Summary: US equity market saw the S&P 500 trade higher yesterday, led by industrial, financial and commodity shares while the tech-heavy Nasdaq 100 dropped. The general market was supported by Biden's expansionary budget plan and solid economic data. The dollar trades steady after yesterday's rally with bond yields trading close to a one-week high on concerns of more debt supply to fund spending. The correction in commodities seems to have run its course with gains seen across all sectors led by crude, corn and copper, even the China-centric bulk commodities have recovered despite Chinese clamp down attempts.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – volatility and intraday trading ranges in US equities continue to be compressed. Longer term yields are bouncing back again so we expect some emerging pressure in US technology stocks. Nasdaq 100 futures are trading around 13,665 in early European trading hours, with the 13,600 level still being the key support level to watch for downside risk.
Euro STOXX 50 (EU50.I) - today’s open in the STOXX 50 futures above 4,050 suggest an underlying strength and the potential energy for extending the longer-term rally in European equities. If commodities continue to be strong, we expect inflationary expectations to continue rising driving value stocks higher against growth lifting yields which in turn would European banks and European equity indices on a relative basis.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Both the Danish and Japanese central banks chiefs have been out over the last 24 hours calling Bitcoin and other cryptocurrencies nothing else but speculative assets. On the flipside of these attacks, Bitcoin has found itself a strong ally in Cathie Wood, the founder of Ark Invest, saying that Bitcoin will only get bigger and “...it’ll be impossible to shut it down”. XBTUSD is trading just below 37,000 in early European trading hours with the 36,500 being an important support level to prevent a further selloff.
EURUSD – trades near a one-week low with support around the 21-day moving average at 1.2140 with resistance at 1.2250 followed by the 1.2349 high from the beginning of the year. The dollar has strengthened against all its G-10 peers amid speculation it is being boosted by month-end flows, and Biden’s plan to unveil a budget that would increase federal spending to $6 trillion. A small pickup in U.S. bond yields at a time of fading yields in Europe also a reason why the Greenback has managed to recover and hold above the January low.
Gold (XAUUSD) seems to have entered a long overdue consolidation phase, a development silver and platinum’s underperformance has been flagging for a few days now. A break below $1890 targeting $1870 followed by the big one at $1845. Continued focus on the dollar and yields which have both strengthened this week.
Copper (COPPERNYJUL21) rallied to retrace more than half of its recent 9% correction on supply concerns, and after the market concluded Chinese measures to curb speculation and hoarding would primarily be focusing on the highly polluting steel industry. The threat of strike actions by individual groups at BHP in Chile, who operates the world’s biggest copper mine, helped further improve sentiment. Not least given the prospect of strong and rising demand for so-called green metals over the coming years.
Crude oil futures found a fresh bid with surging U.S.-led demand offsetting concerns about the prospect of rising Iranian supplies. The rally was led WTI (OILUSJUL21) which closed at a two-year high yesterday with Brent once again taking a closer look at $70 and the top of the recent range. Focus turning to next week’s OPEC+ meeting where the group, despite uncertainties about future Iranian output, is expected to confirm an already agreed 0.8 million barrels per day increase for July. Until the market receives more clarity about the outcome of the U.S.-Iran negotiations, the upside potential beyond the March high at $71.40 seems limited.
Today’s PCE deflator and Biden’s budget proposal have the potential to reignite the reflation trade (IEF, TLT). This week’s 5- and 7-year strong auctions highlighted an increase of demand for US Treasuries. However, things can quickly change if the PCE deflator surprises expectations. The PCE index is the Federal Reserve’s favorite inflation gauge, and it is expected to show a price increase of 3.5% YoY. However, a surprise will put inflation way above the central bank’s inflation target, increasing tapering fears. Today’s data together with Biden's stimulus budget proposal may trigger a selloff in US Treasuries ahead of next week’s jobs numbers.
Tapering fears break European sovereigns’ rally (IGLT, VGEA). BOE’s Vlieghe said that interest rates could rise earlier than expected, at the beginning of next year. This was enough to send yields higher not only in the UK, but also in the euro area. Although tapering talks are going to weight on bond yields globally, we believe that the real game changer is going to be September’s German election. Until then, US Treasuries will set Directions for yields in the bloc.
What is going on?
Today’s PCE deflator is key to understand the direction of US Treasury yields (IEF). This week’s 5- and 7-year auctions showed a pick-up of demand for US Treasuries. However, things can quickly change if the PCE deflator surprises expectations. The PCE index is the Federal Reserve’s favorite inflation gauge, and it is expected to show a price increase of 3.5% YoY. However, a surprise will put inflation way above the central bank’s inflation target, increasing tapering fears. Today’s data together with next week’s jobs numbers are crucial to set direction of yields ahead of the next FOMC meeting on June the 15th.
Corn (CORNJUL21) surged the most in two years, further recovering from the recent rout after weekly export date showed the second largest ever sale since 1990. After hitting a one-month low on Wednesday at $6.03, the July contract rose by the exchange allowed limit to $6.6450, thereby pulling both wheat (WHEATJUL21) and especially soybeans (SOYBEANJUL21) higher with it. The sale primarily driven by another bumper order from China a reminder the country, despite attempting to clamp down on speculation and hoarding will continue to drain global supplies in order to feed the expansion of the world's biggest hog herd.
JD Logistics shares starting 14% above IPO price ending a successful IPO raising $3.2bn for this fast-growing logistics company that grew revenue up 47% y/y and EBITDA margin expanding 3%-points in 2020 on rapidly surging demand for e-commerce. The company is tapping into the red hot sentiment for logistics companies looking to be the big winners in the future of global trading and e-commerce.
Engine No 1 coup of ExxonMobil board seats comes with big change as the hedge fund is demanding the oil and gas giant has to position itself for success, which will mean less oil and gas in the future. The overall picture that is emerging is that all the oil and gas companies in the developed world will be a constraint on oil production going forward potentially adding to pricing pressures.
Biden is proposing a $6trn budget for the fiscal year starting 1 October aiming to significantly upgrading the country’s infrastructure. If the budget goes through it would be 5% increase over the projected 2021 level and also includes higher taxes going forward. The signal from the Biden administration fits with our overall view that governments will push harder on the economy until inflation spikes and constrains governments’ ability to do large fiscal expansion.
What are we watching next?
Will China succeed in controlling commodity prices? The Chinese State Council likely put the foot down on commodities in China as several key industries from steelmaking to construction materials were bleeding economically at the current commodity prices. The big question is whether China can limit the pressure on commodity prices. With large fiscal expansions in the US and Europe, it seems China is not the dominant buyer of commodities and thus the entire sector has entered a new regime with new dynamics. For equities it could mean even more input cost pressures and potentially profit margin surprises to the downside in the 2H.
Earnings reports this week. Salesforce delivered better-than-expected FY22 Q1 revenue and EPS figures after the US market close and provided a Q2 outlook above consensus estimates. The company’s acquisition of Slack Technologies is expected to closed by the end of FY22 Q2 and contribute $500mn to revenue in the current fiscal year. The only earnings release today worth mentioning is the Chinese e-commerce company Meituan expected to report earnings after the Hong Kong close. Given the strong earnings figures from other Chinese technology and e-commerce companies we expect Meituan to deliver above consensus.
Economic Calendar Highlights for today (times GMT)
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy