Market Quick Take - April 16, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities seemed to enjoy the combination of very strong data – especially the stimulus-check boosted US Retail Sales, while falling long treasury yields fail to act as a brake on valuation concerns. But the treasury market, in finding strength yesterday, suggests some level of caution that the current strength in economic numbers could prove transitory once the impact from latest rounds of stimulus fade, a stance not at all evident in the powerful current momentum in US equities.

Stoxx 50 (EU.I) - Stoxx 50 futures pushed through the narrow trading range as we alluded to yesterday breaking above the 3,933-level closing at 3,942, the highest closer ever for SToxx 50 futures. The earnings season and profit guidance so far during Q1 earnings have given arguments for being long European equities than US equities and if Stoxx 50 futures can close today above yesterday’s close it will mark a bullish signal for the coming weeks.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin is struggling to maintain altitude a bit if still above the critical 60k level as Coinbase shares gapped higher on news that the famed ARK invest “disruption” fund is pouring funds into shares, but alas shares closed slightly lower from the prior day and well off the day’s highs. Ethereum poked to new highs above 2,500 overnight but was back toward 2,400 this morning.

EURUSD and AUDUSD – It is clear that 1.2000 is the next critical hurdle for EURUSD as the late rally has paused just ahead of that level. While strong US data should be theoretically USD-supportive, the reaction in treasury market suggests that it is well anticipated and perhaps that the market is wondering how the economy will perform when the cash splash from stimulus checks fades. The recent rally has neutralized the prior sell-off. First support comes in at perhaps 1.1900 for maintaining an upside view as we watch for positive euro-catalysts for a new rally attempt. For AUDUSD, the important support is 0.7650-75 after this recent surge if we are to maintain an upside view toward 0.800+.

EURGBP – the price action has churned in EURGBP as the pair has traded around the 0.8700 area after the market perhaps unwound a premium that sterling developed on its more rapid roll-out of the Covid vaccine and as we consider that Europe is set to absorb more of the global stimulus than the UK will enjoy, in terms of stimulus to export growth, etc. Still, the post-Brexit revaluation higher of sterling higher looks far from complete as we watch for a turn back to strength from here and as high as 0.8870-0.8900.  Above that latter zone, and it would be back to the drawing board for sterling bulls.

Crude oil, copper and gold traders will be watching the weekly closes after a weaker dollar, lower bond yields and strong US and China data have pushed these key markets to or above previous resistance. Crude oil trades up more than 6% on the week following upbeat oil market reports from OPEC and the IEA. The levels to look out for are $65.50 in Brent and $62.25 in WTI. HG copper meanwhile has broken its recent consolidation range to trade above $4.14/lb on renewed decarbonization focus after Goldman Sachs said prices could rally more than 60% by 2025. Finally, gold has supported by the surprise yield drop and weaker dollar recovered to challenge $1765/oz, and a close above combined with the now established double bottom below $1680 may help trigger renewed investor interest.

The rally in US Treasuries was provoked by Japanese investors and followed by a squeeze in short bond positions (TLT, IEF). Ten-year US Treasury yields fell by 11 basis points hitting 1.52% as Japanese investors were buying overseas securities. Thirty-year note yields fell as well hitting 2.20%, a level previously seen at the end of February. It is important to note that the rally was short lived and by the end of the day yields reversed their trend ending six to seven basis points higher from their dip. The rally’s problem is that the macroeconomic backdrop stays strongly skewed towards inflation. Therefore, as inflationary pressures become more evident a selloff is most likely to resume.

Corporate America continues to secure cheap debt as Treasuries gain (HYG, USIG). Companies are taking advantage of the positive moment sparked from lower US Treasury yields to issue debt. Yesterday, JP Morgan issued $13 billion worth of bonds, the largest deal for a bank. After holding its issuance for a couple of days due to the Huarong fallout, Tencent issued $4.15 billion of bonds securing low interest expenses. Although the credit market does not seem in danger it is important to keep in mind that the corporate world is getting more leveraged, thus more exposed to interest rate risk.

What is going on?

China’s Q1 GDP surged 18.3% relative to last year’s Covid-impacted number, a level that was actually slightly below consensus expectations for 18.5% YoY growth and was only up 0.6% QoQ. The news was not celebrated much overnight as China continues to maintain a tight monetary policy as it is concerned with overheating in some industries and excessive debt build up in real-estate. Retail Sales for March did beat expectations with a leap of 34.2% YoY growth, while policy aimed at restraining property investment seem to be working as the March Property Investment figure was “merely” up 25.6% vs. 30% expected. March Industrial Production rose 24.5% vs. 26.5% expected.

Strong US data sees US treasury yield drop - Yesterday saw a strong batch of US data, as the weekly initial jobless claims figure plunged to 576k on the week versus 700k expected. The US Retail Sales numbers for the month were absurdly strong on the impact of stimulus checks, with the headline at +9.8% month-on-month, and the core at +8.2%. Elsewhere, the Philly Fed business survey was the strongest ever at 50.2 (after the prior even stronger 51.8 was revised back to 44.5). And yet, the news utterly failed to impress the treasury market, as yields dropped sharply at the longer end of the yield curve. Clearly the market is questioning whether US growth momentum will fade quickly beyond the next quarter or so.

What are we watching next?

Will sentiment change around Covid as world-wide daily cases are set for a record? The new rising wave of Covid cases in populous EM countries could dent sentiment next week as it appears we are within days of recording a new record daily case count for the virus, with India now registering the most daily cases at 216k vs. 144k just a week ago. Even in the US, where vaccine efforts are advanced, a handful of states are registering case count rises and the politicization of the vaccine and concerns about safety is now seeing growing resistance by many to receive it.

Earnings reports this week. The interesting pattern so far in the Q1 earnings season is that European companies have released more positive outlooks (LVMH, SAP, ABB, Boozt etc.) and have reacted more positively than the US earnings. This also matches what we observe regarding the rebound in earnings with the MSCI World performing better than the S&P 500 since Q4 2019. Charles Schwab posted the best quarter ever yesterday reflecting high client activity for the Q1, but the company did not provide any outlook for the year reflecting the uncertainty over whether retail investor activity will continue at same pace, which likely added to the 3% decline in the stock price. Delta Air Lines shares were also down 3% yesterday despite the US airliner moved to being cash flow positive by the end of the Q1 and management making many positive comments about pickup in traffic and talking about strong pent-up demand.

• Today: Zijin Mining Group, CDW, Bank of New York Mellon, PNC Financial Services, Morgan Stanley, State Street, Kansas City Southern

Economic Calendar Highlights for today (times GMT)

• 0900 – Euro Zone Mar. Final CPI
• 1200 – Poland Mar. CPI
• 1215 – Canada Mar. Housing Starts
• 1230 – US Mar. Housing Starts and Building Permits
• 1400 – US Apr. Preliminary University of Michigan Sentiment

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