Market Quick Take - May 25, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the strong surge in equities yesterday, in part on a trio of Fed members commenting on the expectation that the recent inflation spike will prove temporary, saw the Nasdaq 100 index surge back above the 21-day MA near 13,520 and the 61.8% retracement of the sell-off at 13,625, which leaves only the all-time highs just above 14,050 as the only remaining resistance as the yield-sensitive index has staged a strong recover while long US treasury yields have pushed to two-week lows. The S&P 500 was never as heavily impacted, but also rose clear of recent resistance, including its own 21-day MA at 4,162, leaving it less than a percent from the all-time high of 4,238.

Euro STOXX 50 (EU50.I) - yesterday’s session saw a strong breakout of the recent highs and the momentum in European equities is continuing this morning with STOXX 50 futures pushing firmly above the 4,050 level. The banks are leading the momentum together with cyclical industries. Today’s key support level is naturally yesterday’s close at 4,043.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). After testing the recent lows at the weekend, major cryptocurrencies rallied sharply yesterday, perhaps in part on comments from famed hedge fund billionaire Ray Dalio, who said that he owns Bitcoin yesterday, touting its potential to remain a store of value, although he also noted that “Bitcoin’s greatest risk is its success” as governments could move against the space at some point.The key area of resistance for Bitcoin remains the 42k area that it recently failed to retake after its rebound from the prior large selling wave. Similarly, the 3,000 area looks like the key resistance for Ethereum.

EURUSD – we have seen four sessions in a row with a direction changes, with the latest one back to the upside yesterday in the wake of Fed comments indicating widespread belief among Fed members that inflation pressures will prove transitory yesterday. EURUSD Is trading this morning poised near the top of the recent range (just below 1.2250), and has perhaps been unable to punch higher as the recent sharp rise in German Bund yields has reversed sharply in recent sessions, indicating the enthusiasm surrounding an improved post-Covid lockdown growth outlook is unable to take yields higher. A close above range resistance will set the focus on the cycle high from early this year at 1.2349.

JPY crosses – a US travel warning to Japan is adding to widespread clamor for Japan to cancel the Tokyo Olympics that are scheduled to begin in just under two months, as Japan struggles with Covid outbreaks and a very low level of vaccinating its population. This issue hanging over Japan may have spoiled the JPY’s ability to rally on the recent drop in global safe haven yields as the focus elsewhere is on post-opening up growth surges. A cancellation of the Olympics could mark a near-term capitulation in JPY longs, but if yields remain low, the JPY looks too cheap, particularly given recent reminders that Japanese real yields (the nominal yield less inflation) are far less negative than elsewhere.

Crude oil (OILUKJUL21 & OILUSJUN21) trades higher after spending the past two trading sessions reversing most of last week's losses. This in response to expectations the market will be able to absorb additional Iranian barrels should U.S. sanctions end up being lifted. A weaker dollar and steady Treasury yields providing some additional macroeconomic tail wind. Until the global recovery in fuel demand becomes more synchronized, Brent is likely to remain stuck in a $65 to low $70 range. Focus on Vienna today where nuclear talks resumes and the Brent prompt spread which remains close to flat, signaling a market in doubt about the short-term outlook.

Metal's trade mixed following soothing Fed comments on inflation (see below) with HG copper (COPPERUSJUL21) rebounding from a three-week low and a relatively shallow 9% correction. Recent Chinese announcement about striking down on commodity price manipulation having a limited impact given the bullish outlook for so-called “green” metals. Gold (XAUUSD) meanwhile has drifted lower and increasingly looks like a metal that needs to consolidate recent strong gains. As long the consolidation/correction does not challenge the 200-day moving average at $1843, the potential for further upside remains. However, the recent pullback in industrial metals have seen both silver (XAGUSD, XAUXAG) and platinum (XPTUSD) underperform gold, potentially setting up some interesting relative value trades.

The bond market’s focus for the week needs to be inflation (TLT, IEF). Before the US Personal Consumption Expenditures are released on Friday, it will be important to see where inflation expectations will go following today’s Consumer Confidence numbers. Breakeven rates fell from their highs last week after the FOMC minutes showed that members are open to start discussions about tapering in the next meetings. Yet, the Federal Reserve remains committed to the average inflation targeting framework leaving inflation venerable. If inflation expectations resume their rise, we might see US Treasury yields resume their rise.

