Summary: Equity markets are trading on nervous footing as global bond yields are rising everywhere, even if US treasuries at the longer end of the curve are still slightly below the cycle highs. In the UK, Prime Minister Johnson survived a party leadership confidence vote, but his future remains murky. Overnight, the Reserve Bank of Australia hiked 50 basis points, stoking an AUD rally in the crosses, while the Japanese yen continues its collapse as the Bank of Japan’s yield curve control policy means that the currency asborbs the pressure of rising yields when Japan’s bond market can’t.
Nasdaq 100 futures are this morning trading around the 12,500 level with the 12,454 level being the key support level to watch on the downside should the selling pressure continue. The equity market remains weak despite the recent rebound from the cycle lows with commodity prices hitting a new all-time high recently and Larry Summers comments that the US is entering the “age of residential inflation” and will require Volcker style aggressiveness to tame inflation. The US 10-year yield is also surging on strong momentum hitting 3.05% this morning putting pressure on long duration technology stocks.
Chinese equities are weak today fluctuating between small gains and losses from yesterday. Chinese authorities were said to be completing their cybersecurity investigation into Didi Global Inc (DIDI), Full Truck Alliance Co (YMM), and Kanzhun Ltd. (BZ) and preparing to lift bans on adding new users and allowing their mobile apps back on domestic app stores as soon as this week. According to the Wall Street Journal, these companies would be subject to fines and must give 1% equity stake to the Chinese Government. Didi jumped as much 68% before closing 24% higher yesterday in New York. The report did not generate much further hype in Chinese internet stocks today.
The yen is practically spiraling into the abyss, dropping to new lows almost across the board as most major economies saw their longer-term government bond yields posting new cycle highs late last week, with a fresh rise in yields to start this week. Every uptick in yields is transmitted straight to the JPY as long as the Bank of Japan maintains its cap on 10-year JGB yields. The US 10-year yield, unlike most of its DM peers, has yet to post new cycle- and multi-year highs above 3.25%, but should it do so, the pressure on the JPY will mount further and at some point, the Bank of Japan may be forced down from its policy, which could trigger monumental volatility should it do so. Traders should tread carefully here.
The Aussie got solid support in the crosses from the RBA decision overnight to hike rates by 50 basis points to take the policy rate to 0.85% (most were expecting either a 25-basis point move or a 40-basis point hike to get the central bank’s policy rate onto a standard quarter-point increment of 0.75%.) AUDNZD, for example, jumped to a new four-year high on the development. But weak risk sentiment in Asia saw the currency trading lower versus the US dollar as the AUDUSD pair last week found resistance right around the key 0.7260 area, which contains multiple longer term moving averages, including the 200-day SMA. A new sentiment rally and rally in key commodity prices will be needed to pick the AUD up again in the AUDUSD context.
Crude oil trades near $120 after last week’s OPEC+ production hike failed to ease worries about tight supply, and after Saudi Arabia raised its July sales prices to Asia by more than expected in anticipation of strong demand for its crude, not least from China where lockdowns continue to be eased. Brent has so far been rejected twice at $122, the key battleground ahead of $123.75, while fuel products, led by gasoline, already trade at record levels, as refineries scramble to supply a fuel market that has been upended by sanctions and robust demand. With supply being this tight, prices will likely need to go higher in order to kill demand and balance the market. On tap today, EIA’s Short-Term Energy Outlook and API’s weekly stock report.
Gold trades below its 21- and 200-day moving averages, both around $1842, with the fresh loss of momentum being driven by rising yields and a stronger dollar after robust US data last week eased worries that a rapid succession of rate hikes would drive the US economy into a recession, thereby raising the risk of stagflation and a so-called policy mistake. US ten-year inflation adjusted yields trades around 0.25%, a key reason why some traders see gold as being overvalued at current levels. Support at $1830 and $1820. Copper (COPPERUSJUL22) and Silver (XAGUSD) meanwhile both trades lower on global growth worries, with silver’s three successive rejections around $22.50 raising the short-term downside risk
US yields jumped higher yesterday but are not providing the leadership for this cycle, as yields have posted new cycle highs almost everywhere else as early as late last week. The 10-year Treasury benchmark traded clear of 3.00%, but the big focus is on the 3.25% area that was near the cycle high of 2018. The US Treasury will auction 3-year notes today, 10-year notes tomorrow and 30-year T-bonds on Thursday.
Elon Musk is continuing to find all levers available to change the deal price of the Twitter acquisition or maybe pull out of the deal all together. We know from recent internal e-mails that Musk is getting very negative on the global economy and with his wealth being under pressure from falling Tesla shares the pressure is mounting on Musk. The ongoing dynamics make it less likely that the deal will go through.
This includes proposals to raise its ambition on the carbon market, impose an emissions levy on energy-intensive products from abroad and phase out the combustion engine by 2035. The plans to slash emissions by 55% by the end of the decade have become even more pertinent following the Moscow’s invasion of Ukraine, as the region attempts to break its Russian fossil fuels habit.
... given the focus on global supplies of key stables from wheat and rice to edible oils. The USDA’s World Agricultural Supply and Demand Estimates are scheduled to be published on Friday. The Food and Agriculture Organization (FAO) of the United Nations also publishes its biannual Food Outlook on Thursday and will be key to watch for developments affecting the global food and feed markets. In addition, the market will focus on the Black Sea area and whether a deal can be reached that will allow Ukraine to ship up towards 25 million tons of grains currently blocked in. Speculators meanwhile have been net sellers of six crop futures for the past seven weeks, cutting bullish bets by 26% from a ten-year high.
A quiet earnings week is ahead of us but earnings releases from Inditex (parent company of the Zara brand) tomorrow will be monitored for guidance on consumer sentiment in Europe. Later on Thursday, DocuSign and NIO will be two closely watched technology companies with DocuSign being one of the big casualties since the peak last year in US technology stocks; analysts are expecting revenue growth to slow to 24% y/y with a big increase in operating income expected.
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy