AUDUSD – Drops to Twelve Month Low Below Key 0.70 Level

In the last few weeks the AUDUSD has fallen strongly from resistance at the three-month high around 0.7550 back down to a three month low below 0.72, before dropping sharply to finish last week down to a 12 month low below the key 0.70 level. In doing so it has pushed through multiple key levels of 0.74, 0.73 and most recently 0.72, all of which have provided support and resistance to the currency pair over the last few months. This fall follows several weeks of a strong rally which saw the AUDUSD not only move back up through resistance at 0.73 but continuing higher to the 0.74 level and moving through to the three-month high.

This current medium term down trend is becoming similar to its fall during June/July which saw it drop over 600 pips. The AUDUSD is now eyeing off the 0.70 level to see whether it receives any support from this level, after it was a major support level 12 months ago providing the base for its push higher to 0.80 earlier this year. Given the strong fall over the last few weeks, it is reasonable to expect a rally of some description in the new week, but you cannot question how strong this current fall has been.

The 0.70 level is also a nice round number as a multiple of 10 cents and prevents the AUDUSD from falling into a completely new range with a ‘6’ in front of the price, something it hasn’t had for 18 months.

If it is to receive some solid support shortly which sees the AUDUSD rally higher, there are several aforementioned levels above which are likely to step in and provide resistance which will apply constant downward pressure on price.

 

RBA Expected to Sit on Rates in Final 2021 Meeting

The Reserve Bank of Australia (RBA) meets for the final time tomorrow and no one expects them to move interest rates. Since their last meeting in November, thanks to lockdowns in ACT, NSW and Victoria, the economy contracted by 1.9% in the September quarter.

Whilst this decline was smaller than expected, it was still the third largest contraction for a quarter in Australia ever. Now that those states are free from lockdowns, retail spending has exploded.
When Australian Treasurer Josh Frydenberg delivers his mid-year budget review on 16th December, he will be upgrading his growth forecast for next year.

Last week the Organisation for Economic Cooperation and Development (OECD) warned that Australia’s central bank may need to increase interest rates sooner and faster than it is currently anticipating, keeping a close eye on rising inflation. Many economists are starting to believe that the RBA may be able to lift rates from the historic low of 0.1% sooner than their current 2024 plan.

RBA Governor Philip Lowe recently reiterated to financial markers that they shouldn’t expect interest rate increases in 2022. He added that current rates are consistent with inflation of 2 – 3%. Lowe stated that the central bank would only increase rates if it saw inflation sustainably in or above the target range.

AMP Capital chief economist Shane Oliver believes interest rates could start moving upwards in late 2022. “The main threat would be if Omicron turns out to be more deadly than Delta with vaccines offering little protection resulting in a return to lengthy lockdowns … resulting in another year of disrupted growth,” Dr Oliver said.

ASX200 – Relying on Support at Key 7200 Level

The ASX200 index struggled around the 7200 level trying to stay above it. 3 stocks from the ASX200 list achieved an all-time high last week. Namely:

  • Uniti Group
  • National Storage
  • Collins Foods

No stocks achieved an all-time low last week, but the following stocks achieved a 12-month low:

  • Adbri
  • Aurizon Holdings
  • Bapcor
  • Bendigo and Adelaide Bank
  • Costa Group
  • Kogan.com
  • Magellan Financial Group
  • Nearmap
  • Pendal Group
  • Platinum Asset
  • Pointsbet Holdings
  • Polynovo
  • Regis Resources
  • Zip Co

Closing out the week two weeks ago, the ASX200 index dropped sharply to its lowest level in seven weeks smashing through any support at 7320 and potentially moving through another key level of 7200. This sharp drop has technically completed the head and shoulders reversal pattern that had been forming over the last few months. The pattern had the head above 7600 in August and the first shoulder at around 7400 and the current shoulder around 7500. This is widely accepted as a medium term trend reversal pattern.

In the last week however, it has enjoyed some much-needed support from the key 7200 level propping it up and keeping it within reach of 7400. Prior to the sharp drop, the ASX200 index traded right around the key 7400 level for several weeks, whilst receiving some support from it which allowed it to trade to a six week high just shy of 7500. Even though it received some support from 7320, it struggled to return to 7400.

In early October, the ASX200 enjoyed solid support from the 7200 level where it propped it up for around two weeks and this level has been called upon again as the index has dropped lower. With the sharp drop and some increased daily ranges in the last week, the volatility in the ASX200 index (seen in the chart below as the red line) had picked up.

The following is the Australian industry sectors ranked from the best performing sector to the worst, over the last three months:

  • Utilities
  • Communication Services
  • Energy
  • Australian Real Estate Investment Trusts (REIT)
  • Consumer Discretionary
  • Consumer Staples
  • Industrials
  • Health Care
  • Materials
  • Financials-x-A-REIT
  • Financials
  • Information Technology

All things considered, the index has moved very strongly over the last 12 months, with recent signs that it could easily return to its recent all time high and threaten to move higher. However the recent sharp drop to a seven week low has placed any of those plans on hold for the time being.

AUDUSD – Falls Strongly from Three Month High at 0.7550 Down to Key 0.73 Level

In the last two weeks the AUDUSD has fallen strongly from resistance at the three-month high around 0.7550 back down to another key level of 0.74 where it was supported to finish last week, before continuing to decline back to another key level of 0.73. This two-week fall follows several weeks of a strong rally which saw the AUDUSD not only move back up through resistance at 0.73 but continuing higher to the 0.74 level and moving through to the three-month high. After hitting resistance at 0.7550 a few weeks ago, its rally did slow down as it rallied back up to 0.7550 to run into resistance again forcing it lower.

Given its range trading over the last few months, there are several levels that are poised to resume playing a role, which includes the current 0.73 level where it has found some support in the last day or so. The 0.73 level first gained attention in August when for several weeks it propped up the AUDUSD and kept it within a range between it and 0.74.

If the AUDUSD continues to drop and move back through the key 0.73 level, you could expect the 0.71 level to provide some support after it reversed at that level in August. Failing that, the round number of 0.70 is more likely to step in and provide support to the AUDUSD.

Although now less likely, should it bounce off the support at 0.74 and move through the resistance at 0.7550, you would expect the 0.78 level to play a role again having influenced the AUDUSD as much as it did earlier in the year across many months. If the current support at 0.73 continues to prop up the AUDUSD, then the key 0.74 level may resume its role and provide some resistance again.

RBA Leaves Rates as Historic Lows – Banks Move Independently

Having left the cash rate at its historic lows at its monthly board meeting, the Reserve Bank of Australia (RBA) did change their tune ever so slightly as they left the door open to a rate rise in 2023, having previously said they couldn’t see rates rising until 2024. However this is of little comfort to many as in recent years, major Australian lenders have seen it fit to make interest rate moves independent of the central bank. This includes moves in the last week or so.

After the meeting, RBA Governor Philip Lowe said that inflation had picked up earlier than expected but in underlying terms was “still low”. “The board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2½ per cent at the end of 2023 and for only a gradual increase in wages growth,” he said. Governor Lowe has repeatedly rejected predictions that he’ll need to raise interest rates next year in response to higher inflation.

They are also still very conscious of the red-hot property market in Australia with increasing “household indebtedness” as people continue to question why the central bank isn’t playing a role in maintaining a lid on soaring prices and curbing borrowing. The central bank has been reluctant to comment on housing adopting the approach that they have a bigger economic picture to manage.

However after their last meeting, the central bank did make a comment on the scenario of increasing rates quickly and the impact on property prices. “Price falls could be widespread if interest rates were to increase sharply due to unexpected inflation or rising risk premiums,” the RBA said in its Financial Stability Review released last Friday. “Sharp price falls could cause greatest harm to the financial system for assets where leverage is common, notably residential and commercial property.”

ASX200 – Continues to Trade Around Key Level of 7400

In a sign of how well the market is moving in the last 18 months, 13 stocks from the ASX200 list achieved an all time high last week. Namely: ASX, AUSNET SERVICES, CHALICE MINING, COMMONWEALTH BANK, GRAINCORP, IDP EDUCATION, JAMES HARDIE, JANUS HENDERSON, MEGAPORT, PREMIER INVESTMENTS, RELIANCE WORLDWIDE, SEEK, TECHNOLOGY ONE

A quick scan through the ASX Top 20 stocks will show a handful of stocks that have performed very poorly this year, while others have shone. In the last three months, Aristocrat Leisure and Macquarie Group have been the best performers. Commonwealth Bank and Afterpay join that group if you look over the last 6 – 12 months. Continuing to drag the chain are the miners in BHP, Rio Tinto and Fortescue Metals, which are all trading at close to 12 month lows.

