Summary: US equities sold off yesterday after attempting to rally earlier in the day, with the Nasdaq 100 index now pushing down near three-week lows in futures trading overnight. Speculative names were worst hit. Elsewhere, bonds rallied in the wake of US data despite a record high ISM Manufacturing Prices Paid reading and precious metals rallied, with silver breaking above resistance.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – momentum has faded dramatically over the past week with the 4,167 level looking critical on the downside in the S&P 500 futures. If broken it could initiate a short-term sell-off in US equities. Yesterday’s big beat on ISM Prices Paid led commodity stocks higher while the interest rate sensitive stocks were down across the board despite the US 10-year yield not moving a lot indicating that equities are expecting higher prices and potentially lower margins later into the year.
STOXX 50 (STOXX50E.I) - momentum has come to a stop as well in European equities as investors are digesting the potential direction in German yields which have been moving higher lately. Earnings are strong and the Covid-19 pandemic seems to be coming under control in Europe with the continent opening its economies. STOXX 50 futures are boxed into a tight trading range of 3,925-4,000.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin has been unable to take out the key 58.1k area retracement, even as it made an intraday go at 59k yesterday, so clearly this is the technical resistance holding the price action back from a fuller recovery. Ethereum, meanwhile, is in its own universe, ramping higher for further record levels yesterday and overnight above 3,400, although price action in the Asian session was quite choppy (3,455 high followed by sell-off below 3,200 only to rebound to 3,380 as of this writing).
AUDUSD – the Aussie was slightly firmer overnight in some crosses on the new RBA statement release, which upgraded the outlook for the domestic economy and offered the guidance that the yield-curve-control policy would be reviewed at the July meeting. AUDUSD has been trading in an impossibly constricted range all year between about 0.7600 and 0.7800, save for a brief foray up to 0.8000 and minor pokes at the 0.7600 range support. Something will have to give soon in either direction, with the needle pointing lower if we are headed for a bout of rougher waters on concerns for the post-release-from-lockdown and stimulus outlook. The initial bearish triggers would be a close south of 0.7700, but really, given the persistence of the range, south of 0.7600.
EURJPY and JPY crosses – the USD and JPY are likely to prove “fellow travelers” (show positive correlation in the crosses) here if risk sentiment continues to crumble and safe haven fixed income rallies as was the case yesterday, but it will be interesting to see if the JPY rises to the top of the heap as some of the JPY cross trends have been so established that positioning and sentiment may not be ready for a sudden pick-up in JPY strength, leading to aggravated volatility. Levels to watch include the 130.50-130.00 area in EURJPY, where JPY shorts have been caught off guard by a sharp reversal back lower in EU sovereign yields yesterday after the German Bund yield poked to a cycle high.
Silver (XAGUSD) broke higher while gold (XAUUSD) once again got rejected just below the key $1800 level. Overnight both trades softer with the stronger dollar more than off-setting a 10-week low in U.S. 10-year real yields at –0.83%. Silver took the lead after U.S. manufacturing data cooled in April, thereby and despite surging inflation raising the prospect for lower rates for longer. Gold needs to hold above the 21-day moving average ($1767) in order to mount another attack on long-held short positions. Key levels to watch being $1800 followed by $1818. Silver is currently in an uptrend with resistance at $26.94 followed by $27.34.
Ten-year Bunds yields are poised to turn positive despite of what happens with Treasury yields in the United States (IS0L). Yesterday, 10-year Bund yields broke above -0.20% to a new record high at -0.16% for the first time since March last year. Thirty-year Bund yields rose to 0.38% the highest since July 2019. We continue to bearish European sovereigns and particular Bunds because they remain extremely vulnerable to rises in US Treasuries yields. Indeed, increased purchases under the PEPP program did not break the correlation between Bunds and US Treasuries. Therefore, Bunds are meant to fall as soon as the reflation trade comes back to life in the US. Even if US Treasury fail to take Bund yields into positive territory, the German election in fall will provoke yields higher as the new government focuses on a better European integration and increased fiscal spending.
Strong job data this week might renew a selloff within US Treasuries (IEF, TLT). Bond investors should look out for job data this week. If jobs come out stronger than expected, the market might fear early tapering. We are monitoring closely the 1.75% level for 10-year yields. Once this resistance is broken, yields are likely to rise towards 2%.
What is going on?
The April US ISM Manufacturing survey disappointed, and showed hefty inflation pressures. The headline April US ISM Manufacturing survey reading released yesterday was a lofty 60.7, but was expected closer to 65 after the March reading was the highest since the early 1980’s. Interpreting “diffusion” indices is difficult as this is still a very strong reading suggesting strong growth, but the pace of improvement in manufacturing has likely peaked for the cycle. The Prices Paid sub-index was worth its own headline, registering 89.6 the highest reading since the 1970’s, save for two months in 2008, when oil prices rose far above 100 dollars/barrel.
US planting picked up speed last week thereby cooling the bullish market mood. In their weekly update, the USDA saw Corn 46% planted (vs 17% a week ago and 36% five-year average), soybeans 24% planted (vs 8% and 11%) and spring wheat 49% planted (vs 28% and 32%). Still the immediate concerns that underpins the market remain concerns about the dry weather in Brazil and its impact on world corn supply. These developments help underpin the old crop contracts of May and July while stabilizing the new crop contracts of SOYBEANNOV21, CORNDEC21 and WHEATDEC21). In corn and soybean futures we note the latest surge has triggered a reduction in the open interest on CME, potentially a sign that fresh buying is drying up and that the rally is primarily driven by short covering.
What are we watching next?
Whether the “sell in May and go away” saying is the operative phrase for equity investors. So far, after one session (for the US and with the UK out yesterday and Japan and China on holiday until Thursday), the “sell in May and go away” saying is the proving spot on, but far too early to tell how this month will shape up. Issues on the radar could include concerns that the next rounds of US stimulus will prove smaller than expected and could be offset by changes to the tax code, with yesterday’s treasury rally despite the wild ISM Prices Paid data suggesting that the market may be buying into the “transitory” inflation narrative peddled by the Fed.
Earnings reports this week. Yesterday was light on earnings except for Siemens Healthineers posting strong results and raising 2021 sales guidance as so many European companies have done this year. Nutrien also reported yesterday, and is part of our commodity basket, posting better than expected revenue and earnings growth and significantly lifting 2021 guidance. Activision Blizzard is reporting today and could move sentiment in the gaming industry which has not been gaining momentum for a while. Infineon Technologies has reported earnings in early European morning hours posting good results and lifting their guidance riding the wave of the boom in semiconductors.
Economic Calendar Highlights for today (times GMT)
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