Market Quick Take - March 31, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities traded rather heavily, if within a tight range as we ponder next steps for treasury yields and US President Biden’s upcoming stimulus plan, as well as how it will be paid for. Recall that Trump’s lowering of corporate taxes was a huge boon to the US market and that threats that the Democrats will return to a higher tax level could erode support for stocks, even in a recovering economy. Tactically, the S&P 500 Index only starts to get into trouble on a close below 3,900, while the situation for the Nasdaq 100 looks rather nervous, with any new dip below 12,610 possibly ushering in a quick push lower to test the 12,200 key pivot low.

German Dax (DAX.I) - the German DAX index continues its very strong performance, buoyed by prospects of strong earnings from world demand recovery internationally. The index notched above 15,000 for the first time yesterday, although the pace of gains is somewhat worrisome as the acceleration on top of an already strong market could point to destabilizing price action.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin trades near the top of the cycle and the key 60k level, while Ethereum trades near 1895 resistance and below the all-time top of 1975. See our latest Crypto Weekly for an overview of recent key developments.

USDJPY and JPY crosses – USDJPY burst through 110.00 yesterday, likely triggering a number of stop-loss inspired buying as well as having cleared a likely cluster of options structures around that level. The pair trading near 111.00 overnight even without notable new highs in US yields yesterday (were new highs actually reversed intraday) suggests the pair is getting overstretched. Two things will focus traders attention in the session today and in the coming week: the first is the transition to a new Japanese financial year tomorrow and the other is whether US Treasury yields continue to rise in the wake of US labor market data in coming days (noted below). The next major chart level higher is north of 114.50 and arguably the psychological level of 115.00. 

AUDUSD – we can look at AUDUSD as a proxy for how the US dollar is performing relative to the less yield-sensitive currencies (like JPY, SEK) and note that the pair tested toward the key pivot lows yesterday below 0.7600. Risk sentiment and commodities prices are the more likely drivers of AUD direction here, with the recent weakness in the Chinese renminbi adding some further pressure. A break below the very well defined 0.7565 level could open up for a test toward 0.7400, just below which the 200-day moving average comes in.

Spot Gold (XAUUSD) - gold punched to new local lows yesterday well south of 1,700 and traded within a few dollars of the major pivot low and support area just below 1,680, a break of which could open up for 1,600 and even the next major support area around 1,557. Pressure could come from a stronger US dollar and/or higher US treasury yields as we watch for incoming US labor market data in coming days, as noted below.

US massive fiscal stimulus overshadows quarter-end (TLT, IEF). So far, we have not seen quarter-end rebalancing out of stocks and into Treasuries despite today Japan is closing its fiscal year. It leaves Treasuries extremely volatile as President Biden unveils fiscal stimulus today, probably pushing inflation expectations higher.Inflation remains the driving factor of US Treasury yields. Once 10-year yields break above 1.75%, they may rise fast to test the strong resistance level at 2%.

French 10-year OAT bond issuance tomorrow critical as European sovereigns continue to sell off (BTP10). US Treasuriesare dragging European sovereigns lower.It is concerning for the European Central Bank which has been vocal about keeping yields in the euro area low. It will be critical to observe whether demand will support the issuance of the 10-year French OAT tomorrow, as yields are just a couple of basis points away from turning positive. We believe that the ECB is fighting an uphill battle and that its policy to keep yields low might cause rotation from European sovereigns to the US safe havens.

What is going on?

China official non-manufacturing PMI jumps to 56.3 in March, the highest reading in five months and a sharp improvement in the reading of51.4 in Feb. The pick-up in manufacturing for the month after the long national Lunar New Year holiday was less notable at 51.9.

Germany Mar. headline CPI comes in at 0.5% MoM and +1.7% YoY, as expected. While inflation has reached its highest level in Germany since pre-pandemic levels and will likely jump further for a few months on basing effect of the year-ago pandemic break-out, the ECB maintains a rather weak inflation outlook. One recent development supporting that idea is the pay deal between the nearly 4 million Germany metals and engineering workers this week, which produced a modest EUR 500 Covid bonus and a wage rise of 2.3% for the next 21 months.

US Mar. Consumer Confidence rose a staggering 19+ points to 109.7, the largest gain in years for a single month. Normally, this survey correlates best with conditions in the US labor market, but stimulus checks rolling out this month may be behind some of the upside impulse. Both the present situation and the expectations components leaped higher by similar amounts.

What are we watching next?

Amazon.com workers’ unionization vote at Alabama fulfilment center was yesterday, but as it was held by mail the tally will take place today. The implications for Amazon.com are obvious, if labor costs are set to rise for the company at its huge network of fulfilment centers. But alsoat stake is whether a tidal shift is underway for the labor force in the US, where the power of unions has been in decline for decades and never really got going in the South.

US payrolls and jobless claims data this week - with lockdowns easing quickly across many parts of the US this month, this is the month we should expect a strong rebound in payrolls growth on a scale. Data to watch include the March ADP private payrolls data due later today, the initial weekly jobless claims and ISM Manufacturing employment sub-index tomorrow and the official March nonfarm payrolls change up Friday. Expectations for the ADP payrolls today is over half a million and over 600k for Friday’s official payrolls change data, Next Monday, the employment subindex of the March ISM Services index bears watching for the crucial services sector employment. The huge leap in US March Consumer Confidence noted above suggests that we should expect robust employment numbers.

US equity market closed on Friday, bond market only open until Noon in New York – which is rather interesting, given the release of the US official jobs report on Friday morning in the US. On an especially strong or weak jobs figure, the treasury market could be very jumpy due to thin liquidity.

US treasury yields - we have noted that US yields, from five years and further out the curve, are an important market input and that these bear watching for the impact across markets as the cost of funding rises for a market that has enjoyed only easy policy and stimulus. Particularly interesting will be the reaction in US treasury yields to the employment data noted above.

US President Biden to outline infrastructure plan today, thought to be north of $2 trillion - together with new proposals for tax hikes to pay for the plan, a different approach from exploding the deficit to pay for Covid-inspired stimulus. 

Earnings reports this week. A number of interesting Chinese names reporting this week, together with a handful of others, before the big US earnings season starts to crank into gear starting in two weeks. H&M will be an interesting one to watch today, given the stock’s recent fall on the company’s flap with Chinese authorities due to comments about cotton sourced from Xinjiang.

Economic Calendar Highlights for today (times GMT)

• 0755 – Germany Mar. Unemployment Rate / Change
• 0900 – Euro Zone Mar. Flash CPI estimate
• 1215 – US Mar. ADP Employment Change
• 1230 – Canada Jan. GDP 
• 1430 – US Weekly DoE Crude Oil and Product Inventories
• 2350 – Japan Q1 Tankan Survey
• 0030 – Australia Feb. Trade Balance
• 0145 – China Mar. Caixin Manufacturing PMI

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