In the last few weeks the ASX200 index has traded in a narrow range receiving some support from the current key level of 7400 level returning to a six week high near 7500. The ASX200 traded right around the 7500 level in a very tight range for several weeks two months ago and it is little surprise that this level is offering some resistance again. On multiple occasions in the last few weeks, as the index has approached that level it did struggle to maintain the momentum and did stall for several days before easing lower to near 7300.

Over the last few months the ASX200 index has been loosely forming a head and shoulders pattern with the head above 7600 in August and the two shoulders around 7400. This is widely accepted as a trend reversal pattern, however its current movement higher in the last two weeks is threatening to collapse the pattern.

Several weeks ago, the ASX200 enjoyed solid support from the 7200 level where it propped it up for around two weeks and this may be called upon again should the index continue to ease lower.  The volatility in the ASX200 index (seen in the chart below as the red line) has decreased in the last few weeks returning to a longer-term average.

All things considered, the index has moved very strongly over the last 12 months, with recent signs that it could easily return to its recent all time high and threaten to move higher. The resistance around 7500 is the current obstacle that needs to be cleared although there are obvious levels, eg. 7200, ready to resume support for the index.

AUDUSD – Eases from Three Month High at 0.7550 Down to Key 0.74 Level

In the last week or so the AUDUSD has eased from resistance at the three-month high around 0.7550 back down to another key level of 0.74 where it was supported to finish last week. This retracement follows several weeks of a strong rally which saw the AUDUSD not only move back up through resistance at 0.73 but continuing higher to the 0.74 level and moving through to the three-month high. After hitting resistance at 0.7550 a few weeks ago, its rally did slow down as it rallied back up to 0.7550 to run into resistance again forcing it lower.

Although now less likely, should it bounce off the support at 0.74 and move through the resistance at 0.7550, you would expect the 0.78 level to play a role again having influenced the AUDUSD as much as it did earlier in the year across many months. If the current support at 0.74 fails, then the key 0.73 level is likely to step in and provide some support again.

Given its range trading over the last few months, there are several levels that are poised to resume playing a role including the current 0.74 level but also 0.73 and 0.71, now that the AUDUSD has eased away from the three month high at 0.7550. The 0.73 level first gained attention in August when for several weeks it propped up the AUDUSD and kept it within a range between it and 0.74. The price movement over the last two months has reversed the medium-term trend after it pushed through 0.7450 and moved through to the three-month high.

If the AUDUSD does reverse strongly and move back through 0.74 and 0.73, you could expect the 0.71 level to provide some support after it reversed at that level in August. Failing that, the round number of 0.70 is more likely to step in and provide support to the AUDUSD.

 

RBA Leaves Rates as Historic Lows

As no surprise to anyone, last week the Reserve Bank of Australia (RBA) kept the cash rate at its historic lows at its monthly board meeting. However they did change their tune ever so slightly as they left the door open to a rate rise in 2023, having previously said they couldn’t see rates rising until 2024. After the meeting last Tuesday, RBA Governor Philip Lowe said that inflation had picked up earlier than expected but in underlying terms was “still low”. “The board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2½ per cent at the end of 2023 and for only a gradual increase in wages growth,” he said.

They are also still very conscious of the red-hot property market in Australia with increasing “household indebtedness” as people continue to question why the central bank isn’t playing a role in maintaining a lid on soaring prices and curbing borrowing. The central bank has been reluctant to comment on housing adopting the approach that they have a bigger economic picture to manage.

However last week they did make a comment on the scenario of increasing rates quickly and the impact on property prices. “Price falls could be widespread if interest rates were to increase sharply due to unexpected inflation or rising risk premiums,” the RBA said in its Financial Stability Review released last Friday. “Sharp price falls could cause greatest harm to the financial system for assets where leverage is common, notably residential and commercial property.”

However, “while there has been a slight moderation in housing turnover and housing price growth as a result of the lockdowns, recent data on commitments suggest housing credit growth is likely to pick up further” the RBA added.

 

ASX200 – Continues to Trade Around Key Level of 7400

A quick scan through the ASX Top 20 stocks will show a handful of stocks that have performed very poorly this year, while others have shone. In the last week, Aristocrat Leisure, Commonwealth Bank and Macquarie Group have all achieved all time highs on the back of very strong up trends. Aristocrat is also the best performing stock over the last six and 12 months. If you look outside into the top 50, ASX joins that list.

Continuing to drag the chain are the miners in BHP, Rio Tinto and Fortescue Metals, which are all trading at close to 12 month lows. It makes you wonder how much higher the S&P/ASX200 index would be if it wasn’t for these few stocks.

In the last week or so the ASX200 index has reversed well off the 7300 level returning to a one month high near the key 7500 level. The ASX200 traded right around the 7500 level in a very tight range for several weeks two months ago and that level is likely to offer some resistance again. As the index approached that level last week it did struggle to maintain the momentum and did stall for several days before easing lower to 7300.

Over the last few months the ASX200 index has been loosely forming a head and shoulders pattern with the head above 7600 in August and the two shoulders near 7400. This is widely accepted as a trend reversal pattern, however its current movement higher in the last week is threatening to collapse the pattern.

Several weeks ago, the ASX200 enjoyed solid support from the 7200 level where it propped it up for around two weeks and this may be called upon again should the index continue to ease lower. The volatility in the ASX200 index (seen in the chart below as the red line) has decreased in the last few weeks returning to a longer-term average

All things considered, the index has moved very strongly over the last 12 months, with recent signs that it could easily return to its recent all time high and threaten to move higher.

Meet the new DAX 40 constituents 

The German flagship index DAX is being increased to 40 constituents from September 20th. The change is the biggest in the history of the index and whilst it is not expected to materially alter the pricing of the index, it could affect the way investors view it. 

So, who are the new DAX members? 

Airbus SE 

Airbus is Europe’s answer to Boeing. Based in the Netherlands, it operates in the aerospace and defence industry. Through to September 10th the stock had rallied 26% year-to-date after taking a battering during the 2020 selloff, though it has yet to recover previous highs. Revenues rose 30% in the first half of 2021 from a year earlier, whilst the six-month period also saw the company return to profit after posting a loss of almost €2bn a year ago. 

Zalando SE 

Zalando is an online shoes and fashion retailer. It has undergone rapid expansion, accelerated by the Covid-19 pandemic as shopping trends shifted online. Revenues surged by 40% in the first half of 2021, whilst net income for the period grew from €36m a year before to almost €155m. Shares were trading just shy of €100, with the company commanding a market cap of around €25bn. 

Siemens Healthineers AG 

Siemens Healthineers develops technology used predominantly in the healthcare industry. Products in areas such as diagnostic and therapeutic imaging, laboratory and point of care diagnostics, and molecular medicine, are among its specialities. YTD gains of around 36% have seen it ascend all-time highs as demand for its products looks to be heading only one way. In the nine months to the end of June revenues were up 21% and net income up 29%. 

Symrise AG 

Symrise is a supplier of fragrances, flavourings and ingredients used in cosmetics. Shares are up roughly 10% in 2021 and the market cap has grown to over €16bn. In the six months to the end of June, revenues grew 5% to €1.91bn, whilst net income increased 16% to over €196m. 

HelloFresh SE 

HelloFresh is an online food services company that delivers pre-portioned ingredients to subscribers, allowing them to make home-cooked meals based on a recipe provided. As the market for online, home-delivered food grew rapidly during the pandemic, HelloFresh has enjoyed rapid growth in sales and its share price. Sales rose to €1.56 billion in the June quarter from €972 million a year earlier. It sees full-year revenue growth of 45-55% this year. Shares have rallied over 40% in 2021. 

Sartorius AG Vz  

Sartorius manufactures pharmaceutical and laboratory equipment, placing it squarely at the heart of the biotech sector. Needless to say, growth has rapid. In the first half of the year order intake rose 82.4 percent; sales revenue was up 60.1 percent; whilst underlying EBITDA margins improved markedly to 34.1 percent. Underlying EBITDA rose 89.2 percent to €555 million, whilst net profit climbed 108.7% to €259m. Shares in the group have risen 125% YTD. 

Porsche Automobil Holding  

Porsche makes cars. It is a holding company of VW with investments in the automotive industry. Shares have had a good year, with the stock up 50% YTD to its highest since the financial crisis of 2008. 

