Summary: Equities have largely traded sideways in a low-energy session yesterday and overnight for global markets as we await new catalysts and failed to find one in a US 10-year treasury note auction yesterday. The focus today could be rather intense on the US March CPI release as headline inflation is expected to jump well north of 2% before an inevitable further spike in coming months due to the basing effects of Covid-induced price collapses last year.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities traded in a narrow range near all-time highs for the major indices as we await interesting macro data today in the form of the March CPI and a 30-year T-bond auction as well as the anticipation as earnings season kicks off in earnest this week.
Stoxx 50 (EU.I) - three straight lower highs suggesting downward pressure on European equities and lack of any clear catalyst. European equities are still among the cheapest in the world, but political risk premium and uncertainty of the economic rebound due to lack of fiscal impulse could cause an overhang for a while. The 3,900 level in Stoxx 50 futures is the key support level and if broken opens up for a large selling area.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin has traded nervously back and forth across the 60k level and below the all-time high north of 61.7k as traders mull taking the price to new territory – dips have been very shallow, and some test would seem imminent. Ethereum pulled back to the 2150 area after testing new highs near 2200 yesterday.
EURUSD and AUDUSD – the USD picture remains in limbo after a fairly weak US 10-year auction only boosted US yields very slightly ahead of today’s 30-year T-bond auction and March CPI data as we still look to yields and secondarily, risk appetite, for sparking direction (higher US yields presumably USD-supportive). EURUSD has been trying and so far failing to break back above the 200-day moving average near 1.1900 and arguably needs to make a run for 1.2000 to neutralize the recent sell-off wave. Elsewhere, the USD has been firmer, if completely sideways, as in AUDUSD, where the search continues for a pulse after the pair has traded sideways for weeks in an impossibly tight range. The 0.7550 area to the downside and 0.7700-50 area to the upside could trigger fresh order flow.
USDJPY and JPY crosses – today could prove a pivotal day for the interest-rate sensitive JPY crosses, which generally rose on a fresh uptick in US yields. With today’s US T-bond auction and March CPI release, treasury market activity could heat up again. USDJPY looks pivotal in the 109-110 zone and yields remain the key coincident indicator, with any fresh rally in longer-dated US treasuries possibly leading to 107-75-108.00, while a pull higher in yields would likely mean we saw the lows for now in USDJPY and possibly other JPY crosses. (In EURJPY, the technical situation focuses on whether the pair has formed a double top, while in AUDJPY, the watch is one for whether the pair will trace out a head and shoulders formation if it sells off a bit more this week toward 82.50.)
Spot Gold (XAUUSD) remains stuck in neutral and struggling to find a gear. Yesterday it reversed lower in response to higher yields after the U.S. Treasury auctioned 3- and 10-year notes. Despite rallying stock markets, higher yields and a firm dollar the yellow metal managed to stabilize during March, not least due to investment flows turning positive as central bank buying from Hungary (63t) and India (160t) exceeded the amount that was sold via ETF’s (183t). We maintain a short-term neutral view on gold and while the twice rejection below $1680 points to a potential bottom it still needs confirmation, hence the focus on $1765. Focus this week on U.S. CPI and U.S. Treasury auctions.
Crude oil (OILUSMAY21 & OILUKJUN21) trades higher in response to Middle East tensions and robust Chinese trade data for March, but overall remains rangebound with the prospect for stronger economic growth helping to offset the impact of continued virus flare-ups, and rising US shale oil production just as OPEC+ prepares to add supply. While the demand outlook into the second half looks strong, short-term challenges are likely to keep Brent rangebound, currently between $60.5 and $65.5. Focus today on OPEC’s Monthly Oil Market Report.
Today’s 30-year US Treasury auction might see weak demand, sending 10-year yields higher to 1.75% (TLT, IEF). Yesterday’s 3- and 10-year bond auctions went reasonably well. Yet, demand for Treasuries remains below the one-year average, indicating that if inflation expectations continue to rise, investors are ready to dump the safe-havens. We believe that tonight’s 30-year auction might be the catalyst for a further steepening of the yield curve, particularly if CPI data come stronger than expected. If such a scenario were to happen, 10-year yields have the potential to be pushed up to test their resistance line at 1.75%.
