Summary: Equity markets were mixed yesterday and overnight, with Chinese shares trading heavily for the second session in a row. Elsewhere, US treasuries rallied steeply all along the yield curve, taking yields to their lowest level in more than a week, despite a series of very strong US numbers recently. The Japanese yen has enjoyed that particular development and USDJPY has moved back below 110.00.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – after a string of strong sessions, the US equity market cooled off yesterday with a quiet session as the S&P 500 Index must get accustomed to the new territory above 4,000. The steepness of this rally is unusual. The two times in recent memory when the market has rallied in a semi-parabolic fashion – in June and early September of last year, a significant and rather steep consolidation set in. The Nasdaq 100, meanwhile, has cleared 13,300 area resistance recently, with the key overhead resistance now at the all-time high just short of 14,000.
German Dax (DAX.I) - we noted yesterday that a that a 10% move in the space of just a couple of weeks is rather aggressive for the German Index, and yesterday opening level was near the high price of the day, with a back-up in the Euro not helpful as the cash session closed yesterday on the session lows despite an overall gain on the day. The index could consolidate back to the prior major high near 14,800 without perturbing a very strong trend.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin is languishing near the lower end of the recent rather tight range, trading below 58k, with the 60-61.7k zone the key overhead resistance. Ethereum has grabbed more attention recently by pulling to new record highs, but trades below 2,100 this morning after posting a new high-water market at 2,150 yesterday.
EURGBP – the European Commission said that enough vaccine supplies will be available to immunize the majority of EU citizens by the end of June, far earlier than previous expectations, (although this like depends on more widespread use of the controversial AstraZeneca vaccine, which would account for some 70 million of the total). Regardless, this news item may have been behind the very steep rally in EURGBP yesterday as this reminds the market that the UK’s first mover advantage on vaccinations will eventually fade in the coming months. The next areas of interest higher include 0.8650 (recent pivot area) and then perhaps 0.8760, the 38.2% retracement of the sell-off from the December high.
USDJPY and JPY crosses – the sharp rally in US treasuries yesterday has helped support the JPY again after its recent long bout of weakness. Given that this rally in treasuries comes as we have seen some very impressive macro numbers out of the US, it suggests that the market remains well supported, which could also support the JPY here. Levels to watch for if the yen is mounting a more determined comeback include the prior high in USDJPY near 109.35, and in EURJPY, the battle between the two currencies and the double top at 130.67 is in focus.
Spot Gold (XAUUSD) & spot Silver (XAGUSD) - both punched higher yesterday but have yet to succeed in changing the general perception the metals are currently of little use while the dollar flexes its muscles and stocks continue to reach new record highs. The double bottom created last week below $1680 providing some technical support but for confirmation it still needs to break above $1765. Silver meanwhile found resistance at $25.30, the trendline from the February high while platinum's (XPTUSD) discount to gold dropped below $500 for the first time since May 2019 on strong industrial demand. Focus on today’s FOMC minutes and Chinese PPI on Friday.
Crude oil (OILUSMAY21 & OILUKJUN21) remains rangebound with the prospect for stronger economic growth helping to offset the impact of a resurgent coronavirus. A US industry report showed a 2.6 million barrels drop in US crude stocks last week while gasoline stocks continued to recover with 4.6 million barrels gain. The weekly EIA report is due later and surveys point to a 1.6 million barrel drop in oil stocks. While the demand outlook into the second half looks strong, short-term challenges remain to keep Brent stuck in a $60 to $65 range for now.
US yield curve flattens with the belly of the curve leading the gains (TLT, IEF). Yesterday, the US yield curve flattened considerably led by 5-year Treasuries as investors unwinded short positions after last week's nonfarm payrolls. We believe the rally in Treasuries is misleading because sentiment remains bearish in the long term. Today the FOMC minutes might give better insight on how members envision the economic recovery and when they expect to hike rates. If 5-year US Treasury yields break above 1%, they might provoke a squeeze that could send 10-year yields on a fast track to 2%.
Bearish sentiment in European sovereigns is accelerating countries’ plans to issue new debt (IEGA, IBGM). Despite the European Central Bank has increased purchases under the PEPP program, European sovereigns continue to tumble. Bearish sentiment in pushing countries to take the decision to issue debt now other than running the risk to issue more expensive debt later. Italy and Portugal have announced that they are looking to issue 50- and 10-year government bonds respectively. These issuances and the ones of Spain and France tomorrow are key to understand whether demand for European sovereigns continue to be supported.
What is going on?
A national coalition of US businesses mounts anti-trust campaign against Amazon. The Wall Street Journal (paywall) has an exclusive report on this story, which is an effort by a number of US trade groups, each representing thousands of businesses, to influence Congress to new federal legislation to move against Amazon.com by requiring it to spin off business lines and to not sell its own products in competition with its other suppliers., among other efforts.
Toshiba Corp. (6502:xtks) is considering a buyout offer from CVC Capital Partners, who may be offering a 30% premium over the company’s recent share price. This could be the largest private equity-led buyout of a company in years, with the deal possibly worth some $20 billion.
High end Arabica Coffee which slipped 10% last month rose 3.9% yesterday amid signs of a widening supply deficit in response to reduced output in Brazil and as global demand recover with vaccine rollouts facilitating the easing of social restrictions and a gradual return to out-of-home coffee demand in cafes, workplaces, and restaurants. Brazil’s largest co-op Cooxupe has forecast their growers will see their coffee production decline 32% from this season due to dry weather and very warm temperatures. In the futures market, however the one-year contango remains stubbornly high above 7% and needs to come down (market to tighten) to attract further investment demand.
Coinbase announces preliminary Q1 figures. The largest trading exchange of cryptocurrencies is still pending for its IPO with no update on pricing or first day of trading. However, the exchange announced yesterday preliminary figures showing net revenue at $1.8bn which is almost twice as much as Euronext revenue in all of 2020. The strong figures will likely drive huge demand for shares in Coinbase at the IPO.
What are we watching next?
Are we at peak US outperformance here? We have seen a string of impressive numbers out of the US recently, including nearly a million payrolls added in the March jobs report and a record ISM Services survey released this Monday. But elsewhere, there is also good news: the Banca D’ Italia’s Eurocoin growth indicator suggests Europe is undergoing its strongest GDP growth surge in more than twenty years, and that is even before the EU has enjoyed more widespread lifting of Covid restrictions (quite the opposite, in fact). This isn’t to say that the US economy is set for a rough patch, but the contrast in the recent data relative to the market action (lower US yields and a lower US dollar) is striking.
Earnings reports this week and next week. The earnings calendar is non-existent this week as the Q1 earnings season is warming up for its beginning next week. Major US banks will be in focus with Wells Fargo and Bank of America 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, earnings from Charles Schwab will be of interest, and finally Delta Air Lines is crucial for understanding travel dynamics as the economy recovers.
Economic Calendar Highlights for today (times GMT)
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