Market Quick Take - May 18, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – The US equity market sold off yesterday after the two very strong prior sessions, but ended the day well off the lows and the futures rallied overnight on a strong Asian session. The local resistance in the S&P 500 Index is 4,180 ahead of the 4,238 top and for the Nasdaq 100 the 21-day moving average at 13,621. Key support for the Nasdaq 100 is recent low in the 12.915 area. Traders will do well to keep an eye on the US treasury market, which has correlated positively with US equities (note under What Next below) for over two weeks. Treasury price rolled over yesterday after a recent rally. Any strong new surge in US yields could provide a headwind for further notable gains, especially for the more yield-sensitive Nasdaq 100.

Euro STOXX 50 (EU50.I) - the commodity sector was yesterday again one of the strongest performers suggesting the value vs growth trade is continuing. This trend is benefitting European equities and STOXX 50 futures have erased yesterday’s losses pushing towards the all-time high from six sessions ago. If the US 10-year yield is stable around the current level, there is little downside risk for equities overall at this point.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Crypto traders are still trying to pick up the pieces after one of the worst sell-offs of the year (surprisingly, the percentage draw-down for Bitcoin in this latest episode is very similar in magnitude to the brief one in January). Maintaining above the key 42k level (near the high from Jan and low yesterday) looks important for avoiding a further sell-off. Ethereum has rallied back to the pivotal 3,500-3,600 area.

AUDUSD and other small G10/USD pairs – a comeback in commodities yesterday helped to boost the smaller G10 currencies versus the US dollar once again, after some recent choppy see-sawing in the price action. AUDUSD and NZDUSD are still in the shadow of the recent sell-off and in Australia, commodities are important for any prospects of new highs, as the RBA is not doing much to support (see comments on RBA meeting minutes below), but USDCAD touched close to the cycle low and the big 1.2000 level.  A breakdown in the USD versus these pairs needed after recent choppiness for USD bears to have a more comprehensive argument.

EURUSD – the EURUSD supermajor rose close to the cycle high of 1.2182 yesterday and looks primed for further gains if sentiment continues to pick up for the Euro Zone recovery and EU sovereign yields continue running higher, after the German Bund (10-year) rose to new cycle highs recently. A key challenge and test of the rally would be any fresh strong rise in longer US treasury yields, which were a major USD support back in March. But at present US “real yields” - the nominal yields adjusted for break-evens, have been falling and are near the lows since Feb.

Gold (XAUUSD) led by silver (XAGUSD) continues to trade higher after breaking the down trend from last August while on-fire silver once again is aiming for $30. Supported by general metal strength, Asian virus woes, Middle East tensions, elevated crypto volatility denting its store-of-value credentials, a weaker dollar and stable Treasury yields. Support in silver at $28.30 and gold at $1845 while the next levels of resistance can be found at $29 and $1876. Focus on FOMC minutes tomorrow.

Copper (COPPERUSJUL21) trades higher and sits just 2.5% below the record from last week. The market has been focusing on green transformation demand giving copper a major boost due to inelastic supply from producers. The latter receiving increased attention after the Chilean election left power largely in the hands of the left wing. They have proposed a progressive rising tax on Chilean copper sales to a maximum of 75%, a proposal that potentially could be copied by the leading Presidential candidate in Peru. Together these two countries account for around 40% of global supply.

Crude oil (OILUKJUL21 & OILUSJUL21) gearing up to challenge resistance, in Brent at $70 and WTI at $66.75 with a potential break then targeting the March highs at $71.40 and $68. While part of the rising gold story is due to escalating Asian virus worries, oil bulls instead take comfort from growing demand optimism in the U.S., Europe and China. We are skeptical about oil’s short-term ability to move higher on these types of headlines with a synchronized recovery in global fuel demand needed to justify higher prices at this time.