Italy 3-, 5- and 15-year bond auction will test the market following Draghi’s announcement the country will increase debt by EUR 40 billion (BTP10). Today Italian BTPS will test investors' appetite, as the country prepares to issue more debt. We believe that Italian sovereign bonds represent an important source of coupon, which investors cannot turn down while a big part of non-US assets offer negative yields. Therefore, Italian BTPS will continue to be well bid, especially long-term issuances which at the moment provide a considerable high yield compared to peers.
The United Kingdom will sell more 50-year Gilts today amid high demand (IGLT). The UK will reopen the 2071 Gilts issuance as investors are demanding more of this maturity.Dealers have been reluctant to sell the bonds to the Bank of England as part of the QE programme because they do not want to run short of 50-year maturity. We will be closely monitoring the auction bidding metrics and 10-year yields to understand weatherhigh demand can positively affect sentiment in the belly of the curve.
What is going on?
Political situation in ruling CDU/CSU bloc heating up further after party meetings. The CSU leader Markus Söder is loudly challenging the CDU leader Armin Laschet, who is already suffering badly in the polls, together with the polling of voting intentions in the September election, with the bloc having lost all of its boost from the pandemic response. A decision on who will be the bloc’s candidate could be forthcoming in days, with CDU leadership still apparently supporting Laschet.
Biden touts support for big official boost to chip production. US President Biden touts bipartisan congressional support for $50 billion effort to support semiconductor manufacturing and research in the wake of the ongoing global shortage.
China trade surplus far smaller than expected at $13.8B – while exports in March did grow at a 30% year-on-year clip (a pace impacted by the Covid disruptions of a year ago), the growth of especially commodity imports was higher and the overall import growth reached 38.1% year-on-year. The miss was significant as expectations were for a surplus of over $50 billion.
NVIDIA to make CPU in attack on Intel. Shares of Intel fell yesterday as NVIDIA announced that it will begin making CPUs for big cloud companies in their data centers. In addition, the chipmaker announced that Q1 revenue is tracking above $5.3bn and the fiscal outlook is tracking beyond the previously communicated outlook.
What are we watching next?
US 30-year T-Bond auction and March CPI release today - these could be pivotal for US yields and spark volatility into other markets if demand is particularly weak at the T-bond auction or the CPI reading is far north of expectations. The March CPI reading is expected at 0.5% MoM and +2.5% YoY for the headline and +0.2% MoM and +1.5% YoY for the core readings.
RBNZ meeting tonight – no changes to the policy rate expected, but NZD could be reactive to anticipated moves on the housing market, following recent government initiatives to limit housing speculation and the recent addition of the price of housing to the RBNZ’s mandate.
US set to apply currency manipulator tag to Taiwan, but not China? This is widely expected as Taiwan runs a large trade surplus with the US and has shown obvious signs of manipulating its currency and building large FX reserves to avoid strength in the past, with recent weakness mostly down to sympathetic weakness in other regional currencies on rising US yields. The move is a bit confusing, given the geopolitical backdrop and US diplomatic support for Taiwan, not to mention the global semiconductor shortage, with Taiwan the largest producer of high-end chips. China is not expected to be on the list of manipulators.
Earnings reports this week. The earnings calendar heats up this week as the first Q1 results roll in. Three major US banks will be in focus, the biggest of them all JPMorgan Chase, and then Wells Fargo and Bank of America. The latter two are worth watching due to their large footprint in ordinary US households. With the latest talk that retail investors are losing interest in trading the market, the report from Charles Schwab looks key, and finally Delta Air Lines is crucial for understanding travel dynamics as the Covid lockdowns are lifting in the US.
Economic Calendar Highlights for today (times GMT)
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