Summary: Equity markets took a breather yesterday ahead of the important FOMC meeting later today, where investors will look for the latest Fed observations on inflation and any hint of growing discomfort after remarkable spikes in US inflation data of late. Any hawkish shift from the Fed could unsettle a very stretched equity market. Elsewhere, US president Biden and Russian president Putin are set to meet today in Geneva.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – yesterday was the first trading session in a while with US growth pockets experiencing a broader sell-off with bubble stocks and biotechnology stocks leading the declines. US interest rates are coming back higher ahead of the FOMC, and the recent market reaction is a sign of interest rate sensitivity lurking beneath the surface in US equity growth pockets. Nasdaq 100 futures have erased close to all of the gains on Monday trading just above the 14,000 level this morning in Europe, with this big level obviously being a key psychological level to watch.
EURO STOXX 50 (EU50.I) - European equities measured by the broader STOXX 600 Index has gained in eight straight sessions into new all-time highs making it the longest winning streak from a previous all-time high. This underscores the big shift in sentiment on Europe and those bets are still ongoing on inflation and value stocks despite a BofA survey yesterday showed that 75% of investors now believe in transitory inflation. STOXX 50 futures are trading just below the 4,150 level with intraday price range declining over the past two sessions indicating potential fatigue.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Cryptocurrencies were unable to develop further momentum on the back of the recent rally, as Bitcoin remains in the key 40-42k resistance zone, while Ethereum is embedded in the range well below the key 3,000 resistance level. In the US, House Democrats announced a Cryptocurrency working group “to engage with regulators and experts to do a deep dive on this poorly understood and minimally regulated industry.”
USD pairs – nearly across the board, traders have pressed the pause button on the US dollar, most likely wanting to have a look at tonight’s FOMC meeting and Powell press conference for any new guidance before making new trading decisions. The USD has been leaning stronger in recent days, but ranges are so compressed that there is little information value in recent developments amidst low volatility.
USDRUB and EM currencies over FOMC – Today we have an FOMC meeting that could be very important for EM currencies, as any surprise hawkishness would like be felt most strongly in the EM space, which has had quite a run to the upside in recent months and would be sensitive to any direction change in the weak US dollar. The action is perhaps doubly interesting for USDRUB as US President Biden and Russian President Putin are set to meet today in Geneva and RUB trader will watch closely for signs of a thawing or worsening relationship as the ruble has until recently been subject to a significant “geopolitical discount” on concerns over sanctions from the US. The 72.70 area is important resistance in that pair.
Crude oil (OILUKAUG21 & OILUSJUL21) remains the go to commodity while the metal and agriculture sectors are going through a correction. Speculators remain strong buyers in the belief downside risks are limited with OPEC+ keeping supplies tight at a time of rising demand. An additional bid reached the market last night after the industry-funded API said crude oil stocks fell 8.5 million barrels last week, if confirmed by the EIA later today it would be the largest drop since January and the fourth consecutive decline. Whether or not Brent will continue its ascent towards $80 will depend on the future production decisions by the OPEC+ group.
Gold (XAUUSD) treading water ahead of today’s FOMC meeting (see below) with steady real yields and dollar not providing much input at this time. While no change in policy is expected, Fed officials will release of a new set of policy and economic forecasts in which they could project interest-rate liftoff in 2023. The press conference will also be closely watched for signs that the Fed is getting uncomfortable with the current inflation spike. Key support remains the 200-day moving average at $1839 followed by $1825, the 38.2% retracement of the rally from the April low.
US Treasury yields will not be able to break above 1.7% even amid a hawkish Federal reserve (IEF, TLT). Today, the Federal Reserve has the golden opportunity to take advantage of extremely easy financial conditions to prepare the market about tapering discussions ahead. Yet, the unprecedented amount of liquidity in money markets and rotation from lower yielding government bonds to US Treasuries will keep compressing yields, making it difficult to break above 1.70% until tapering talks are properly engaged. In the most dovish scenario, 10-year yields could test their support at 1.40% and if they break below this level, they could fall as much as 1.40%.
What is going on?
US May Retail Sales showed modest stimulus check “hangover”. While the US May Retail Sales numbers were nominally a bit weaker than expected at –1.3% month-on-month for the headline and –0.8% ex Autos and Gas, the prior month’s data was revised sharply higher, such that there is hardly any change from the March data, which rose massively (over 10% month-on-month) due to the $1,400 stimulus check.
Chinese authorities have stepped up their efforts curb commodity prices after ordering state enterprises to control risks and limit their exposure to overseas commodity markets. In addition, the National Food and Strategic Reserves Administration will soon start to release national reserves of copper, aluminum and zinc which will be sold in batches to fabricators and manufacturers. Copper (COPPERUSSEP21) has slumped to a six-week low in response to China’s efforts and rising supply with the LME cash to 3’s contango reached a one-year high while Chinese importers are paying the lowest premiums over LME in five years.
Oracle shares down 5% on weak outlook. Oracle reported FY21 Q4 (ending in May) earnings last night showing revenue of $11.2bn up 8% and adj. EPS rose 38% y/y hitting $1.39, but it was the Q1 outlook that disappointed investors with Oracle guiding EPS of $0.94-0.98 vs est. $1.03 with the cloud falling short of expectations. As we said yesterday on the Saxo Market Call, it looks like Oracle is running out of options for finding a new growth avenue.
What are we watching next?
Important FOMC meeting up tonight: does the Fed offer anything new on QE tapering or shift its forecasts notably? Tonight’s FOMC meeting will see the release of a new set of policy and economic forecasts. These could be more important than any changes to the policy statement, although Fed Chair Powell’s press conference will also be closely watched for signs that the Fed is getting uncomfortable with the current inflation spike. The prior set of forecasts in March showed that the Fed expecting a mild inflationary surge this year of 2.4% in the core PCE inflation followed by a drop back towards the 2.0% level for 2022 and the longer run. But April core PCE inflation rose to 3.1% YoY, with the May number not yet available, while the May CPI ex-food-and-energy, was out at 3.8%. In March, the Fed forecasted the unemployment rate to drop back to the pre-pandemic level of 3.5% by the end of 2023 but recent signs suggest that there are as many open job positions as their unemployed – a problem not addressable through monetary policy. Finally, the March forecasts of the Fed policy rate showed a few more Fed members pulling forward the anticipated timing of raising rates, but the median forecast remained for lift-off in 2024. The market is currently pricing Fed lift-off for the late 2022, early 2023 time frame. Any new language on the eventual tapering of asset purchases will be monitored closely as well.
Earnings reports this week. The US homebuilder Lennar is today’s earnings focus with FY21 Q2 (ending in May) is expected to show 18% revenue growth and 33% EPS growth as the US housing market continues at a blistering pace. The key focus is rising input costs and Lennar’s ability to pass on higher prices to protect recent margin gains and to what extent these higher prices are impacting demand going forward.
Economic Calendar Highlights for today (times GMT)
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