Market Quick Take - March 24, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – tremendous divergence in US equities yesterday, as the megacap Nasdaq 100 index tried to put on a show of resilience and only closed very slightly lower, while the S&P 500 Index rejected the bulk of the prior day’s rally, and small cap stocks were blasted for their worst session since last June, in the case of the Russell 2000 Index. If the Nasdaq 100 joins the broader selling pressure, traders should eye the recent 12,682 low as a possible trigger for a test of the 12,200 pivot lows from early March, noting that the 200 day moving average comes into the picture soon below that (rising from 11,868 currently). For the S&P 500, the local pivot low of 3,875 remains a focus, possibly opening for a 3,813 test, the last major Fibonacci retracement level that could trigger a more profound deleveraging if broken (3,710 is the next pivot low of note)

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin yesterday teased below the pivot low around 53.3k without breaking, likely an important level ahead of what looks like the existentially important 50k area for Bitcoin bulls if a new selling wave materializes. Ethereum has failed to bounce after the Monday sell-off that took the cryptocurrency below the prior range (1715-1880+). Eyeing the chart there, the 1300-1400 zone looks to be the key structural pivot area.

USDCAD – while the price action in USDCAD was rather muted compared to the other commodity dollars (rising far less than AUDUSD and NZDUSD fell over the last session), this was actually quite an impressive performance from CAD, as one wuld normally have expected a far larger correction, given the huge sell-off in crude oil prices. One development offering some CAD support was the announcement yesterday by the BoC’s Gravelle of an unwinding of some BoC liquidity programmes (more below in What is going on?). But USDCAD has now retraced much of the latest sell-off wave and would complete that if it trades north of 1.2700, which would point to further consolidation that could lead as high as the major 1.3000 area.

EURUSD – the pair is pushing on the key pivot lows below 1.1850, a break of which could open up for 1.1600 and even 1.1500 ultimately. The chief driver of the moment could be the sense that the Euro Zone recovery keeps pushing farther and farther over the horizon as Covid lockdowns spread. And rather dire “risk off” sentiment in Asia is likely also supporting the US dollar.

Gold (XAUUSD) trades steady as it remains in no-man's land with falling real yields, down to –0,7%, being offset by continued dollar strength.  While hedge funds increased bullish bets by 30% from a 22-month low in the week to March 16, ETF holdings continue to dwindle with almost daily declines seen since early February. We remain short-term neutral below $1765 with the risk of additional weakness below $1720. Silver (XAGUSD) meanwhile is standing close to the edge with fading support from industrial metals. Below $25 the market will be focusing on $24.84 followed by $24.65, the 200-day moving average.

Crude oil (OILUKMAY21 & OILUSAPR21) took another hit yesterday with Brent breaking support to touch $60/b, a very important psychological level, and one that OPEC+ is likely to step in and defend. Continued fund selling helped drive the front month spreads back into contango thereby sending a signal of oversupply. Overnight the market has rebounded as investors and traders assess the impact on global oil and product flows after a 400-meter container blocked the Suez Canal. More than 1 million barrels of oil and products passes through in both directions daily. Given the potential for OPEC+ responding to a s/t deteriorating demand outlook we see the downside in Brent limited to around $58/b.

Today’s five-year auction will give a better insight over Treasuries’ foreign demand (TLT, IEF). Yesterday’s 2-year Treasury auction failed to show that foreign investors’ demand is increasing before the end of the fiscal year. Indeed, while the bid-to-cover ratio was slightly higher than last six auctions’ average, indirect bids were lower. Following the auction, the market rallied with 10-year yields closing at 1.61%. Yet, sentiment can quickly change if we see weak foreign demand in today’s 5-year auction. Geopolitical tensions with China are currently also supporting US treasury prices.

New lockdown measures, slow vaccination campaigns, turmoil in Turkey and geopolitical pressures from China support European Sovereigns (BTP10, IS0P). European sovereigns continued to tighten yesterday as countries imposed new lockdown restrictions ahead of Easter. Italy tightened around 4.5 basis points to a yield of 0.59% as Draghi vowed that 80% of Italian would be vaccinated by September. Yet, European sovereigns remain sensitive to the performance of US Treasuries, which might resume their selloff at any point.