What is going on?

Fed officials indicate clear bias to believe that inflation spike will prove temporary - with the Fed’s Lael Brainard, an FOMC voter on the Board of Governors, stating that “A very important part of inflation dynamics is longer-term inflation expectations and those have been extremely well anchored, implying that if we saw some  development pushing inflation up I wouldn’t expect that to get embedded in the ongoing inflation rate.” The St. Louis Fed president Bullard and Atlanta Fed president Bostic (FOMC voter) made similar comments yesterday.

The main takeaways from the latest Commitments of Traders report in the week to May 18 were hedge funds increasing their net long in gold to a 16-week high due to continued improvement in the technical outlook during a period of stable Treasury yields and a weaker dollar. Overall funds cut bullish bets to a four-week low with selling across the agricultural sector being the main culprits. Most noticeable was the accelerated net selling across the three key crops where reductions in both corn and soybeans triggered a reduction in the net long to a December low.

What are we watching next?

Swelling use of Fed reverse repo facility, a sign that the Fed will be forced to taper purchases? Daily usage of the Fed’s reverse repo facility reached nearly $395B yesterday, above the $369B from Friday and the highest level since 2017. Normally, a rise in this facility was associated with quarter-end, as financial institutions strived to reduce their balance sheet size for reporting purposes. But many suggest that this time, the swelling of this facility (ironically showing the Fed having to lend out huge amounts of treasuries when it is buying them via QE to supposedly support the market) suggests that there is too much liquidity in the US financial system and that the Fed’s QE is worsening this distortion and they will need to taper asset purchases.

US infrastructure talks in Washington near collapse? Recent signals suggest that Republicans and Democrats are not nearing any agreement on an infrastructure deal and Republicans may not even bother to make a counter-proposal in response to Biden’s initial proposal. Progressive Democrats are arguing in favour of moving without Republican involvement.

Robinhood IPO S-1 filing is expected this week – the fastest US retail brokerage company which was catapulted Robinhood into world-wide fame during the historic GameStop squeeze as the company was forced by US regulators to put up more regulatory capital to maintain client positions. Since the hectic weeks of the GameStop squeeze the retail brokerage firm has worked to filed for IPO to both increase capital but also capitalize on its high growth rates over the past five years. The company is saying that it expects it S-1 filing to be published this week and is aiming for first day of trading by the end of June.

Earnings reports this week. The earnings season is lost its transmission into broader equity sentiment at this point, but there are still earnings releases on the tap. Nvidia earnings on Wednesday are expected to be strong due to strong demand for crypto mining and gaming and is key release for the semiconductor industry and the overall technology sector. Snowflake is part of the bubble theme basket and will report its second earnings release since its red hot IPO last year. On Chinese earnings the key focus this week will be on Xiaomi, Pinduoduo, and Meituan.

• Monday: Sino Pharmaceutical
• Tuesday: Alibaba Health, Intuit, AutoZone, Zscaler,
• Wednesday: Xiaomi, Bank of Montreal, Nvidia, Pinduoduo, Snowflake, Workday
• Thursday: Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Salesforce, Medtronic, Costco Wholesale, Dell Technologies, VMware, Autodesk
• Friday: Meituan

Economic Calendar Highlights for today (times GMT)

• 0800 – Germany May IFO Business Climate Survey
• 1200 – US Fed’s Barkin (Voter) to speak
• 1300 – US Mar. S&P CoreLogic Home Price Index
• 1340 – US Fed’s Evans (voter) to speak
• 1400 – US Apr. New Home Sales
• 1400 – US Fed’s Quarles (Voter) to testify before Senate committee
• 1400 – ECB Chief Economist Lane to speak
• 1400 – US May Consumer Confidence
• 2030 – API’s Weekly Crude and Product Stock Report
• 0200 – New Zealand RBNZ Official Cash Rate Announcement
• 0300 – New Zealand RBNZ Governor Orr press conference

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