking today on the economy and the US April CPI release is also up later, with the headline expected at a near 10-year high of 3.6% and the core at 2.3% (range high since 2008 for that figure is 2.4%).
Earnings reports this week. Palantir Technologies did not deliver spectacular earnings yesterday, but their long-term revenue growth guidance was significantly above consensus, but it was management’s comments that it is planning to accept payments in Bitcoin and potentially adding it to its balance sheet. Allianz is the big earnings release in early morning trading in Europe, and Q1 earnings look very strong which could push the stock back to its recent highs.
Economic Calendar Highlights for today (times GMT)
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