Market Quick Take - May 20, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities were in for a choppy session yesterday, likely distracted by the freefall earlier in the day in cryptocurrency prices before that market’s powerful bounce saw a sympathetic bounce in equities that took the action back to more or less unchanged. The action reminds traders of the critical 12,915 area lows in the Nasdaq 100 as an important support, while the 13,450-13,550 zone higher is the important pivot zone now. The S&P 500 found support ahead of the key 4,040 area pivot low from last week that could trigger further selling if broken. Resistance is in the 4,179 area that capped the action at the start of the week.

Euro STOXX 50 (EU50.I) - ECB’s comments yesterday about market exuberance came just before the intraday meltdown in cryptocurrencies and steep risk-off across equities. STOXX 50 futures have recovered overnight and in early European trading sitting around the 3,950 level which right in the middle of the trading range established over the past month. ECB’s comments are a bit ironic since the exuberance is the biggest in bonds driven by their own action, which then are fueling more aggressive equity valuation. The party will always end with the central banks. For STOXX 50 futures today’s important support level to watch is yesterday’s close at 3,930.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Intense selling pressure in the crypto space saw remarkable volatility yesterday, likely aggravated by leveraged positions in the market in the wake of a People’s Bank of China statement reminding that digital token payments are not legal in China. Bitcoin fell nearly all the way to 30k before a sharp rebound toward 40k, while Ethereum sold off over 40% intraday before bouncing from under 2,000 to over 2,600 as of this writing.

EURUSD – after posting new highs near 1.2250 yesterday, EURUSD retreated south of the 1.2200 level and would be in danger of a tactical reversal if the price action is not sustained above perhaps 1.2150. Yesterday saw new highs in the German Bund yield easing as new support came into the market – as rising EU yields have been a key support for the recent strength in the euro. It looks a pivotal session or two ahead for this supermajor and the USD outlook.

AUDUSD – the Aussie remains surprisingly resilient and rangebound after the Chinese government weighed in against recent commodity price rises (more below), not to mention Chinese directing companies to look for ways to avoid importing Australian iron ore. Australia is China’s number one source for iron ore imports. The Australian jobs data overnight was mixed, with strong +34k growth in full time positions a positive, but the drop in the participation rate of 0.3% exceeding the 0.2% drop in the unemployment rate to 5.5%. Some volatility should be expected in the Australia jobs market after the end of pandemic-related wage subsidies in April. AUDUSD traders are waiting for the price action to drop out of the 0.7675- 0.7900 range of the last five weeks.

Gold (XAUUSD) trades at a four-month high following a roller coaster day where continued turmoil in the crypto space triggered a round of haven buying before deflating somewhat after FOMC minutes turned out to be more hawkish than expected (see below). Silver (XAGUSD) as well as HG copper (COPPERJUL21), two recent outperformers, got caught up in the general risk aversion, both however without breaking any downside levels that could signal a deeper correction. Gold has yet to close above $1876, the 50% retracement of the August to April correction, and until it does, look out for any bond market related weakness.

Crude oil (OILUKJUL21 & OILUSJUn21) took a tumble to a three-week low after the broader market slump was exacerbated by the prospect of a boost in Iranian supply as nuclear talks continue and the EIA reported a 1.3 million barrels rise in crude stocks. A report that was distorted by last week's Colonial pipeline outage. Mitigating the rise was a drop in gasoline stocks and implied gasoline demand exceeding 10 million barrels/day for the first time in 14 months. Brent is likely to remain stuck in a $65 to $70 range while the ongoing virus threat prevents a synchronized recovery in global fuel demand at a time of rising OPEC+ production.

What is going on?

FOMC minutes seen as more hawkish than expected - although the reaction looks rather strong relative to the modest indications that some Fed members would like for the debate to begin on when it would be appropriate to consider a taper of asset purchases. The key portion of the minutes discussing this: “A number of participants suggested that if the economy continue to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” While the USD is stronger after this development, yields are hardly changed after an initial knee-jerk sell-off in treasuries.

China sends another warning on rising commodity prices. The Chinese cabinet weighed in against rising commodity prices yesterday – and announced efforts it would take to curb commodity inflation, with Premier Li Keqiang saying that more needs to be done to prevent price rises from being passed through to consumers. Iron ore futures sold off sharply in China overnight. These comments raising concerns about the resilience of Chinese demand, and together with broader market turmoil yesterday helped send futures contract linked to energy, industrial metals and agriculture lower. The Bloomberg Commodity Index lost 1.8% on the day led by weakness in oil, copper and soybeans.

What are we watching next?

US Fed’s Kaplan to speak later – Robert Kaplan is president of the Dallas Fed and is not a voter this year, but has been one of the first to speak out on the Fed needing to taper asset purchases “sooner rather than later”. Given the focus on the mild taper talk in the FOMC minutes released last night, this could elicit a market reaction if Kaplan indicates a significant number of Fed members share his views in his appearance today.

Robinhood IPO S-1 filing is expected next week – the fastest US retail brokerage company which was catapulted Robinhood into world-wide fame during the historic GameStop squeeze as the company was forced by US regulators to put up more regulatory capital to maintain client positions. Since the hectic weeks of the GameStop squeeze the retail brokerage firm has worked to filed for IPO to both increase capital but also capitalize on its high growth rates over the past five years. The company is saying that it expects it S-1 filing to be ready by next week and is aiming for first day of trading by the end of June.

Earnings reports this week. Strong Q1 earnings and outlook from Chinese e-commerce giant JD.com was enough to offset weakness Chinese equities which are still digesting technology regulation and a declining credit impulse normally an indicator of lower growth ahead. Today, the key earnings to watch are from Tencent which is sitting in the middle of the Chinese technology regulation and drive to increase market competition. Tencent shares are still down 20% from the peak in January, but overall, the stock is holding up well given the increased uncertainty about regulation. Global investors have increasingly warmed up to Chinese technology companies which are becoming more attractive in terms of valuation. Lately, both George Soros and Cathie Wood have been increasing their stake in Chinese technology companies.

• Today: Applied Materials, Ross Stores, Palo Alto Networks, Tencent
• Friday: Richemont, Pinduoduo, Deere

Economic Calendar Highlights for today (times GMT)

Today: South Africa SARB Interest Rate Announcement

• 1230 – US May Philadelphia Fed Survey
• 1230 – US Weekly Initial Jobless Claims
• 1400 – Canada Bank of Canada to release Financial System Review
• 1430 – US Weekly Natural Gas Storage change
• 1430 – US Fed’s Kaplan (non-voter) to speak
• 1500 – Canada Bank of Canada Macklem Press Conference
• 2300 – Australia May Flash Services PMI
• 2301 – UK May GfK Consumer Confidence
• 2330 – Japan Apr. National CPI
• 0130 – Australia Apr. Retail Sales

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