Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: The US equity market staged a partial recovery yesterday, but only after a steep extension of the recent sell-off, as futures trade this morning near the same level they closed on Wednesday. In FX, the US dollar remains pinned near the top of its recent move, as EURUSD trades below the key 1.1700 area. And the yen pulled back broadly higher, trying to maintain pace with the greenback. Commodities took a beating led by those dependent on demand from top consumer China.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities bounced back late in yesterday's session following a sharp technical selloff driven by fears over the economic slowdown related to the delta variant. Asian equities are lower today, but Nasdaq 100 is holding the line in early European trading hours. The 14,895 level is the first key support level to watch and if broken could extend the selloff to 14,809.
EURUSD – watching for closing levels for the week today as the pair has done the deed in breaking below 1.1700 but has yet to follow through notably to the next targets of 1.1600 and possibly 1.1500 or possibly eventually the 1.1290 level, which is the 61.8% Fibonacci retracement of the entire post-pandemic rally, but would likely only extend the sell-off to this degree on a significant deleveraging across global risk assets. Implied options volatility remains very quiet, with 1-month and 3-month implied volatility both below 5.5%.
USDCAD – with the break down in oil prices, USDCAD has screamed higher from its levels at the start of the week to above 1.2850 this morning, with yesterday’s breakdown in oil prices to the lowest levels since May and likely crowded positioning (on the Bank of Canada’s relative hawkish stance, although that story has become stale since early July, given the Fed’s shift toward a tapering stance and a tightening of the spread from July lows in the US dollar’s favour). Yesterday’s extension of the rally was particularly sharp and the huge 1.3000 level is now suddenly not far away, a level that proven pivotal not only late last year, but also before the pandemic outbreak.
Gold (XAUUSD) trades up on the week, thereby building on the strong technical signal from the previous week. This despite a challenging backdrop which has seen commodities suffer their worst week in a couple of months in response to a stronger dollar and the prospect for Fed tapering to start sooner than previously expected. The relative support for gold, despite the stronger dollar, compared with others has been driven by some haven demand, as virus woes dent the general risk appetite, thereby supporting bonds with yields holding steady despite increased taper risks. However, for gold to shine again it still needs to break decisively above $1830/oz.
Crude oil (OILUSSEP21 & OILUKOCT21) found a fresh bid in Asia after slumping to the lowest since May in response to Covid-19 risks to demand in China and other major consumers, a stronger dollar and US shale production rising to a one-year high. Further weakness from here would once again turn the spotlight back on OPEC+ with verbal market intervention potentially being followed by talks of pausing agreed production increases until a clearer demand picture emerges. Brent managed to find support ahead of the May low at $64.5/b.
Copper (COPPERUSDEC21) slumped to a four-month low before finding support below $4/lb, and so far, it is holding above the 200-day SMA at $4.03. The metal together with iron ore, the most China-centric commodity has been hurt by the recent weakness in Chinese macro numbers, the spreading of Covid-19 in China and now also a stronger dollar. While the short-term technical outlook has deteriorated, the long-term bullish outlook for copper remains as demand for green transformation metals heat up.
What is going on?
Global container shipping rates continue to rise with the Drewry Composite Container Freight rate rising to $9,600 per 40 ft box compared with a long-term average around $1,600. The biggest rise seen on the U.S. west coast, as the biggest trade gateway with Asia is clogged with inbound container vessels, thereby delaying turnarounds and the availability of containers. Furthermore, the world’s third-busiest container port, China’s Ningbo-Zhoushan has remained partially closed for a prolonged period due to a Covid outbreaks.
China-centric commodities, led by iron ore, took a beating yesterday before attempting to recover during today’s Asian session. Iron ore trades down by 12% this week while copper sank to its lowest price since April. Still down 7% it has nevertheless managed to climb back above its 200-day SMA at $4.03/lb. The main culprits behind the weakness which also helped drive crude oil to a 3-month low are concerns about growth in top consumer China, the delta coronavirus variant, and the fear the Fed could taper quickly, driving the dollar to the highest since November. Bar a few which included gold, these developments helped trigger multiple sell signals driving down the Bloomberg Commodity index 3% on the week.
KOSPI 200 and CSI 300 are sounding the alarms bells. The South Korean and Chinese equity markets are declining again today with the CSI 300 down 9% for the year and KOSPI 200 touching the lowest levels since the first trading day of the year. The technology crackdown and changing priorities in China including its new data privacy law are causing global flows to reverse across Asian markets.
China’s Evergrande told to fix its debt situation by financial regulators. The PBOC and China Banking and Insurance Commission issued a statement after meeting with Evergrande representatives yesterday demanding the company stop spreading false information and telling it to get its house in order, a sign that regulators are losing patience with the company, the largest real estate developer in China. Evergrande’s debt has been in a downward spiral since June and pushed lower this week, with one 2025 Evergrande bond trading below 40 cents on the dollar overnight.
Investors buy inflation protection securities amid stagflation worries (TIP). Yesterday’s reopening sale of 30-year US Treasury Inflation-Protected Securities attracted strong demand and awarded a high yield of –0.292%, the highest on record. The auction came after a volatile day in markets where risky assets plunged, and safe havens such as Gold and nominal US Treasuries were well bid. It is a sign that investors are increasingly concerned about the growth outlook.
What are we watching next?
Broadening evidence of the risk of a significant market decline. Yesterday we penned a longer piece and an abridged version breaking down the evidence that this market could face a significant setback in coming weeks as the post-pandemic stimulus cycle has largely played itself out.
Jackson Hole next week - the bottom line in the wake of the FOMC minutes is that most on the Fed seem ready to taper and before the end of the year – but when? The next steps will include any hints from Fed Chair Powell himself at next week’s Jackson Hole Fed symposium, which may offer clues on whether the September 22 FOMC meeting is “live” for an actual taper announcement, with purchases to actually slow starting October 1, for example.
Earnings to watch today. Today’s earnings focus is Deere which is one of the largest manufacturers of farming equipment and a good read into the demand outlook for the agricultural sector.
Economic calendar highlights for today (times GMT)
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