Market Quick Take - July 29, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities tried to extend the rally from the lows as the FOMC meeting failed to bring any threatening message on imminent Fed plans to remove accommodation, with the Nasdaq 100 clearing the key 15,000 level briefly and the S&P 500 above 4,400 before sentiment softened again after hours in late trading, in part on Facebook shares selling off after it report earnings (more below). The first significant downside levels are the respective 21-day moving averages – 14,818 for the Nasdaq 100 and 4,350 for the S&P 500.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Bitcoin price action remains bottled up near the critical 40k area, unable to drum up fresh bullish momentum from the fairly USD-bearish FOMC meeting. Ethereum has traded sideways below its own key resistance area into 2,400-40. A draft of the US infrastructure bill (more below) would look to raise $28 billion by taxing crypto assets.

Facebook (FB:xnas) – Facebook reported strong results that beat estimates, but in its guidance said that Apple’s new restrictions on data collecting on mobile devices could bring “headwinds”, as could regulatory changes. These concerns saw Facebook shares tumbling sharply in after hours trading by some 5%.

Boeing (BA:xnys) – Boeing shares surged over 4% yesterday as the company reported its first profit since 2019, easily beating consensus estimates with earnings of $0.40 per share. As well, the “cash burn” rate for the quarter was far lower than expected at $705 million (estimated to have been over $2.5 billion).

High Grade Copper – miners at the world’s largest copper mine, the Escondida mine in Chile, are moving closer calling a strike after rejecting the “final” wage off from owner BHP Group. Copper prices have seen a resurgence recently from just below $4.20 per pound to above $4.60 per pound earlier this week and actually settled sharply lower yesterday below $4.50 per pound despite this news.

EURUSD – EURUSD is trying to build a base after the FOMC failed to provide a spark for further downside as Powell stuck to his guns in expressing a wait-and-see approach (more below). The price action rose to a new more than two-week high above 1.1850, although the trading range has been very compressed and the bar is high for a proper bullish reversal here given the scale of the June drop, but a start would be a rally clear of the psychological 1.2000 level.

AUDUSD – continuing to look for signs of life here as the bear trend has stalled out after the price action dropped below the key 0.7400 area. A bullish reversal would require a sharp rally to 0.0.7500 to start, but really the 0.7600 area is the important hurdle, which is near recent pivot highs and now the 200-day moving average. Australian short rates aren’t doing much to inspire Aussie bulls as these have drooped to local lows well below 25 basis points over the last couple of sessions.

US Treasuries (SHY:xnas, TLT:xnas, IEF:xnas) The US treasury market got very little out of the FOMC meeting last night, with long treasuries knee-jerking slightly lower upon the release of the statement before erasing that reaction and the US 10-year benchmark, for example, trading nearly unchanged this morning from the closing level on Tuesday just below 1.25%. It’s important to remember that the US Treasury is poised to finish drawing down its general account with the Fed, which could put further pressure on yields in the near-term. In the long-term, yields will inevitably rise as the central bank’s focus shifts more and more towards inflation, and a tapering announcement gets closer.

What’s going on?

FOMC meeting brings modest shift in direction of tapering. There was a clear shift in the language in the monetary policy statement issued late yesterday by the FOMC as “progress” towards the Fed’s goals was noted in the modest changes to the June statement, while the language around the Fed’s QE was repositioned slightly, rather than suggesting that the Fed “will continue to increase its holdings…” to “Last December, the Committee indicated that it would continue to increase its holdings.” In the press conference, Fed Chair Powell indicated that the “substantial further progress” toward the employment goals has not yet been met, while his dodging of inflation questions, saying that the committee will have to decide if inflation goals have been met, indirectly suggested that there are diverging opinions on inflation. After a brief pulling higher of rate expectations upon the new monetary policy statement release and during the Powell press conference, the reaction was later erased, suggesting that this meeting and press conference brought no new surprises.

The Federal Reserve established a “rate corridor” in money markets to prepare for tightening (SHY). The Fed established a standing repo facility (RP) at 0.25%, creating a ceiling in money markets, while the Reverse Repo facility (RRP) stands as a floor at 0.05%. By setting up these repo facilities the Fed decreases the necessity to be reactive amid market disruptions.

China moves to calm markets after recent sell-off. The Chinese security regulator called a meeting of investment bank executives late yesterday in an effort to bring calm to the Chinese equity market after a steep sell-off on Beijing’s move against the online education industry, with reassurances that the measures were targeted only at that industry and not others. Elsewhere in China, the PBOC boosted cash injections into the financial system yesterday, adding CNY 30 billion of liquidity with a reverse repo operation. The Chinese CSI-300 index was up over 1.5% from yesterday’s close as of this writing.

Infrastructure bill passes first test in US Senate bipartisan support – an initial vote on moving the $550 billion forward succeeded in avoiding a filibuster as more than 12 Republican Senators voted in favor of moving the bill forward, though the crafting of the bill is not complete and would still need to not only pass the Senate but also the House before Biden can sign the bill into law. The bill includes spending for bridges, public transport, power grids, electrical vehicle charging infrastructure and more. Much of the spending would be spread over five years and thus would represent a very modest fiscal impulse.

What are we watching next?

St. Louis Fed’s Bullard out speaking tomorrow. During Fed Chair Powell’s press conference, it was implicitly clear that the Committee is divided on Fed messaging on inflation as Powell deferred to “the committee” rather than expressing his opinion on inflation on a couple of occasions. One of the leading voices in expressing a more hawkish view on inflation has been St. Louis Fed president Bullard, who, although not a voter may be seen as representing a concerned faction among key Fed profiles. He has already been out saying that the time is right for the Fed to begin tapering purchases and will speak on Friday.

Robinhood IPO to price and trade today (HOOD:xnas). The US-based retail trading platform Robinhood is expected to begin trading today with an offering price of $38 per share, which would value the company at nearly $32 billion.

Earnings for the rest of this week. Germany car-maker Volkswagen has already been out reporting this morning, and raised its earnings outlook due to strong anticipated demand for higher end cars and despite the chip shortage limiting production. In the US, E-commerce and cloud computing giant Amazon is the latest mega-cap to report as the company reports earnings for the first time under new CEO Andy Jassy. The Amazon Web Services growth and guidance will be closely watched, with Q2 estimated by analysts to have grown some 31% year-on-year.

• Thursday: Volkswagen, Amazon, Mastercard, Twilio
• Friday: ExxonMobil, Chevron, Caterpillar, BBVA, BNP Paribas

Economic Calendar Highlights for today (times are GMT)

• 0700 – Spain Jul. Flash CPI
• 0730 – Sweden Q2 GDP indicator
• 0755 – Germany Jul. Unemployment Change / Unemployment Rate
• 0830 – UK Jun. Mortgage Approvals
• 0900 – Euro Zone Jul. Confidence Surveys
• 1230 – US Weekly Initial Jobless Claims
• 1230 – US Q2 GDP Estimate
• 1430 – US Weekly Natural Gas Storage hange
• 2200 – New Zealand Jul. ANZ Consumer Confidence
• 2330 – Japan Jun. Jobless Rate
• 2330 – Japan Jun. Industrial Production
• 2350 – Japan Jun. Retail Sales
• 0130 – Australia Q2 PPI

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