What is going on?

Bank of Canada announces it is unwinding emergency programs. Bank of Canada Deputy Governor Gravelle yesterday announced that on May 10, the bank will stop its term repurchase operations and another repo facility. Programmes for buying commercial paper, provincial bonds and corporate bonds will also be unwound. The main Canadian government bond programme will be retained, but Gravelle teased an eventual tapering of QE purchases. The measures in aggregate will lead to a notable reduction in the Bank of Canada’s balance sheet in coming months.

US chip-maker Intel (INTC:xnas – shares rose 6% yesterday) announces big spending plans on new factories, including new foundries for making chips for other countries. This will put the country in direction competition with the world’s leading advanced chip-maker Taiwan Semiconductor Manufacturing Co. (TSMC – US ADR is TSM:xnys). The initial plans are for two factories costing $20 billion in Arizona, with other factories planned for the US and Europe and other locations. TSMC is also building a plant in Arizona for some $10 billion.

Strong Adobe (ADBE:xnas ) earnings and guidance. The leading creative software maker reported Q1 earnings last night with revenue at $3.91bn vs est. $3.76bn and EPS $3.14 vs est. $2.79. The company guides EPS of $11.85 up from previously $11.20. Revenue growth for the previous quarter was 26% y/y the highest in many years although from a lower base due to Covid-19 it shows that the company is still finding new ways to generate revenue.

GameStop (GME:xnys) shares slide 15% in extended trading. The popular meme stock that has been the center of an incredible short squeeze causing big losses for some hedge funds some months ago finally hit reality yesterday with its earnings release. Figures disappointed across the board and shares traded down 15% in extended trading, which could trigger heavy selling with cash equity trading starts today.

What are we watching next?

Next US stimulus plans from the Biden administration - President Biden is said to be planning to reveal 2022 spending requests next week. It will be interesting to watch the reception of these plans by key Democratic senators and even the Republican opposition to see if they can progress.

US Treasury Yields and Treasury auctions today and tomorrow – US yields have been tamed in recent sessions, and are far less in focus than they have been for the last couple of weeks. Today and tomorrow see two large treasury auctions of 5-year and 7-year treasuries, respectively, that will help determine whether the “rising US yields” narrative can be entirely taken off the front burner for now.

Quarter end equity/fixed income rebalancing – with huge moves lower in bonds in the first quarter, portfolio rebalancing into quarter end next Wednesday could see buying pressure for fixed income and selling pressure in equities from those portfolio managers with a mandate to maintain specific percentages of their assets under management in bonds and stocks.

Earnings to watch – strong earnings yesterday from Adobe could lift sentiment in US technology stocks today, but otherwise the rest of the week is now about Chinese earnings with the most important earnings today being PetroChina, Xiaomi, and Tencent.

• Today: PetroChina, Xiaomi, ANTA Sports Products, China Mengniu Dairy, Tencent, General Mills, E.ON
• Thursday: China Mobile, China Life Insurance, China Evergrande New Energy, Nongfu Spring, CNOOC, Anhui Conch Cement, China CITIC Bank, Country Garden
• Friday: China Construction Bank, China Petroleum & Chemical, China Shenhua Energy, Bank of Communications, Longfor Group, Meituan

Economic Calendar Highlights for today (times GMT)

0815-0900 – Euro Zone Mar. Flash Services and Manufacturing PMI
0930 – UK Mar. Flash Services and Manufacturing PMI
1230 – US Feb. Durable Goods Orders
1250 – US Fed’s Barkin (Voter) speaking
1330 – Czech Central Bank Rate Announcement
1345 – US Mar. Flash Markit Services and Manufacturing PMI
1400 – US Fed Chair Powell and Treasury Secretary Yellen speak before Senate Banking Panel
1430 – US Weekly DoE Crude Oil and Product Inventories
1500 – Euro Zone Mar. Consumer Confidence
1700 – US 5-year Treasury Auction
1735 – US Fed’s Williams (Voter) to speak
2300 – US Fed’s Evans (Voter) to speak on economic outlook

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