Summary: US equities recovered yesterday from a relatively minor stumble, with the broader S&P 500 managing to claw back to a new all-time high by the close before the Asian session brought a bit of retrenchment. In New Zealand, the first community case of Covid-19 in six months spooked crowded NZD longs on the day before the central bank is expected to hike rates. Ongoing Covid-19 concerns in Asia are holding back sentiment outside of the US.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 future nosedived 1.3% in a short timespan late in yesterday’s session before starting a comeback rally that has closed the drop. With the US 10-year yield dropping back towards the 1.2% level technology stocks will get a natural support. The broader equity market is sliding today with Asia looking heavy and European equity futures all in red.
USDJPY and JPY crosses – we continue to focus on USDJPY as a relative measure of JPY strength, but the real action in JPY has been in the crosses, where the recent slide in yields is supporting further JPY strength and major support is under attack in the likes of EURJPY (200-day moving average fell yesterday for the first time in over a year and testing the lowest levels since April) and AUDJPY in a similar state. The JPY rally could deepen if a bit of weak risk sentiment is thrown into the mix.
NZDUSD and all NZD crosses – the NZD was sent into a sudden tailspin overnight on the first confirmed community case of Covid in six months (see more below), which, given New Zealand’s history of extreme measures to prevent the disease from spreading, could result in profound shutdowns of the economy, particularly if it is determined that there are more cases afoot and even more so if it is confirmed that the case or cases are of the delta variant. Already, a rush on supermarkets has been set in motion by this news. Given that yields at the front end of the NZ yield curve has soared to over 100 basis points in anticipation of a string of rate hikes starting with tonight’s RBNZ meeting, the further negative impact on NZD could be considerable if the RBNZ holds tonight, particularly given potentially crowded long NZD positioning.
EU gas (GASNLBASESEP21) and power (POWERDEBASESEP21) soared to new highs yesterday as a Russian supply crunch look set to extend into September. With little explanation from state-controlled gas exporter Gazprom being provided, the market has been left wondering whether the drop is politically motivated related to the Nord Stream 2 which still needs German regulator approval. The current depletion has left the market short of time to refill stocks before winter with the short-term impact being much higher gas and electricity bills across the region as well as higher pollution with gas being substituted by coal.
Gold (XAUUSD) trades higher for a fifth day with lower Treasury yields helping to offset a firmer dollar. With economic activity in China slowing and sentiment in the US taking a knock from a resurgent delta virus, the investment metals have attracted renewed demand. This morning gold trades above its 21-day moving average at $1790, and it may signal a return to the recent range where key resistance remains the multiple tops just above $1830. Silver (XAGUSD) is facing some resistance at $24 followed by $24.50. Today the market will be watching a speech by Fed chair Powell, as well as minutes of the Fed’s last meeting.
This week’s FOMC minutes might be a step towards tapering, but the bond market is not ready for it (TLT). The market is not prepared for the Federal Reserve to taper purchases under its QE programs. Rates have been plummeting since March, hinting at gloomier expectations ahead, dismissing any sign of early tapering. We believe that this week’s FOMC minutes will reveal whether stimulus withdrawal was tackled in depth by the central bank’s members, which could hint to a tapering announcement as soon as Jackson Hole. A surprise will put upward pressure on long term yields, in particular 30-year rates, which are now trading below 2%. Demand diminishes below this level, leaving this maturity particularly vulnerable to a tapering surprise.
Italian government bond yields hit six months low (BTPS). Last week, Italy had to call off a debt auction because the government is flooded with cash. We expect the honeymoon to continue and the BTPS-Bund spread to tighten to 75bps. Yet, it doesn’t mean that Italian yields will not resume their rise. We believe the German election will push yields higher in the entire Eurozone, including Italy. Yet, BTPS yields will soar slower than peers, provoking spread compression against the Bund.
What is going on?
RBA Minutes suggest the central bank is ready to act if Covid impact mounts - in minutes released overnight, the central bank pledged that it is “prepared to act in response to further bad news on the health front should that lead to a more significant setback for the economic recovery”. This sounded rather more cautious than an optimistic statement of just a couple of weeks ago as shutdowns in some of Australia’s largest cities have been widened amid community spread of the delta variant of the Covid virus.
KOSPI 200 plunges 6% in 7 trading sessions. Signs of China slowing down, a semiconductor industry that is peaking in terms of pricing, and a spreading a delta variant in Asia are putting the South Korean equity market under pressure hitting the lowest levels since March. The leading equity index, KOSPI 200, is close to touching its 200-day moving average which is the first time since June 2020.
US August Empire Manufacturing far lower than expected – although it was still at a relatively robust 18.3 reading, the expectations were for 28.5 after the blowout 43.0 of July (highest in the survey’s 20-year history). The index of Prices Received came in at 46.0 versus 39.4, the highest in the history of the survey (three previous all-time highs were set in April, May and July), while the Prices Paid series saw a reading of 76.1, still very elevated if slightly lower than the July reading.
The agriculture sector remains in demand and in the latest COT report covering the week to August 10, the speculative net length in 12 major food commodities exceeded one million lots. Driven by strong buying of soybeans, corn and not least wheat ahead of last week’s bullish WASDE report, with the latter surging higher on weather related production downgrades in the US, Canada and Russia. Dwindling stocks of high protein milling wheat used for human consumption in bread, has given a boost to Paris Milling wheat and Kansas HRW wheat. Sugar is another highflyer due to lower supplies from frost and drought hit regions in Brazil, and news India, the world’s second largest shipper is considering diverting canes towards the production of biofuel to curb imports of increasingly expensive crude oil.
What are we watching next?
Early elections possible for Poland – the ruing Law and Justice party may decide it needs the support of other parties to pass legislation - including a very controversial Media Law that would compromise media independence as well as a tax and spending programme aimed at its populist base - after a party supporting the ruling coalition pulled its support.
RBNZ meeting tonight (Wednesday, 18 August for APAC time zones) – the 25- basis point rate strongly expected by consensus tonight is suddenly in doubt after New Zealand found its first case of “community” Covid in the largest city Auckland today – the first such case since February. No confirmation as of yet on the variant of this case, but Prime Minister Ardern has already called tonight for a nationwide lockdown of 3-days to fight the risk of an outbreak and a 7-day lockdown for Auckland.
Earnings to watch today. We expected Meituan yesterday to release their Q2 earnings, but it has been postponed until 23 August. Today’s earnings focus is BHP Group due to its vast mining operations and thus link to commodity inflation. Walmart and Home Depot are two big retailers in groceries and home improvement which will give good insights into the US consumer outlook for the rest of the year. Sea, which is fast-growing Southeast Asian e-commerce and gaming company, is also reporting and a highly anticipated earnings release as many retail investors are invested in the company.
Economic calendar highlights for today (times GMT)
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Head of Fixed Income Strategy
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