The selloff in European sovereigns will not be over until a new equilibrium is found after the German election (IGEA, BTP10). News concerning a possible rate hike in Hungary in June caused a selloff in the bloc’s government bonds as investors feared that the ECB will follow withs a light tapering of the PEPP program. This caused Italian sovereigns to lead losses as they are the biggest beneficiaries of purchases under the PEPP. Although Italian BTPS yields are now offering a pick up over Greece, they rose only to the highest level since last summer. In comparison, French and German yields rose to a two-year high. While Italian BTPS will be met with higher demand as their nominal yield rises, the same cannot be said about other EU sovereign offering ultra-low yields. We expect the German election to push yields in the euro area further up, but to cause spread compression among EU countries in the long run.

What is going on?

Hungarian Central Bank signals possible rate hike and as soon as next month after the country’s headline inflation rate rose above 5% in the April CPI release. This caught the market by surprise and EURHUF dropped over 1% to its lowest levels since August of last year.

Chile stocks sold off hard yesterday as a vote leaves the left in charge of writing of new constitution. Chile will be writing a new constitution and elections held at the weekend have resulted in strong for the left bloc that could change the game for Chilean companies and result in heavier taxation of large miner’s profits in particular. That is the fear behind a fall of 9.3% in Chile’s stock market yesterday.

Australia’s central bank, the  RBA, published minutes of its last meeting overnight that continue to relay the message that the bank doesn’t forecast that conditions will be in place for a rate hike until 2024 at the earliest, while arguing that economic data (particularly employment) and market stability will be the critical factors for whether the central bank will make any adjustments to its QE programme and whether it will roll forward the 0.10% yield control target of the April 2024 Australian Government Bond to the November 2024 bond. Given the clear focus on employment outcomes, the April Australia employment data on Thursday will be closely watched. Tonight’s Q1 Australia Wage data for Q1 is expected to show wage rises of only 1.4% YoY, one of the reasons the RBA is not concerned about excessively inflationary outcomes.

What are we watching next?

Correlation between US equities and treasuries – as noted in yesterday’s Quick Take, it is unusual to see the recent positive correlation, which could drive significant volatility if it continues, particularly if US treasuries sell-off steeply again and take long US yields back toward new cycle highs.

UK Apr. CPI tomorrow morning at 0600 GMT – and noting the contrast in the UK CPI readings relative to the US if the UK reading comes in anywhere near expected (+1.5% YoY headline and +1.3% YoY core). The US April CPI headline number of 4.6% YoY and a core reading of 3.2% were the highest in many years. Higher relative CPI with a policy rate still near zero supports sterling over the US dollar, for example from a “real yield” perspective, I.e., the amount that inflation exceeds the policy rate makes the real return on holding US dollars far inferior if US inflation rates remain comparatively elevated.

Earnings reports this week. Yesterday, we flagged that Meituan, Xiaomi, and Tencent would report earnings. Either the earnings calendar we are using was wrong or all companies moved their release date over the weekend. Meituan and Xioami are both reporting instead next week. Tencent Music reported as planned yesterday with revenue beating estimates while active user numbers came in a bit lower. The music streaming service also said that it is having talks with Chinese regulators without specifying on what matters. In Europe this morning, Generali has reported much better than expected earnings. Today, the key focus is on Walmart and Home Depot to get insights on the current inflation situation.

• Tuesday: Generali, Vodafone, Walmart, Home Depot, Sea, NetEase, Baidu, Trip.com, Take-Two Interactive
• Wednesday: Experian, Cisco, Lowe’s, JD.com, Target, TJX Cos, KE Holdings
• Thursday: Applied Materials, Ross Stores, Palo Alto Networks, Tencent
• Friday: Richemont, Pinduoduo, Deere

Economic Calendar Highlights for today (times GMT)

• 0900 – Euro Zone Mar. Trade Balance
• 1230 – US Apr. Housing Starts and Building Permits
• 1400 – UK Bank of England Governor Bailey to Speak
• 1505 – US Fed’s Kaplan (non-voter) to speak
• 2030 – API's Weekly Crude and Fuel Stock Report
• 0030 – Australia May Westpac Consumer Confidence
• 0130 – Australia Q1 Wage Index
• 0600 – UK Apr. CPI

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: