Summary: Yesterday was a day of capitulation and saw equity market gloom spreading, with many European bourses posting their worst performance of the year, while safe haven bonds spiked higher and the bottom fell out of the crude oil market. In China, a troubled large property developer in deepening trouble is causing jitters, although futures markets did manage to piece together a solid bounce from the lows yesterday that has held to some degree overnight in Asia.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – another ugly day on Wall Street as the broader market sold off heavily, with the mega-caps faring somewhat better, such that the Nasdaq 100 lost less than a percent on the day, closing just south of the first key moving average at 15,545, although now that MA is near the current price as of this writing anear 14,600. The important next level lower is the clearly defined 14,050 top from April/early May. The S&P 500, meanwhile, sold off over 1.5% and found support almost precisely at the 61.8% retracement of the recent rally at 4,225 (coincidentally also the location of the 55-day moving average). The next support there of note is perhaps the 61.8% retracement of the larger rally way from the May lows, coming in at 4,159.
DAX 30 (GER30.I) – Many European indices suffered their worst session of the year yesterday, pricing in the weak Friday close in the US in addition to the further selling yesterday. The move yesterday takes the DAX well below the notable 15,300 support area – with the next level into 14,806.
Nikkei 225 (JP225.i) – the Nikkei 225 dropped through the 200-day moving average overnight and is trading at the lows since the very beginning of this year, just below the May low and a prominent line of support running just below 27,400.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Cryptocurrencies seem to show some degree of correlation with risk sentiment more broadly in global markets, as Bitcoin has dropped below 30,000 overnight for only the second time since January, but has not closed below that level since January 1. Ethereum is likewise on the ropes and trading near the lows levels since March, the series of lows in the low 1,700’s.
EURUSD – the EURUSD staged a mysterious sharp rally yesterday that may have been correlated with a run lower in USDJPY that briefly worked against the greenback’s favour, but the price action has settled lower toward this critical sub-1.1800 area that has been in play for two weeks now and is near the approximate “neckline” of a head-and-shoulders formation that began forming late last year. If the weak risk sentiment we are seeing continues, the USD is likely to outperform and traders will have a hard time waiting for the Thursday ECB meeting (previewed below). The next areas of note lower are the 2021 low of 1.1704 from early April, and then the late 2020 low near 1.1600.
USDJPY – the USD and JPY are stronger versus nearly all other currencies, with the JPY getting the upper hand yesterday as the spike in safe-haven government bonds offered the JPY the strongest support and local support gave way in USDJPY. The next key level of note there that likely continues to indicate whether the JPY maintains the upper hand is the 109.10 area that marked yesterday’s lows, as it is near a key Ichimoku support level and the 61.8% retracement of the late rally from the April lows near 107.50. A smart rally back well clear of 110.00 would be needed to suggest that the downside threat is reversing.
Crude Oil was blasted for the worst drop of the year yesterday (in dollar terms, second-worst in percentage terms), a fall of nearly five dollars from Friday’s close for Brent and exceeding that for WTI. The driver was the combination of weak risk sentiment and a clouded outlook due to the Covid resurgence, but also the OPEC+ negotiation breakthrough that will see production increased 400k barrels next month. With such a large sell-off the focus could drop as low as the 200-day moving average for crude – for the rolling front-month coming in just above 60.00 for Brent currently and juts below 57.00 for WTI.
Gold (XAUUSD) Gold finally flashed signs of its traditional safe haven status yesterday, erasing another sell-off intraday that took it south of 1,800 before bounding later in the session. Still, the precious metal needs to vault well clear of the 200-day moving average and recent highs 1,825-35 for a sense that it is playing a more prominent role in diversification from weak risk sentiment elsewhere, with 1,800 the important tactical level to shore up the downside risk.
US Treasuries (SHY:xnas, TLT:xnas, IEF:xnas) A huge new spike in US treasuries yesterday saw long yields plummeting to new lows for the cycle, with the US 10-year benchmark closing near 1.20% and below the 200-aday moving average for the first time since last November. A sharp sympathetic drop in break-evens suggests fading concern in inflationary outcomes, perhaps helped by the sharp drop in crude oil prices yesterday. The next natural focus lower is the 1.00% yield area for the 10-year benchmark. The 2-10 yield curve flattened below 100 bps for the first time since early February.
What’s going on?
Global hot weather outbreaks stressing natural gas and other markets – heat waves in the US are seeing Natural Gas prices back toward the highs for the cycle near 3.80, while heat outbreaks in Asia – in Japan and China, for example, are seeing the highest LNG prices in years in Asia, save for a brief spike back at the beginning of this year.
China Evergrande Group crisis a major focus for default risk. The company is the China’s largest property developer and saw its stock drop to a new four-year low overnight, marking a more than 25% drop over the last two days at the lows overnight, while its bonds also came under renewed pressure and traded at all-time lows. One event precipitating the run on the company’s debt and equity was a local Chinese court freezing a $20 million bank deposit. Other Chinese companies with weak credit were on edge overnight as the market ponders the impact of a default. Evergrande is trying to offload properties and other assets to shore up its debt, estimated at some currency-adjusted $300 billion. This morning, Evergrande shares and debt rallied sharply on news that a Chinese city would allow the company to resume property sales after a recent suspension.
US, UK and others accuse Chinese government of Microsoft hack. In the latest signs of worsening US-China tensions, the US and other nations accused China of “malicious cyber activities”, including ransomware, data theft and cyber-espionage of public and private operators, among these an attack on Microsoft Exchange this year.
What are we watching next?
Does this risk-off move continue to feed on itself? The spike in volatility yesterday has seen the VIX lurch higher to as high as 25 yesterday, the highest since a brief series of spikes in May. Given signs of a highly leveraged market of late – in part due to the lack of significant equity market corrections since at least last September-October – and with thin liquidity in the summer months, there is some risk that significant further selling can aggravate this risk-off move further, sending the market into a more profound tailspin and a proper “correction” of some 10% or more in the major indices on order flow linked to volatility expansion, portfolio risk adjustment and stop-loss driven selling.
ECB meeting on Thursday – Expect the ECB to give more insights on the implications on monetary policy of its new strategy and to adjust its forward guidance. We could see the ECB bring some clarity to its definition of the end of the Covid-19 crisis and to link more explicitly the APP to the new inflation target set at « 2% » from « below, but close to 2% ». With uncertainty prevailing regarding the macroeconomic impact of the delta variant in Europe, we see ECB president Christine Lagarde leaning dovish. But behind the scenes, expect a very heated debate between the doves and the hawks about the future of bond purchases.
Earnings for the rest of this week. We are moving into the heart of the earnings season starting this week, with many prominent names reporting. Halliburton, the oil and gas services giant, reports before the open today, while Netflix reports after the close. Daimler has tumbled this week and since the notable June highs ahead of its report tomorrow. Note Intel and Twitter reporting on Thursday.
Economic Calendar Highlights for today (times are GMT)
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