Market Quick Take - June 11, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – despite a worse-than-expected US May CPI print the US 10-year yield continued to decline lifting sentiment across the board in US equities with especially US technology stocks and growth pockets rallying. The market is currently betting on the transitory inflation regime, which if becomes true, could deliver another year of strong equity returns. Nasdaq 100 futures are the most sensitive to the inflation bet and rallied over 1% yesterday trading around 13,960 level in early European trading. Watch the big 14,000 level for a potential upside breakout.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin and other cryptocurrencies are still digesting the decision by the international banking association that Bitcoin will have the highest regulatory capital requirements due to its excessive volatility. The proponents say it is a sign of its adoption and antagonists are saying it is a sign that cryptocurrencies will have difficulties scaling because it will be too expensive. Bitcoin has bounced back from the 31,000 level three sessions ago trading around the 37,000 this morning in Europe.

EURUSD – The ECB meeting came and went with little to-do yesterday as members of the governing council differed over the necessary pace of bond purchases over the summer, when markets are thin. And despite the huge surprise in the US CPI and big drop in US treasury yields, the US dollar was relatively stable in what looks an impressive performance for the US dollar. Given all of the signs of excess USD liquidity (especially the Fed reverse repo account and other factors noted below), the US dollar is doing remarkably well, although now the focus will be on the FOMC meeting next Wednesday and to what degree an asset purchase taper is flagged as a policy option soon. EURUSD is indecisive trading exactly mid-range between the upside pivot of 1.2266 and downside pivot at 1.2104.

USDRUB – the Russian central bank meets today and observers are split on whether the central bank will hike 25 or 50 basis points, with a strong majority now believing the larger hike is likely as a way for the central bank to improve the purchasing power of the ruble as food prices have risen sharply this year. A 50-bp hike would be higher than previous guidance had suggested, so traders will also look for any shift in focus in the guidance after today’s decision. USDRUB broke down through a big range low near 72.60 earlier this week, a level that is now resistance.

Crude oil (OILUSJUL21 & OILUKAUG21) trades softer with WTI continuing to bounce around $70. While prompt timespreads, especially in Brent highlight a current tightness, the market is asking whether the recovery in western hemisphere demand has already been priced in. Yesterday algorithms that controls a high percentage of daily trading volumes briefly choked after misreading news regarding the US lifting sanctions on one Iranian and not the country, it drove a +2% price drop which may have stopped out several recently established longs. Focus today on IEA’s Oil Market Report for June.

Gold (XAUUSD) and silver (XAGUSD) both found a bid following the strongest CPI print in decades, but instead of being supported by inflation hedges, the metals bounced as Treasury yields eased to a new low for the recent cycle, as the market concluded that inflation is transitory, and that Fed will not taper early. With next week’s FOMC unlikely to trigger any increased taper focus, the attention will instead turn to Jackson Hole in late August for any announcement about a change in direction. Ten-year real yields dropped to a one-month low at –0.94% with silver outperforming to see the XAUXAG ratio touch a one week low. Once again bullion traders will be looking at resistance levels, probably $1904, and then $1916.

The bond market doesn’t care about inflation; it cares only about monetary policies (IEF, TLT). Yesterday CPI numbers surprised on the upside but failed to push yields higher. Bond yields did the opposite, closing even lower by the end of the day, with the 10y closing at 1.44% for the first time since the beginning of March. Demand for 30-year notes at the US Treasury auction was also strong. Foreign investor bids were well above the five-year average, showing that investors abroad prefer US Treasury over their countries’ government bonds offering near-zero returns. Although the CPI increased 5% YoY, the high yield at the 30-year auction ended up be 2.172%, down 20bps roughly from May’s auction.

What is going on?

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The US Treasury General Account dropped over the last week by $139 billion to reach $674 billion. The Treasury has set the goal of reducing the account to under $500 billion by August 1 and the drawdown of funds increases USD liquidity and pressures US Treasury yields lower, particularly at the very short end of the curve. In a somewhat related story, the Fed’s reverse repo account, in which the Fed lends out treasuries to a market that needs a place to park liquidity, rose to a new recent high of $534 billion.

US May CPI rose 5.0% year-on-year, the fastest since 2008, with core inflation running +3.8%, the highest since 1992. The month-on-month figures were also higher than expected at 0.6% and 0.7%, respectively, and annualized 3-month core inflation is running at 8.3%. A major contributor was a +7.3% rise month-on-month in used car prices, which was responsible for a third of the rise.

Intel is in talks to acquire semiconductor company SiFive. According to news reports Intel has reportedly bid $2bn for California based SiFive, which is a chip design company based on the RISC-V architecture attempting to bring open-source standards to the semiconductor industry. This is part of Intel’s new strategy to also offering a foundry model meaning that customers can come with their own designs and get Intel to manufacture those chips. SiFive is a competitor to Nvidia which is trying to acquire chip designer Arm from Softbank.

GameStop drops 27% on Q1 earnings. The original meme stock that took the world stage this year dropped 27% yesterday as investors digested better than expected Q1 results, that is still showing operations balancing at break-even. But the company’s decision to issue more shares and its strategy presentations had investors disappointed. At this point, it is difficult to see how GameStop can ever become a profitable enough company to justify the valuation.

Grain markets trading mixed following the monthly supply and demand report (WASDE) frow the USDA. Corn (CORNDEC21) heading for a second weekly gain after the report pegged supplies below expectations due to strong demand from the ethanol and export sectors. Adding to this weather models forecasting more dry weather in key US production region. Wheat (WHEATDEC21) rose on worries that drought would reduce production while Soybeans (SOYBEANNOV21) remained under pressure after the USDA said stockpiles will be bigger than expected with high prices curbing demand for soyoil and soymeal.

China is offering to release state reserves of industrial metals as part of their continued efforts to cool commodities markets and keep a lid on inflation. This after surging costs of imported commodities helped drive China’s factory-gate inflation to its highest level since 2008. The metals that according to sources will be offered directly to end-users include copper, aluminum and zinc. The offer will be monthly and will last through the year. The news having a limited impact on copper (COPPERUSJUL21) which is rising after once again finding support in the low $4.4’s.

What are we watching next?

G-7 meeting up today, with prominent geopolitical risks in play. US and EU countries in the G-7 seem ready to ease confrontation on a number of trade issues that dogged relations during the Trump administration, an important development. But likely more immediately important could be any G-7 statement from this summit that produces strong language on investigating the origins of the Covid-19 virus, as circulated in a draft statement, and/or demands related to China’s activity in the Taiwan Strait or accusations of human rights abuses in Xinjiang. A secondary focus will be on the status of EU-UK relations after tensions over the Northern Ireland/Republic of Ireland border.

Earnings reports this week. Chewy shares were down 1.5% in extended trading post its earnings release despite Q1 EBITDA came out at $77.4mn vs est. $32.3mn and revenue was in line. The outlook was lifted a bit from previous range and that might have been the disappointment given how strong other profit guidance raises have been this earnings season.

Economic Calendar Highlights for today (times GMT)

• 0800 - IEA's Monthly Oil Market Report
• 1030 – Russia Central Bank rate decision
• 1400 – US Jun. Preliminary University of Michigan Sentiment/Inflation expectations
• G-7 meeting

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