Market Quick Take – June 30 2021

Another surge in US equities sees new highs in the major indices, with Asia slightly mixed to positive overnight. Japan has been weighed down slightly by the stronger Japanese yen, which has managed to keep pace with a new firming in the US dollar. Gold, meanwhile, punched to new local lows, perhaps as fewer see a prominent role here for the precious metal with the Fed hinting at a new tightening cycle and as commodity prices have eased.

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures led by technology are pushing higher with US interest rates steady and no major hiccups from the news or macro side. Yesterday’s close in Nasdaq 100 at 14,563 is the natural key level to watch today if we see technical selling flow coming into the market. A stronger than expected ADP jobs number later today could be a key event risk for US technology stocks as it could life the interest outlook.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Cryptocurrencies are taking a bit of a breather after their recent three-day rally, with Bitcoin reversing most of yesterday’s gains overnight and into this morning, trading just under 35k as of this writing, while Ethereum is back toward 2,100 after trading as high as 2,245 yesterday.

EURUSD – the next level of note for EURUSD is just below 1.1848, where the pair found support in the wake of the FOMC meeting of two weeks ago that triggered a steep sell-off. The local consolidation high is 1.1975, just shy of the important 1.2000 level. The tactical downside potential may be linked to the scale of any upside surprises in US employment and earnings data, including the ADP payrolls today and Nonfarm payrolls change and earnings data on Friday. A move below 1.1800 would begin to complete the “neckline” of a head-and-shoulders formation, a break of which could signal significantly lower levels toward 1.1600 or even 1.1500.

JPY crosses – the yen has managed to back up recently as long yields remain anchored and perhaps as the air coming out of the “reflation trade” in places has helped remove some of the negative focus on the currency on the BoJ’s cap on 10-year Japanese government bond yields. So far, the JPY has shown resilience by merely following the USD higher recently, with a bigger signal of more isolated strength only on USDJPY pushing down through 110.00-109.50, which would break the lower bound of the rising channel that has developed since April. In-line or slightly lower US data that keeps US yields quiet at the long end of the curve may continue to help the JPY firm broadly.

Gold (XAUUSD) suffered another setback yesterday as the dollar strengthened, thereby sending the yellow metal towards its worst month in more than four years. Silver (XAGUSD) meanwhile managed to stay above its 200-day SMA and within its recent range. Strong US consumer spending helped strengthen the dollar while supporting the Fed’s recently established hawkish view. US 10-year real yields in the meantime did nothing and as long they remain deeply in negative territory, the prospect for a gold revival still exists. In the short term however, the direction look set to be dictated by the dollar with support below $1750 at $1735 while safety is relative far away above $1800.

Grain markets await important quarterly stock and annual acreage reports from the US Department of Agriculture today at 1600 GMT. Ahead of the report which is expected to show a potential price limiting increase in acreage for corn (+3%) and soybeans (+1.5%), the latter trades higher with dry weather worries across US Midwest supporting prices. While dry weather concerns in the north-west remains a concern to crops in US and Canada, wheat nevertheless trades lower on expectations of higher output in Russia, the world’s dominant exporter.

What is going on?

Former South African president Jacob Zuma sentenced to jail. The former South African leader was sentenced to 15 months in prison for failing to attend an inquiry into allegations of corruption during his time as the country’s president. He has five days to turn himself in or face pursuit by police. The case is seen as a major test of the power of the country’s judiciary and the rule of law in the country.

Strong EU and US confidence surveys. The final June EU consumer confidence confirmed the initial reading of –3.3, which is the highest reading since early 2018, while EU Economic confidence rose to its highest in over twenty years and Industrial confidence posted its strongest reading since data collection began in the 1980’s. Over in the US, the June Consumer Confidence survey rocketed higher to 127.3, taking it back to almost the middle of the pre-Covid range and far higher than the 119.0 expected. As this survey is quite correlated with the strength of the labour market, it will be interesting to have a look at the next few months of jobs data, starting with today’s ADP payrolls change and the Friday US Nonfarm payrolls change and earnings data.

Germany Jun. Flash CPI came in at 0.4% month-on-month and +2.3% year-on-year, the latter a hair lower than the 2.4% expected and 2.5% YoY in May.

Crude oil (OILUSAUG21 & OILUKAUG21) trades bid ahead of today’s stockpiles report from the EIA and tomorrow’s OPEC+ meeting where diplomatic efforts are once needed to bridge a gap between Russia’s proposal to hike against Saudi Arabia’s preferred gradual approach. Surveys point to an August increase of 550k b/d or 10% of the volume that remains idle. Russia wants to focus on stable prices to prevent a US surge and higher market share while Saudi Arabia, just about breaking even on its government budget, may quietly seek to support an even higher price. Last night, the API reported a big 8.5m barrels drop in crude stocks, supporting another rise in front spreads and narrowing discount to Brent.

What are we watching next?

US June ADP payrolls change data and narrative around US jobs market as inflation driver. We’ve recently seen a pronounced spike in US inflation data that the market has been mostly willing to look through as “transitory”, taking the Fed view that pressure will ease once supply chain disruptions have been worked out. The official Nonfarm payrolls change series also suggests that the pace of hiring has been somewhat more muted than expected, leading some to believe that the path back to full employment will help avoid any new inflationary spiral. But signs abound that companies are desperate to hire, with record job openings. And the ADP private payrolls change series has risen sharply in recent months, rising nearly 1 million in May and expected to rise 600k today. An in-line or lower number may support the current narrative, while a significant upside surprise for this survey and the official Nonfarm payrolls change survey could challenge the narrative on inflation risks at the margin, even if we need a few more months data at minimum for further evidence.

Earnings to watch this week. This week’s most important earnings come from Micron Technology on Wednesday which is one of the world’s largest makers of computer memory chips and data storage. Analysts expect Micron Technology to deliver 32% growth on revenue. On Thursday, H&M will report FY21 Q2 earnings which will show how profitability is progressing. Nike showed last week that retailers have reduced inventories and stopped promotions, so our expectation is that H&M will show the same trend.

Today: Nitori, Micron Technology, Constellation Brands, General Mills
Thursday: H&M, Walgreens Boots Alliance, McCormick

Economic Calendar Highlights for today (times GMT)