Summary: Equity sentiment improved in the US yesterday just ahead of key trend support in the S&P 500 Index, while sentiment soured in Asian overnight as Japanese equities finally consolidated notably for the first time after a blistering run higher of late, perhaps in part on the sharp rally in the yen yesterday. Sentiment in Chinese equities remains very weak. Elsewhere, oil surged higher on fresh news of significant draws on US inventories, and a continued surge in natural gas prices.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - with US yields holding steady and a strong Empire Manufacturing print yesterday, US equities rebounded with bids coming in at the dips. Market makers in the US have noted an increasing tendency for retail investors to come in at small dips and buying aggressively. This pattern seems to be unbroken for now. Nasdaq 100 futures are trading around the 15,480 level with resistance just above the 15,500 level.
Hang Seng (HI50.I) - extending declines today down 2% hitting the key support levels from July and August. News is surfacing that Country Garden, another of the big Chinese real estate developers, is now also experiencing some stress adding to deteriorating situation in the Chinse housing market. Chinese technology stocks are also getting close to their recent lows. Finally, yesterday’s selloff in Chinese and US casino stocks also weighed down on sentiment as many operators in Macao believe the casino island will never come back to its former size.
EURUSD – still no direction here as each of the last four sessions has brought directional reversals of the price action earlier in the day, with the price action settling in an impossibly constricted range in the low 1.1800’s. Today we have a US Retail Sales release for August, but the next more decisive move may depend on the USD reaction to next Wednesday’s FOMC meeting, where we would lean on higher odds of the Fed moving to start the asset purchase tapering process than the market expects. The first minor downside trigger area is 1.1750, but the bigger picture awaits a break of the 1.1664-1.1909 range.
USDJPY and JPY crosses – yesterday saw a significant follow-through rally in the Japanese yen, a day after the JPY surged off of local lows in many crosses in the wake of lower-than-expected US inflation data. The lows in USDJPY yesterday saw the pair visiting the key 109.00-10 zone that has served as important support since all the way back in June. The action from here for whether a more significant sell-off will unfold through that support will likely be determined by US data through next Wednesday’s FOMC meeting, with a new rise in US Treasury yields likely needed to keep the pair from testing lower support, perhaps starting with the 200-day moving average currently near 108.05. Meanwhile, an upcoming Japanese election has electrified Japanese stocks on fresh stimulus hopes that are an echo of late 2012 election cycle which brought massive new BoJ policy moves and fiscal policy hopes.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Bitcoin and Ethereum are making a bid at erasing the huge sell-off last week, breaking above local resistance and within striking distance of reversing through the last meaningful retracements of the sell-off, which Bitcoin can do with a move and close north of 50k vs the 48.3k area it trades this morning, while Ethereum needs to vault above 3,750-3,800 to do the same.
Gold (XAUUSD) looks increasingly in danger of a bigger correction after investors failed to respond positively to the post-CPI drop in US Treasury yields. Ahead of next week’s FOMC the market could be softening with no obvious trigger for renewed demand seen before, perhaps apart from surging energy prices giving rebirth to the reflation trade. Look for support at $1780, and if that breaks the next target could be $1762, the 50% retracement of the August to September rally. Key resistance, the 200-day moving average at $1808.
Crude Oil (OILUSOCT21 & OILUKNOV21) extended their recent run of gains, supported by surging gas prices, and signs of a rapidly tightening market after the EIA reported a 6 million barrels drop in US crude stocks. Brent topped $75 for the first time since August with the next target being the July high at $76.15. With Hurricane Ida causing a +30 million barrels loss in production, and with the IEA seeing surging demand into yearend, as Covid impacts fade, bulls are once again in charge.
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 felling to $109/tons.
European bond yields surge amid heavy supply and rising US Treasury yields (VGEA, BTP10, IS0L). Heavy bond supply led yield curves to steepen in the euro area yesterday. This trend will most likely continue today. Around 19 issuers sold €21bn of bonds, with three European Union selling €5bn of bills for the first time. To add to the selloff, Isabel Schnabel Said that the market overestimates the delta variant's effects on the economy, adding pressure to the selloff. Today Spain is issuing 3-, 5- and 10-year bonds, France sells 3- and 5-year bonds and Austria sells 15-year bonds via syndication. Although yields might soften slightly, we expect European sovereigns to continue to trade rangebound until volatility spurs by the German election or rising yields in the US.
Retail sales may add to US Treasury strength (IEF, TLT). Retail sales figures are expected to have fallen in August. Although the drop is largely priced in the market, it could still support US Treasuries pushing yields down by a couple of basis points. Yet, we expect yields to remain rangebound between 1.25% and 1.35% until next week’s FOMC meeting.
What is going on?
Troubled Chinese property developer Evergrande causing widening fallout - with developers’ bonds and equities in China broadly under pressure, including China’s largest developer measured in sales, Country Garden Holdings Co, which saw its stock decline over 11% overnight. Evergrande halted trading in its onshore bonds a day after Chinese banks were told that it would not meet interest payments on Monday.
Global natural gas prices remain on fire with sharp rallies on tight supply seen in all of the three major centers of consumption. In the US, NATGASOCT21 reached a new 7-year high as some GoM (Gulf of Mexico) production remained shut, adding to mounting concern about winter-supply shortages. In Europe, the record run of gains in gas and POWERDEBASCAL22 continued on worries about Russia’s ability to supply enough gas at a time where power generation from wind has slumped. Yesterday, the Dutch TTF benchmark GASNLBASEOCT21 surged to a record €76/MWh or more than $150/b oil equivalent before retracing on Kremlin comments that a Nord Stream 2 approval could balance gas prices in Europe. A comment raising concerns Russia may have played a geopolitical game this summer by keeping supplies suppressed in order to force an approval of the controversial NS2 pipeline.
New Zealand Q2 GDP far higher than expected, with the quarter-on-quarter number coming in at +2.8% and the year-on-year at 17.4%. New Zealand rate expectations surged again on the news, with the 2-year swaps up some 8 bps from yesterday’s levels as traders rush to price in RBNZ policy tightening that was deemed certain to start at the August RBNZ meeting, if only a delta variant covid outbreak hadn’t struck a mere couple of days before the meeting, with the first “community spread” in months. That outbreak appeared almost set to come fully under control in the country’s zero tolerance policy, but in recent days, new cases have popped up and are keeping Auckland, the largest city in NZ, in lockdown.
Australia’s odd employment report. The country’s jobs report shows what happens during a pandemic, as payrolls plunged, but the unemployment rate actually fell slightly to a new cycle low of 4.5% due to 0.5% drop in the participation rate. We won’t know how the Australian economy is doing until the country’s vaccination effort has been rolled out sufficiently to allow a reopening, but the models of the US and Europe provide an idea. The government estimates it can achieve 80% vaccination of the 16 and over population by December.
European car sales improved in August m/m, but car sales are still down 18% from a year ago. The three-month average car sales figures in Europe are at 2013 levels, so the bottlenecks in the global car industry are becoming a big issue for getting production back to 2019 levels.
What are we watching next?
Last US data ahead of next Wednesday’s FOMC meeting – today we get a look at the August US Retail Sales data, where the bite of the delta variant outbreak could be felt again, with tepid expectations for the month-on-month reading of –0.7% for the headline and 0.0% for the “ex Autos and Gas” number. We are more interested in the Friday preliminary September University of Michigan sentiment survey – particularly 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.
Economic calendar highlights for today (times GMT)
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Head of Fixed Income Strategy
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Head of Commodity Strategy