Market Quick Take - July 1 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures failed to extend their momentum yesterday closing lower despite the ADP job report showed solid job growth in June. The only significant pocket of gains yesterday came from the NextGen Medicine theme basket up 1.3% as the gene editing breakthrough by Intellia Therapeutics over the weekend continues to create spillover effects. Nasdaq 100 futures are trading around yesterday’s close in early trading with the 14,549 level being a key support level.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin finds itself embedded back in the recent range below 35k after topping out over 36k earlier this week. Ethereum is under less pressure since yesterday, having rallied to a new local high yesterday before easing back toward 2,200.

EURUSD – this USD supermajor is testing below the recent pivot low of 1.1848 and thus the lowest levels since the beginning of April, when 1.1704 was the prominent low as US long treasury yields as US yields peaked out. This time around, US yields at the long end of the curve are toward the lower end of the recent range and yesterday’s ADP payrolls data failed to provide any fresh spark to the adjustment higher in Fed rate hike expectations on the back of the FOMC meeting. Tomorrow’s US June employment and earnings data are likely the arbiter of whether this move lower holds and goes on to challenge the “neckline” like area of a head and shoulders formation just below 1.1800 and that 1.1704 pivot.

JPY crosses – US yields are an important focus for all markets, especially the Japanese yen, now that quarter-end factors are out of the way with yesterday’s last trading session of the quarter that may have suppressed those yields. US treasuries have weakened since late trading last night, helping USDJPY jerk back above 111.00 overnight (with a weak Q2 Tankan overnight no help). The next key, as for EURUSD, is likely the US June jobs report and earnings numbers tomorrow. Any fresh sharp rise in long yields could see the JPY’s recent attempt to piece together a rally rejected as the JPY loses out on the Bank of Japan’s policy of controlling yields out to 10-years (cap of 0.25%). The next chart point higher is 114.50, a resistance level for much of 2017 and 2018.

Crude oil futures trade sideways ahead of today’s OPEC+ virtual meeting where ministers will meet to decide whether to raise production further from August and onwards. A marathon session awaits with Russia leaning towards opening the taps while Saudi Arabia prefers a more cautious approach. Surveys point to a 0.5 million barrels per day increase but the outlook is being somewhat clouded by renewed lockdowns in Asia and the potential for a surprise Iran nuclear deal. Brent is currently stuck in a two-dollar corridor between $74 and $76.

Grains and oilseed prices jumped yesterday after the USDA projected lower-than-expected stocks and US farmers planting less acreage. The US estimates are fueling global supply concerns as inventories are slim and growing areas in North and South America are troubled by adverse weather. The Bloomberg Grains Spot index jumped 6.4% with individual prices of wheat, soybeans and corn all rallying. Not least CORNDEC21 which after closing limit up has seen further gains in overnight trading while soybeans (SOYBEANSNO21) and wheat (WHEATDEC21) trade a tad softer. Focus now returns to current weather developments which could still swing final production numbers by millions of tons.

Gold (XAUUSD) led by silver (XAGUSD) has managed to find a fresh bid despite lack of support from a strengthening dollar. Ahead of tomorrow's US job report, the yellow metal found support at $1750 and eventually moved higher after silver managed to bounce from it 200-day SMA. US 10-year real yields in the meantime is doing nothing and as long they remain deeply in negative territory, the prospect for a gold revival exists. Gold will be facing resistance at $1795 followed by $1814, the first key Fibo retracement level. In silver, a break above $26.30 may signal a move to $26.75.

What is going on?

China celebrates 100^th anniversary of the Chinese Communist Party. In a speech at the enormous celebration ceremony in Beijing, Chinese President Xi Jinping weighed in on the country’s history and the party’s role in it and vowed that China and Taiwan would “reunify” and promise to block any attempts of formal Taiwanese independence. Taiwan issued a rebuttal, claiming sovereignty and the desire for self-determination.

