Summary: Yesterday saw a mixed session for US equities, with a slightly downbeat feel on closing near the lows of the day, while the mood in Asia was steady. Today we await an ECB meeting with some anticipation, as with the US Federal Reserve, that the bank will need to deliver a tapering message soon. Also up is the US May CPI, where core inflation is expected to show multi-decade highs even as inflation expectations and US treasury yields have eased considerably lower of late.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – a bit more interesting to note what is not happening as opposed to what is – as a very quiet day with a slightly negative feel after closing near the lows of the day looks a bit more negative than otherwise, given support for this market from treasury yields easing sharply lower again yesterday ahead of today’s May US CPI print (more on that below). If a negative mood develops, we’ll watch the 13,530-13,450 area closely in the Nasdaq 100, as the index found support right on the 21-day moving average – currently at 13,530 but coming in near the pivot low of 13,450 when the market found support late last week.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin and other cryptocurrencies are digging themselves further out of their recent hole, taking the price action away from the lows. Cheering the space, El Salvador became the first country to officially recognize payment in bitcoin and the country’s leader directed a local geothermal country to investigate powering bitcoin mining operations with geothermal resources associated with local volcanoes. Elsewhere, US Senator Elizabeth Warren spoke out against bitcoin on its wasteful energy usage in a hearing.
USDCAD – The Bank of Canada meeting yesterday was the expected non-event, as the Bank will maintain course with its ongoing asset purchases and intent to keep supporting the economy until it is fully recovered from the pandemic. Perhaps somewhat less dovish than might have been the case, there was no mention of the sharp rise in the Canadian dollar. USDCAD traded back toward the top of the very tight range in a passive move correlated with USD firmness elsewhere. But given heavy short positioning, the stops may be lined up somewhere above the 1.2150 area if risk sentiment and/or crude oil prices sour in coming sessions (watching the US CPI today and FOMC next week on that account).
GBPUSD – sterling is weaker, both against the big USD and against the EUR, perhaps in part as BoE rate hike expectations (admittedly for well down the road) have pulled back from cycle highs, although so have the expectations for the Fed. The sterling weakness won’t have to extend far to being having technical implications as GBPUSD trades today, ahead of the US May CPI release, near the range low of the last more than three weeks of 1.4083. The bigger level is the pivotal 1.4000 that GBPUSD last broke above just over a month ago after it provided resistance for more than two months prior to that. The G-7 meeting this weekend is a test of the temperature of UK-EU relations.
Crude oil (OILUSJUL21 & OILUKAUG21) trades lower following a mixed EIA stock report. A third weekly reduction in crude stocks on rising refinery demand inadvertently led to a surge in gasoline and diesel stocks during a week were the rolling average of gasoline demand, despite the Memorial Day weekend, ticked lower for the first time in a month. Overall, not a gamechanger, with the subsequent market weakness probably more due to cautionary profit-taking after WTI failed to hold onto gains above $70. Focus on OPEC’s Monthly Oil Market Report.
Gold (XAUUSD) trades lower despite US 10-year Treasury yields almost hitting a two-month low ahead of today’s CPI print and ECB meeting. Besides a firmer dollar creating some headwinds, the drop in yields was primarily led by falling inflation expectations (Breakevens) while real yields, a key inverse driver for gold, ended the day on a high. With most of the short covering from long-term trend following funds done, gold traders have turned their attention to today’s CPI which is expected to reach multi-decade highs, and depending on the outcome, potentially challenging the Fed’s assurances that elevated inflation will be temporary. Support levels: $1855 followed by $1840, the 200-day moving average.
US treasury break below 1.5% before the CPI readings indicating that the market sticks to Federal Reserve message (SHY, IEF TLT). The rally in US Treasuries yesterday has been remarkable. 10-year yields fell below 1.50% and closed on their 100 days simple moving average. If the CPI undershoots estimates, yields can break below their weak support at 1.4% and find new support at 1.2%. However, if the CPI overshoots estimates, the rise in Yields could be abrupt. Despite the recent rally, we remain confident that the long-term trend is for yields to rise as inflation strengthens and the Fed will need to start discussing tapering.
A dovish ECB will add to the German Bund rally, but the CPI readings in the US could revert their gains (IS0L). Bund yields have recently broken off the tight range they have been consolidating in. We expect the ECB to keep monetary policy unchanged today and to reassure the market that it will not taper purchases under the PEPP program until next year. However, everything can change if a selloff ensues from inflation reading out of the US, provoking yields to rise in the eurozone, too. If sentiment continues to be bullish, we can expect yields to break below –0.25% and find new strong support at –0.40%. In the long-term, we continue to believe that Bund yields will rise and turn positive with the German election.
What is going on?
US and China may be set to move forward with trade and investment talks. The Chinese commerce minister Wang Wentao and US Commerce Secretary Gina Raimondo talked over the phone yesterday and “agreed to promote the healthy development of pragmatic cooperation in trade and investment” after an exchange of views on a number of issues. Interesting to see how this story progresses given the G-7 statement risks we discuss below.
The US SEC looking into stock trading rules that could impact pay-for-order-flow companies. New SEC chief Gary Gensler has asked the agency to look into “best execution requirements” that are intended to force brokers to favour customers’ orders. Market makers Virtu and Citadel, who pay retail brokers for the privilege of seeing their order flow would be directly impacted by new rules limiting this advantageous arrangement, which is not practiced in most other countries. Citadel is privately held, but Virtu (VIRT:xnas) dropped 7.7% in yesterday’s session on this news. Gensler also repeated concerns on whether popular retail trading apps were designed to make trading addictive.
What are we watching next?
G-7 meeting up, with prominent geopolitical risks in play. In yesterday’s Quick Take, we noted that the US and EU countries may look to move away from confrontation on a number of trade issues, an important development, but perhaps more immediately important could be any G-7 statement that produces strong language on investigating the origins of the Covid-19 virus, as circulated in a draft statement, and/or demands related to China’s activity in the Taiwan Strait, which would be sure to elicit a strong response from China.
US May CPI and how the market absorbs it – The release today is expected at 4.7% YoY at the headline and 3.5% YoY for the core, ex food and energy reading. The latter would represent a new high since the early 1990’s, but given that this is in the expectations and treasury yields have been sliding, it is difficult to determine how hot the number would have to be on the upside to jolt this market, while a large downside miss would perhaps be more surprising and elicit a larger market reaction in risk appetite, the US dollar and treasuries, etc.
Earnings reports this week. The only company reporting today is Chewy, an e-commerce company selling pets food, which has enjoyed dramatic revenue growth during the pandemic. Analysts expect revenue to climb 31% y/y in FY22 Q1 (ending 30 April) with EBITDA margin still hovering around 2%.
Economic Calendar Highlights for today (times GMT)
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