Market Quick Take - September 2, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities came under modest pressure yesterday after having a poke at the highs for the cycle (and actually posting a new high in the case of the Nasdaq 100). We maintain a cautious tone on the lack of two-way volatility and on the extent of the draw-up in the US equity market with no significant correction, though readily definable catalysts are lacking.

EURUSD – the big EURUSD teased back higher as EU yields offered support yesterday and in the wake of a couple of (well known) hawkish ECB speakers who have recently argued for winding down the ECB’s bond purchases. The extension of the rally well above 1.1800 has helped to neutralize the downside threat, but there is a more significant range high up above 1.1900 and the psychological 1.2000 level looming above that - we may need a major catalyst to wax outright bullish as opposed to simply shifting out of a bearish stance.

AUDUSD – in a further sign that the Aussie is turning the corner, AUDUSD rallied well clear of recent Fibo retracement sticking points just above 0.7300 and the 21-day moving average and has launched a sufficiently V-shaped rejection of the most recent sell-off wave to have neutralized the former down-trend. Overnight, Australia posted a record trade surplus, reminding investors that the country has shifted away from its perma-deficits of yore, especially since 2018. This may be behind the powerful reversal in the crosses like AUDNZD and AUDCAD.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Ethereum and some smaller crypto-coins have shot higher in recent days, with Ethereum rallying several hundred dollars yesterday and well clear of the former 3,300+ area resistance level, even as Bitcoin was mired in the range near 50k as of this morning.

Gold (XAUUSD) - remains stuck in 21-dollar range established at the start of the week while silver is attempting a breakout with the XAUXAG ratio challenging support at 75. ECB officials provided some additional support after hawkish comments helped weaken the dollar against the euro (see below). Overall, both metals seem to be on standby ahead of Friday’s job report, which should give further clues about the timing of Fed taper. In gold the key technical resistance level remains $1835 while silver needs to break through $24.50 to attract fresh buying momentum.

Crude Oil (OILUSOCT21 & OILUKNOV21) - trades lower after OPEC and their allies, as expected, ratified the 400,000 barrels/day rise for October, and after US production rose to a 15-month high. Agreeing to another increase while the world is still battling various virus variants highlights the groups confidence in rising demand, but also that they see $70 as an acceptable price level for now. In the US total oil products supplied, a proxy for demand, hit the highest level since at least 1990. Together with soaring gas prices leading to more fuel burns in Asia as well as production lost from hurricane Ida we believe prices may soon find support.

Ten-year US Treasury yields remain rangebound ahead of tomorrow’s job report (IEF:xnas, TLT:xnas). The bond market’s focus continues to be on this week’s job numbers as they will influence the Federal Reserve’s decision regarding when to begin tapering purchases under the QE program. If job figures exceed expectations, we anticipate a tapering announcement already by September’s FOMC and beginning as soon as October. In that case, we will see yields rising and the yield curve steepening with the 10-year yields rising as high as 1.5% ahead of the Fed meeting. In case job numbers disappoint, tapering may be delayed, giving a boost to US Treasuries. In that case, 10-year yields could drop again to test 1.12%. Any rally would be short-lived as we expect a revival of reflation trade in autumn.

Volatility risk in money markets rises as an agreement over the debt ceiling is not reached (BIL:arcx). The spread between 4 and 8-week Bills is widening as the latter maturity approaches the beginning of November, when the US Treasury might face default if Congress does not lift or extend the debt ceiling. That is why today 4 and 8-weeks Bills auctions are important. Any widening of the spread between the two would indicate that money markets are getting uncomfortable about the debt ceiling. The 8-week T-Bills already offer a yield above the Reverse Repurchase facility rate.

What is going on?

US Aug. ADP private payrolls change comes in short of expectations at 350k versus 625k expected. The slowdown in the U.S. job market is mostly explained by growing concerns about the Delta variant. We don’t think we should pay too much attention to this data. The ADP report is subject to significant revisions and it has proved too pessimistic a guide to the NFP report recently.

U.S. August ISM manufacturing beat expectations. The August number came in at 59.9 versus expectations for 58.5 and July’s 59.5. U.S. factories had continued strong growth in new orders and production. But they are still struggling to fill open positions, which might lead to higher wage growth in the near future. This is a key point to monitor for the U.S. in the near-term..currently near 3% Y/Y).

Corn (CORNDEC21) has slumped to a July low and soybeans (SOYBEANNOV21) trades down for a sixth day with the weakness being caused by halted shipments from a key export terminal on the US Guld coast due to disruptions caused by hurricane Ida. With the harvest of both crops about to begin soon the halt could not happen at a worse time as farmers in the Midwest sends a major portion of their harvest down the Mississippi River for shipments around the world via the Gulf of Mexico. There are already signs of the impact with Chinese soybean imports shifting orders for near-term shipments to Brazil instead.

Germany and Greece have been able to tighten the spread of their 30-year government bond issuance (VGEA, IS0L). Although European sovereigns have been selling off for days, Germany and Greece were able to sell ultra-long government bonds at a tighter spread than guidance due to strong demand. It looks the market is buying the rumor (the recent ECB members’ hawkish comments) to sell the fact (next week ECB’s meeting). Yet, holding these securities might be more painful than people think. In only six trading days Greek government bond fell 7% while German Bunds 4%. Bondholders need to be prepared for further losses if the selloff intensifies ahead of the ECB.

What are we watching next?

Jobs report to disappoint on Friday? The ADP private payrolls change number for August came in at a disappointing 350k versus nearly twice that number expected. While this number has been a poor predictor of the official non-farm payrolls change series (August data out tomorrow), there may be some measure of concern that the delta variant has held back jobs growth in August, especially given that self-imposed activity restrictions would be most prominent in the more job-intensive services industries. Consensus expectations are for +725k in payrolls growth.

Next US anti-trust push against Alphabet – The US Department of Justice is readying a new case against Google parent Alphabet as it seeks to investigate whether Google abuses its dominance of the digital advertising market. This is a second potential major suit after the one filed by a number of state attorneys general in the US investigating Google’s agreement with Facebook in which the companies are accused of manipulating online auctions for advertisers. In a separate story, South Korea is forcing both Apple and Google to open their App Store payment systems to other providers.

ECB meeting next week - this week may have offered the impression that ECB hawks are back. After an overly dovish summer, ECB hawks are sending signals to the market. They are pushing for some kind of exit strategy. Yesterday, Bundesbank chief Jens Weidmann warned that the ECB shouldn’t disregard risk of higher inflation. It is unlikely to have any impact on the outcome of next week’s ECB meeting, in our view. The ECB will mostly upgrade its staff macroeconomic projections and discuss the pace of bond purchases for the last quarter of this year.

Earnings to watch today. Chip giant Broadcom will report earnings today after the market, as will highly valued electronic signature company Docusign, which sells at nearly 35 times sales.

• Today: Broadcom, DocuSign

Economic calendar highlights for today (times GMT)

• 0900 – Euro Zone Jul. PPI
• 1230 – US Weekly Initial Jobless Claims
• 1230 – US Jul. Trade Balance
• 1230 – Canada Jul. International Merchandise Trade
• 1400 – US Jul. Factory Orders
• 1430 – DOE's Weekly Natural Gas Storage Change
• 1700 – US Fed’s Bostic (voter) to speak
• 1900 – US Fed’s Daly (voter) to speak
• 0145 – China Aug. Caixin Services PMI

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