Summary: Summary: US equities closed last week atop a very sharp two-day comeback after a prior steep sell-off, with the mood in Asia mixed to start the week as Taiwan and Japan struggled, while mainland Chinese shares rallied sharply again after avoiding several attempts at breaking down through key support last week. In commodities, iron ore prices have plummeted in recent sessions, copper is edging lower, and grains have tumbled from the highs last week.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – The US equity market extended its sharp bounce on Friday from the Thursday lows and the S&P 500 even rose above the 61.8% retracement of the sell-off at 4,158.5 and closed above the 21-day moving average just above that. The Nasdaq 100 Index found support at the ultimate 61.8% retracement near 12,912 but has bounced less relative to the prior sell-off wave. Next resistance there is perhaps 13,650, the current 21-day moving average. The seeming tight recent correlation between equities and treasuries is a concern for rising volatility.
Euro STOXX 50 (EU50.I) - following two strong sessions to end last week STOXX 50 futures are now back above the 4,000-level flirting with the all-time highs. Growth continues to be strong out of China, although one could argue that we got a minor disappointment overnight on retail sales, supporting growth dynamics in Europe. The value vs growth rotation is also favouring European equities with higher index weight on materials, energy and financials.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin tumbled sharply to a new three-month low at the weekend after Elon Musk seemed to indicate that Tesla had sold its Bitcoin holdings, a rumor he explicitly denied in a tweet this morning, which saw the price recovering. As well, at the weekend, reports of the Bitcoin ransom payment paid to hacking outfit DarkSide being seized (and its involvement in the whole episode) might be considered bad PR. Bitcoin traded overnight to almost exactly its major high from early January near 42k. Most of the entire crypto space suffered a setback at the weekend, as Ethereum sold off to 3,127 before bouncing overnight, at the trough of the sell-off representing a draw-down of over 28%.
AUDUSD and other small G10/USD pairs – traders have suffered significant churning in these pairs in recent days after the recent breakout lower for the US dollar in the wake of the weak April US jobs report led nowhere, after which the USD first rallied and reversed that move, only to back down again sharply Friday. Frustrated traders will be looking for a clearer signal on direction this week, with one indicator – commodities prices, from collapsing grains and Chinese iron ore prices in recent sessions to sideways oil prices, offering a recent headwind for the bearish USD case. For a pair like AUDUSD, a more bearish signal, after the recent rejection of the 0.7825+ breakout, would be a close back below about 0.7675 and eventually below the major 0.7532 pivot from April 1.
EURUSD – similar to the USD comments above, EURUSD is struggling for tactical direction here, but at an interesting time when focus has picked up on EU sovereign yields after the German 10-year Bund yield rose above a major pre- and post-pandemic high near –15 bps, as the hopes for a growth resurgence in Europe are picking up with the prospect of lockdowns ending. EURUSD needs to avoid pushing back towards 1.2000 to avoid the limbo of the range if traders want to keep their sights on the cycle highs from the beginning of the year near 1.2350.
Gold (XAUUSD) trades above its 200-day moving average to challenge trend line resistance from the August high, today around $1858. A break signaling a potential extension to $1876, the 50% retracement of the August to March correction. A slightly stronger dollar being more than offset by lower Treasury yields following Friday’s disappointing U.S. retail sales. Broad weakness across the crypto space potential playing a part as well as the “store of value” label is being challenged.
The grains sector suffers a post-WASDE hangover. After reaching an 8-½ year high the sector suffered its biggest setback since the rally started last August. This after the monthly WASDE report, out last Wednesday, projected lower corn exports and slightly higher production of all three major crops leading to higher new crop stockpiles. Ahead of the slump speculators had already taken the foot of the gas and cut their corn (CORNDEC21) net long by 15% to 316k lots. Overall, it supported an overall reduction in the combined three major crops net long to the lowest since December, thereby reflecting a distinctive cooling attitude to a rally which temporarily went parabolic.
FOMC minutes, 20-year US Treasuries bond auction and European CPI numbers are this week bond’s market focus (IEF, TLT). Last week’s US CPI numbers left the bond market divided between the Federal Reserve’s message of continuous support and fears of higher-than-expected inflation. While Wednesday’s 10-year US Treasury sale received the highest demand from foreign investors since August last year, the 30-year US Treasury auction showed that investors are not yet ready to pick up duration. The 30-year bond auction on Thursday tailed 2.2bps, ending up offering a yield of 2.395%, the highest since November 2019. It is a sign that US Treasuries remain vulnerable, and any other surprise could provoke yields higher.
What is going on?
Chinese April data overnight shows disappointing consumer spending - although year-on-year levels are difficult to interpret due to the extreme effects of the pandemic outbreak and response last year, the clear pattern underlined in the data overnight is that industrial production has bounced back and grown to a far greater degree than final consumption, likely a frustration for policymakers in China looking to rebalance the economy more toward consumption.
US Retail Sales fell in April, the month after an enormous surge from the large $1,400 stimulus checks sent out in March, with that March data for Retail Sales actually revised higher (to +10.7% month-on-month for the headline versus original +9.8%, and ex Autos and Gas to +8.9% vs. 8.2%) while the April data point disappointed (headline at 0.0% vs. +1.0% expected, and ex Autos and Gas at –0.8% vs. +0.3% expected). The degree to which further opening up in the US offsets the fading effect of stimulus checks will be important to watch in coming months.
US inflation expectations rising fast, according to the US University of Michigan survey published Friday. The survey of 5 to 10-year inflation expectations has risen sharply from multi-decade lows prior to the pandemic and in April spiked further to 3.1%, the highest reading in 10 years. The 1-year expectations likewise spiked further – to 4.6%. Both previous spikes to similar levels in 2011 and 2008 were associated with sharp rises in prices for gasoline.
Speculators sell into overheated commodity market. Despite seeing 9 out of 24 major futures contracts record +4% gains in the week to May 11, money managers, according to the latest Commitments of Traders report, instead opted for a small reduction in bullish bets. The most noticeable net selling hitting crude oil (45k) and corn (56k) while buyers concentrated their efforts in gold (29.5k), soybean complex (16.8k), natural gas, gas oil together with sugar and cocoa.
What are we watching next?
Correlation between US equities and treasuries – we are in an unusual period with US equities and treasuries showing a positive correlation, which is at odds with “normal” conditions of the last couple of decades and could mean the kind of two-way volatility we saw over the last week and more in both treasuries and equities extends, as the two asset classes don’t provide any diversification of returns, a situation that aggravates volatility for trillions of dollars of assets under management based on assumptions that the correlation is often negative rather than positive.
Earnings reports this week. Earnings in the MSCI World continues at a blistering pace of 26% growth q/q showing much more strength than US equities and US technology stocks. This week many leading Chinese technology and e-commerce companies are reporting. In the US, the most important earnings during the week will come from Home Depot and Lowe’s as these two home improvement retailers are a good pulse on commodity inflation.
Economic Calendar Highlights for today (times GMT)
1215 - Canada Apr. Housing Starts
1230 – US May Empire Manufacturing
1300 – Canada Apr. Existing Home Sales
1400 – US May NAHB Housing Market Index
1405 – US Fed Vice Chair Clarida to Speak
2000 – U.S. Crop Planting Progress Update
2350 – Japan Q1 GDP Estimate
0130 – Australia RBA Minutes
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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