Summary: A steep sell-off in equities was already underway in the US yesterday, when the selling was aggravated by US Treasury Secretary Janet Yellen suggesting there could be a need to hike rates due to the risks of an overheating economy, comments that she later softened in a clarification. Markets have recovered from some of the damage.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US Treasury Secretary Yellen’s comments (see below in What’s going on?) sharply aggravated and broadened a US equity market sell-off yesterday, with her later follow-up clarifications on the original statement helping to reverse much of the selling that her own rhetoric had prompted – such that the S&P 500 recovered fifty points from the intraday lows. Still, the sell-off has further turned momentum and we’ll watch the 21-day moving average around 4150 on the daily close for a sign that we could risk a more significant setback toward the prior highs and major Fibonacci retracements near 3,975-4,000. The Nasdaq 100 Index is technically weaker and is well back into the range below the prior major cycle high – the focus there on the 13,350-13,300 for risk of possible further capitulation to 12,900, the last retracement support ahead of the 200-day moving average, currently 12,375.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin has pulled farther away from the key upside resistance established near 59k, but the price action is very choppy as it trades in the middle of the multi-week range. Any further weakness beyond about 51.6k would force the focus back toward the 47.1k low from 10 days ago. Ethereum is back in the 3,250 area this morning after ramping as high as 3,530 yesterday. The 3,000 area is the perhaps the first support.
AUDUSD – the Aussie was clearly responsive to the strong swings in risk sentiment, testing below the range of the last two weeks around 0.7700 and just touching the prior range high near 0.7675 before Yellen’s clarification later in the day (see below in What’s going on?) saw the pair bob back up into the range. Strong metals markets (albeit with China completely off-line this week until the Thursday session) are supportive, but a breakdown in AUDUSD would be likely if global risk sentiment suffers a sustained sell-off extending yesterday’s action, and that 0.7675-50 area bears watching on a daily close. Meanwhile, the range is so tight that if the mood improves and the price action turns back up and above 0.7825, the bulls will have their trigger for a go at the 0.8000 top.
EURJPY and JPY crosses – USD and JPY strength were in play yesterday as risk sentiment was weak and US treasuries were strongly bid for a brief time, although much of the move was undone later in the day, leaving the US 10-year benchmark yield, for example, relatively unchanged on the day, although EU yields were sharply lower. Our assessment is that if yields continue to decline at the long end of the US treasury curve (and elsewhere) that the JPY looks too cheap. Notable trigger zones include 130.50-130.00 in EURJPY, while many other JPY crosses are severely range-constrained.
Gold (XAUUSD) and silver (XAGUSD) reversed lower on the Yellen comments (see below), and this despite seeing the dollar unchanged and real yields lower. Thereby reaffirming the importance of $1800 in gold, a level that has now been challenged and rejected on five occasions during the past two weeks. Turning to support it needs to hold above the 21-day moving average ($1767) in order to mount another attack on long-held short positions above $1800. Silveer stayed withing its uptrend with support at $25.95.
Brent (OILUKJUL21) and WTI (OILUSJUN21) extended their gains after the API reported a steep drop in U.S. crude stockpiles. Reopening's in Europe and the U.S. added to the demand revival, thereby helping offset concerns about weaker demand in parts of virus-hit Asia. Ahead of today’s EIA stockpiles report, the API reported a 7.7 million barrel drop in oil while sizable drops in both gasoline and distillate reinforcing bullish views on fuel demand in the world’s largest economy. RBOB gasoline (GASOLINEJUN21) trades near a three-year high with US motorists facing the highest fuel cost this summer since 2015. Brent trades within a four dollar range between $66 and $70.
Ten-year Gilts auction today will unveil market expectations ahead of the BOE meeting tomorrow (IGLT). Some are expecting the BOE to taper purchases under its quantitative easing program. However, the latest report shows that the central bank increased its asset purchases facility to a record £811.0 billion last week. Today’s 10-year Gilts issuance may shed some light over market expectations ahead the BOE monetary policy meeting tomorrow. A hawkish BOE might push yields to break above 0.85% and set their path to 1%.
Today’s jobs and PMI data might put further pressure on US Treasuries (IEF, TLT). Secretary of Treasury Janet Yellen’s comments concerning a possible rise in interest rates to avoid the economy from overheating have not gone unnoticed. The bond market continues to be on hedge as it’s clear that inflation is strengthening by the day. The big question is whether the Federal Reserve will consider to taper sooner than anticipated. This is a question that might be answered this week as strengthening job data may indicate that the central bank doesn’t need to keep dovish. If 10-year yields break above 1.75% we expect them to rise quickly to 2%.
What is going on?
US Treasury Secretary Janet Yellen suggested that the US economy could overheat and lead to interest rate hikes, comments that she latter softened and clarified as something she was “not predicting or recommending” and underlining her belief in the independence of the Fed. The comments unleashed considerable volatility across markets.
Commodities of most colors continue higher with the Bloomberg Commodity Spot Index climbing to its highest since 2011, a year-on-year gain of 65%. All sectors except for precious metals rose yesterday with landmarks reached in corn (CORNJUL21) at $7 per bushel and LME copper at $10,000 per tons. Crude oil meanwhile rose back towards $70/b following a big stockpile drop. Rapid rising growth has led to a surge in demand to create transportation bottlenecks, while challenging weather has supported agricultural goods. To top it all up, investors have been rushing into the sector in their search for momentum and inflation hedges.
Stellantis says chip shortage is worsening. The parent company behind the Fiat brand is saying that the chip shortage is getting worse compared to Q1 where the carmaker produced 190,000 less cars due to the shortage. Even worse, the carmaker says that is has limited visibility on the full-year impact on earnings of the chip shortage.
What are we watching next?
Today’s US April ISM Services Survey and US April ADP private payrolls change and how the market treats the data. This is a key economic indicator for the US economy that should show strength, given the massive stimulus check-driven impulse from mid-March and the ongoing opening up of the US economy from Covid lockdowns. The reading is expected at 64.1 after the March reading of 63.7 was a record in the nearly 25-year history of the survey. The newer, private Markit number rose to its highest ever at 63.1 vs. 60.4 in March. More importantly, will be the market reaction in equities and treasuries. Will strong data (for the headline and the Prices Paid) be celebrated or looked through on concerns that such strength is unsustainable and driven by the unprecedented stimulus that will fade quickly? And worse, how would the least hiccup in this data point, and/or in today’s April ADP private payrolls change data ahead of Friday’s US April jobs report, be treated by the market?
Earnings reports this week. In early European hours we have got earnings from Novo Nordisk coming in just north of expectations and lifting their constant FX growth target this year by 1%-points. Vestas Wind Systems has also reported earnings missing estimates delivering an operating loss vs profit expected confirming the pain across the green transformation theme which is now the worst performing theme year-to-date. For e-commerce and the technology sector we will focus on MercadoLibre, PayPal, and Uber Technologies.
Economic Calendar Highlights for today (times GMT)
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Head of Fixed Income Strategy
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Head of Commodity Strategy