Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: The US equity market avoided panic ahead of the weekend after the Fed moved to allow special leverage ratio rules for banks to expire at the end of this month rather than extend the rule. Overnight, the surprise firing of the Turkish Central Bank chief saw a plunge in the Turkish lira of as much as 15% before the currency found support. The Asian session was mixed, with Japanese equities down sharply while Chinese shares firmed.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities failed to panic after the Fed moved to allow the expiry at the end of this month of special leverage ratio rules for banks, a measure enacted during the disruptions of the pandemic outbreak last year. The S&P 500 Index found support right on the 21-day moving average and Fibo retracement near 3,875, an important support ahead of the 3,813 level, the 61.8% of the most recent rally save. For the Nasdaq 100 index, the important local pivot is the just broken 21-day moving average near current levels at 12,915, with a clearly defined overhead resistance level at 13,287 and the next pivotal level lower near 12,615, the last important Fibo level ahead of the recent 12,200 low.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - the crypto space generally avoided the kind of drama that has marked weekend trading on many occasions in recent history, although a rather steep sell-off in Bitcoin nearly all the way to 55k did materialize yesterday before finding support, while Ethereum has traded in an unusually constricted range centering in 1,800.
EURUSD – the big supermajor slipped toward the lows of about two weeks ago (1.1836) late last week as Europe stumbles with the vaccine roll-out, risking another at least partially lost tourism season for Southern Europe. The 200-day moving average has quietly creeped higher and is now at 1.1857. This moving average was last crossed in May of last year. Big picture, the EURUSD trade must ponder here whether the recent break below 1.2000 will lead to a deeper follow-through lower to 1.1600 or even 1.1500 or whether that recent break was a red herring, possibly to be reversed if US treasury yields stop their ascent, although the support found since last Thursday has failed to drive much support for the euro.
USDTRY – the Turkish lira gapped lower by nearly 15% before finding support overnight and cutting those loses approximately in half after Turkish president Erdogan fired the central bank chief who had hiked rates 200 basis points on Thursday to 19%, more than the 100 bp hike expected and sending the Turkish lira sharply stronger. The new political interference from Erdogan, who has long railed against hiking interest rates because he thinks they cause inflation, send the lira into a tailspin on fears that international investors will pull their money from the country on concerns of new rate cuts the would undermine the orthodox “bitter medicine” of further interest rate hikes to stabilize and strengthen the currency. The country is already low on reserves and could, in extremis have to implement capital controls if capital flight, whether domestic or foreign, becomes a deepening problem. The Turkish lira’s woes are seen as driving no real contagion risk across EM currencies.
Gold (XAUUSD) and especially silver (XAGUSD) and platinum (XPTUSD) have all started the week on a sour note in Asia, and without any trigger apart from a slightly stronger dollar due to Turkish currency turmoil (see above and below). With U.S. yields trading softer ahead of another week of heavy bond auctions, the downside risk looks somewhat limited. The latest COT report covering the week to March 16 saw buyers return to gold for the first time since January. The net-long jumped 30% from a multi-month low after gold managed to find support below $1688/oz. We remain short-term neutral below $1765 with the risk of additional weakness below $1730.
Crude oil (OILUKMAY21 & OILUSAPR21) has steadied after an ugly week which saw a long overdue correction trigger the biggest reversal in five months. Despite recovering somewhat on Friday, both Brent and WTI stay below their 38.2% retracement levels at $65.25 and $62 respectively. The short-term outlook remains challenged by pockets of excess supplies and a slow vaccine rollout and extended lockdowns. Hedge funds held an elevated 72.7 million barrel long into last week's selloff and the extent to which it needs to be reduced further may set the tone for the week ahead. Focus this week on verbal intervention from producers and the April OPEC+ meeting and how they will react to the latest price weakness.
US Treasuries will keep volatile throughout the week amid several Federal Reserve’s speakers, Treasury auctions and Personal Consumer Expenditure data (TLT, IEF). It will be a busy week from the very beginning. Today the Fed’s Chair Powell will speak at an event at the Bank for International Settlements. He will also testify in front of Congress tomorrow and on Wednesday. Despite the week is busy with Fed’s speakers, the focus will be on the demand of US Treasuries during this week’s auctions in particular the 7-year one on Thursday which last month drew record low demand since 2009. On Friday, PCE data will drive inflation expectation putting US Treasuries further at risk.
What is going on?
Turkish president Erdogan fires central bank chief after last week’s large rate hike – see more above on the USDTRY comments. This will likely have little or no direct contagion to other emerging market currencies, where the level of political pressure on central bank policy is not as high, nor the level of central bank reserves so low.
Managed money traders cut what recently was a record bullish commodity bets ahead of last week’s market moving FOMC meeting. The changes in the week to March 16 was, however, a mixed bag with no clear thread seen across or within the three sectors. Half of the 24 commodity futures tracked in our update on www.analysis.saxo were sold, led by natural gas, wheat and copper while buying among the other half was concentrated in corn, gold and the three fuel contracts. Overall, the net long was cut by 2% to 2.5 million lots to the lowest exposure since the week to December 22.
Speculators finally bailed on their long-held dollar short positions against ten IMM currency futures and the Dollar Index. In the week to March 16, they halved their bearish dollar to a nine-month low. Speculators sold a whopping 46k lots or $5.3 billion equivalent of yen futures, thereby flipping the position to a net short for the first time in a year. This was the largest weekly selling of yen since 2011 and interestingly it occurred during a week where the yen traded rangebound and only finished down 0.5%.
What are we watching next?
US Treasury Yields and Treasury auctions this week – the US treasury market has been the source fo considerable attention and moves there have certainly sparked moves in other assets, from gold to equities and the US dollar. Treasury yields have eased lower since their peak last Thursday in the wake of the FOMC meeting, which made it clear once again that the Fed is not concerned with the level of yields at the longer end of the curve yet. Treasury auctions are worth watching this week for the level of demand, both foreign and domestic. A 2-year auction is up tomorrow, a 5-year auction on Wednesday and a 7-year on Thursday.
IPO market ramping up in coming weeks. Many new IPOs are being announced these weeks both in the US, Europe, and China. This morning Roofoods, the parent company behind Deliveroo, has set its IPO price at GBp 390-460 on 384.6mn shares valuing the company at GBP 7.6-8.8bn, making it the largest IPO on the London Stock Exchange this year. Deliveroo say gross transaction value rise 64% in 2020 as lockdowns increased demand for food delivery services. Amazon holds a 16% stake in the Roofoods.
Earnings to watch – the earnings season is thin these weeks as the market is waiting for the Q1 earnings season to kick off in three weeks. This week many major Chinese companies across the energy, industrial and banking industries will report earnings. The only important US company to report this week is Adobe. All names marked in red are the ones that can impact overall market sentiment or their specific industry.
Economic Calendar Highlights for today (times GMT)
1230 – US Feb. Chicago Fed National Activity Index
1300 – ECB's Weidmann to Speak on BIS Panel
1300 – US Fed Chair Powell on BIS Panel discussing central bank innovation
1400 – US Feb. Existing Home Sales
1430 – US Fed’s Barkin (voter) to speak on Covid “scarring” of the economy
1730 – US Fed’s Quarles (voter) to speak on Libor transition
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