No surprise in Jun. US ADP payrolls change. The headline ADP private payrolls change number for June was out at 692k, higher than the 600k expected, but that upward surprise was precisely offset by a -92k revision of the May payrolls change number, taking it down to 886k.

Fed’s reverse repo facility reaches nearly $1 trillion on last day of quarter. The growth of this facility is a symptom of the excess liquidity in the US financial system as the Fed continues its large-scale asset purchases and possibly as large US banks looked to reduce the size of their balance sheets into quarter end to skirt regulatory penalties linked to their size.

Didi Global (DIDI:xnys) becomes second-biggest Chinese IPO in the US. Didi Global, a competitor to Uber Technologies, priced its shares at $14 per share in yesterday’s IPO with shares rising to as high as $18.01 before falling throughout the session to $14.14. The ride-hailing company closed with a market value of $67.8bn and raised $4.4bn in the IPO. The Chinese government has recently started an antitrust case against Didi Global.

Record high demand at the RRP facility will keep US Treasury yields stable regardless of any surprise in jobs and wages tomorrow (SHY, IEF, TLT). The exceptionally high amount of liquidity in markets will limit volatility in bond markets tomorrow amid the nonfarm payrolls report. Yesterday, demand for the RRP almost reached $1 trillion, and there is the probability that that number will rise as the Treasury slashes its Treasury General Account in August. Be cautious: this extreme amount of liquidity means that the Federal Reserve might need to taper fast and aggressively. Low yields also enable the central bank to pursue more aggressive monetary policies.

Demand for duration in euro will be tested today with France and Spain issuing long-term debt (IFRB, IESP). Yesterday’s solid 10-year BTPs auction was catalyst for lower yields across the euro-area. However, Italy offers the best risk-reward ratio in the European Union, being the bloc’s highest yielding sovereign. Today, things might be different for the 20-year OATs and 30-year Bonos auctions, which are going to test market appetite for duration at very low yields, 0.62% and 1.41% respectively.

What are we watching next?

It’s a new quarter – any change in US treasury yields set to unfold? As noted on the massive surge in the size of the Fed’s reverse repo facility into quarter-end, we wonder if the change to a new quarter as well as tomorrow’s jobs report could see a bit more dynamism in US treasury markets, where liquidity factors have likely dominated moves in yields in June. Given that the US Treasury has another month to wind down its “general account” at the Fed that it built up in the wake of the pandemic outbreak last year to the target level of sub-$500 billion by August 1 (with some $250 billion to reduce from current levels to get there), there is some risk that the treasury market continues to trade on these liquidity effects. Treasury yields are important, as any new upside development in yields quickly takes over

Earnings to watch this week. Micron Technology shares fell 2% after its earnings release yesterday despite both revenue and EPS beating expectations. The company’s outlook for FY21 Q4 revenue (ending in August) was $8-8.4bn vs est. $7.9bn reflecting the tight supply and strong pricing which the semiconductor company expects to extend into 2022. Micron is also raising its capital expenditures. The earnings in focus today are from H&M, which has already reported Q2 pre-tax profit of SEK 3.6bn vs est. SEK 3.3bn driven by a positive upside surprise on gross margin hitting 53.9% vs est. 53.2%. H&M says that in local currency terms online sales rose 40% y/y and overall, June sales rose 25% y/y and sees good prospects for cash dividend in 2H 2021.

• Today: H&M, Walgreens Boots Alliance, McCormick

Economic Calendar Highlights for today (times GMT)

• 0715-0800 – Euro Zone Final Jun. Manufacturing PMI
• 0730 – Sweden Riksbank Meeting
• 0800 – UK Bank of England Governor Bailey to speak
• 0900 – Euro Zone May Unemployment Rate
• 1100 – OPEC+ Ministerial meeting look set to start
• 1130 – US Jun. Challenger Job Cuts
• 1230 – US Weekly Initial Jobless Claims
• 1400 – US Jun. ISM Manufacturing
• 1430 – US Weekly Natural Gas Storage Change
• 2200 – New Zealand Jun. ANZ Consumer Confidence

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