Market Quick Take - March 8, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)–US equities ripped back higher Friday to close the day near session highs and reversing much of the losses on Thursday, but the rocky start to the week in Asia has seen US equity futures tumbling again overnight. The Nasdaq 100 found resistance at the pivotal 12,750 area that was a key support before being broken last week. The next levels lower there are 12,070, the last major Fibonacci retracement of the rally from November lows, and then 11,665, the 200-day moving average. The resistance overnight in the S&P 500 was near the 61.8% retracement of the sell-off (3,870 area).Looking lower, the recent low is 3,720 and the next major level is perhaps 3,656, a major prior low.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - cryptocurrencies found some support over the weekend after a few wobbles last week, perhaps boosted by the Senate passing the stimulus bill. Bitcoin is trying to maintain the price action above 50,000 in the Asian session overnightwhile the price action in Ethereum was more forceful, with the price bolting above 1,700 for the first time in almost two weeks.

EURUSD – last week, EURUSD fully took out the prior 1.1950 area low and could be set to explore the range all the way back to 1.1600 or even 1.1500 in the weeks ahead as long as rising US yields are driving increased market volatility and a preference to steer clear of the lowest yielding (longer yields) currency areas, as evidenced by the recently tumbling yen and Swiss franc, for example. EURUSD may eventually find support on the realization that US stimulus will likely drive strong US inflation and low real rates, but the question of who buys the US treasury issuance remains unsolved.

AUDUSD–the AUDUSD is making a bid to find support after breaking well below 0.7700 last week, reversing most of the prior rally wave from early February lows. Resilient commodity prices are the key leg of support for the AUD in the crosses, but if commodities roll over for a consolidation as well here, on top of weak risk sentiment, the Aussie could be in for a further drubbing against the US dollar, back toward 0.7400, with risk of a move to even 0.7000 on a more significant setback from global markets. Bullish hopefuls will need for the 0.7564 low to hold this week and for a new sharp rally back above 0.7800-0.7850 to start.

Gold (XAUUSD)trades back above $1700 after finding support at $1688 on Friday. The recovery, apart from short-covering, being the prospect for Biden’s $1.9 trillion Covid-19 relief plan further adding to inflationary pressures while an attack on a key Saudi Arabian crude oil terminal bumped oil above $70 drove some haven demand. The latest weekly COT report showed a one-third drop in the futures long held by funds to just 57,900 lots, a 22-month low while ETF holdings has shrunk to lowest since last June. Multiple layers of gold resistance remain with the first one being at $1765 while support remains the key $1670-88 area.

Crude oil (OILUKMAY21 and OILUSAPR21)- An already strong price momentum following last week’s surprise OPEC+ decision to roll-over current production levels instead of hiking, was given an additional boost after a key Saudi crude terminal, the world’s largest, was attacked over the weekend. The return of a risk premium to oil saw Brent smashing through $70/b with WTI not far behind at $67.40. Tight market conditions and rising oil prices

This week’s events could pushUS Treasury yields higher (TLT, IEF).Inflation numbers and US Treasury auctions are the focus of the week and might be catalyst for a deeper selloff in Treasuries. Last week the overnight repo rate fell into negative territory indicating that the market expects higher yields ahead.The 10- and 30-year bondauctions on Wednesday and Thursday are going to be a focus as in the recent 7-year auction foreign demand fell dramatically. A key level to monitor is the 1-65% in yield, as it could trigger another squeeze in the mortgage-backed security (MBS) market provoking a fast rise in yields-

Today’s European Central Bank’s bond purchases data will set the tone in European sovereigns (BTP10, IS0P).The data will be crucial in order to understand whether the central bank is supporting of European sovereigns as US Treasuries continue to sell off. If the data show that the ECB didn’tstep up its purchasing effort, it may trigger a selloff of European sovereigns leading the ECB to act more decisively during this week’s monetary policy meeting.

What is going on?

The US Senate passed a version of the $1.9 trillion Biden stimulus bill. In a straight party vote, the bill passed with minor alterations like reducing the weekly supplemental federal unemployment benefit to $300 per week from $400 and lowering the income ceiling for stimulus checks. The House is likely to approve the bill this week and send it to President Biden’s desk for final approval quickly, as some benefits under the previous programme are set to run out at the end of this week.

The weekly Commitments of Traders report found that speculators made their biggest one-week reduction in bullish commodity bets since mid-November. Despite reflation focus and strengthening fundamentals the bond market rout and a stronger dollar led to fresh concerns that deleveraging could spread to commodities. The total net long across 26 major commodity futures was cut by 4% to 2.7 million lots, representing a nominal value of $132.3 billion. All but a handful of contracts were sold with the biggest reduction hitting gold, soybeans and corn while the most noticeable buying interest benefitted cocoa and wheat.

What are we watching next?

Can market nerves calm: hyper-sensitivity to US treasury yieldsand key Treasury auctions set for this week -the sell-off in US equities last week was arguably driven by the market throwing a tantrum in the wake of Fed Chair Powell not signaling more concern on the recent rise in US yields, a rise that was initially triggered by a weak 7-year treasury auction the week prior (and possibly other factors like liquidity issues in money markets linked to the  US treasury shifting huge funds currently parked at the Fed). The treasury market bears close watching this week as it is a key drive of volatility after recent events and two key auctions are up this week – a 10-year Treasury auction Wednesday and a 30-year T-Bond auction on Thursday.

China February PPI - as the world’s factory of consumer goods the price index of Chinese producers is a leading indicator for global inflation. The latest figure for February is scheduled to be released this Wednesday, with expectations at 1.4% y/y figure up from 0.3% y/y in January, and –3.7% y/y in March 2020 at the low point of the pandemic.  With basing effects of those year ago price drops rolling into view this month and next, the index will likely risesignificantly further in coming months.

US technology stocks drawdown– Nasdaq 100 futures are only down 10% from the intraday peak in February and sentiment has been shaken a big among growth investors. Our assessment is that the buy-the-dip framework has not been shaken enough and that many growth investors are betting heavily on a strong rebound. This means that the psychology of the equity market will be intricately linked to the drawdown of technology stocks, but even more importantly, the length of the drawdown. This is something we will closely monitor going forward.

Earnings releases to watch this week:

A new week of earnings outside the standard quarter calendar with the most important earnings releases highlighted in read. Chinese Pinduoduo and JD.com are obviously important for sentiment e-commerce stocks and the wider emerging marketequities. DocuSign is part of the bubble stocks segment and will thus be another test of how much strength there is left among growth investors. Adidas and Inditex both represent European retailing and have been hit hard by the pandemic, but on the flipside will do well when the economies open again. Xpengreporting today is among the new EV-makers that have gone public and given the weak outlook from NIO last week this earnings report could be important for Tesla and NIO sentiment.

Economic Calendar Highlights for today (times GMT)

1000 – UK BoE Governor Bailey to Speak on Economic Outlook
0000 – New Zealand Mar. ANZ Business Confidence/Activity Outlook survey
0030 – Australia Feb. NAB Business Survey

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