Brenntag SE  

Brenntag is a chemical distribution company based in Essen. In the six months through June 2021, revenues rose 9% to €6.6bn but income fell 2% due to a 20% spike in operating expenses. Nevertheless, shares have made all-time highs this year with a YTD gain of 32%. The consensus rating for the stock is ‘hold’ based on the 12 analysts who cover the stock. 

Puma SE  

Puma is a multinational that designs and manufactures athletic and casual footwear, apparel and accessories. It’s done well from the growing demand for leisure clothing (see JD Sports) and probably got a boost from Italy – who wear Puma kit – winning Euro 2020. The stock is up roughly 15% so far in 2021. 

Qiagen N.V. 

Qiagen is a diagnostics company that provides sample and assay technologies for molecular diagnostics, applied testing, academic and pharmaceutical research. It’s been a leading provider of tests for Coronavirus and variants. Profits doubled in the first six months of the year but was forced in July to cut its earnings and revenue guidance for the year because as it anticipates vaccines will cut demand for tests. 

DAX 40 index – all you need to know as the DAX 30 expands

From September, the DAX 30 will be no more as it expands to include ten additional members, creating the DAX 40. 

The German benchmark will be expanded by ten members, to a total of 40 constituents, while the MDAX Index will be reduced from 60 to 50 constituents. 

Deutsche Borse said it is making the changes to increase the quality of the DAX indices and to align them with international standards.

Selection criteria for the DAX 

  • DAX candidates must have a positive EBITDA in their two most recent annual financial statements.
  • The obligation to be listed in the Prime Standard of the Frankfurt Stock Exchange will no longer apply; a listing on the Regulated Market will be sufficient
  • DAX indices will have a scheduled main review twice a year in March and September. Previously there was just a single review each September.
  • All members will need to comply with the recommendations of the German Corporate Governance Code with respect to the formation of an audit committee in the supervisory board.
  • Constituents will be selected by market capitalization only from September. The exchange turnover criterion will no longer be part of the ranking process. Instead, constituents will need to meet minimum turnover requirements.

Potential new DAX constituents 

Heading into the end of August, the largest companies by market cap on the MDAX and therefore potentially set to feature in the new expanded DAX 40 include Airbus SE, Siemens Healthineers AG, Sartorius AG, Beiersdorf AG, Zalando SE, Hannover Rueck SE, Symrise AG, Hellofresh SE, Carl Zeiss Meditec AG and Puma SE. 

But the new rules could have implications for loss-making tech companies. Delivery Hero, for instance, has posted EBITDA losses of more than €330m in each of its last two years. This would make in ineligible under the new rules, though it will remain in the index as an existing member. 

Nothing should change to DAX pricing

We are not anticipating any major changes to prices to our current DAX cash & DAX future products. However, there could be implications to prices as the market responds to the inclusion of the new members.

You can continue trading both instruments at their current market values under the following tickers:

  • Germany 30
  • Germany 30 – Futures
  • MT5 Cash – De30
  • MT4 Futures – Germany30

Please note: there will be no out of hours pricing for these instruments between 22:00 CET on 27th August and 02:10 on 30th August.

Any questions or queries please don’t hesitate to contact us at support@markets.com.

US pre-mkt: Another wobble as US inflation surges to 13-year high

A Volcker-era inflation print: US inflation surged in April, with the year-over-year CPI reading coming in at 4.2%, the highest since Sep 2008 and easily beating the 3.6% expected. Prices rose 0.8% month-on-month, ahead of the 0.2% forecast. A 10% increase in used cars and trucks was the most eye-catching reading with sub-indices (see table below).

The gauge of core inflation made for even more interesting reading, at +0.9% mom and +3% yoy (see chart below). The mom reading was the highest since 1982 when Volcker was in full inflation-busting mode. We can look to lots of things like base effects, supply chain trouble, reopening, pent-up demand, stimulus effects etc as being behind this jump in pricing. Nevertheless, it’s happening; and this perfect storm for inflationary pressures is not about to go away immediately, even if it does, in the end, prove transitory. Yes, it’s predicted – albeit a little hotter than expected – but it’s still bound to stoke worries in the markets about inflation and rising nominal yields. Keep your eyes on the wage growth and job openings for the real inflationary pressure.

As we have noted previously, we can expect a series of hot prints this summer; the Fed has made it clear it will look past these as it thinks inflation will be transitory. We shall only really know if that is the case in a few months’ time. Until then expect gyrations as data shows strong inflation and growth, even if it’s largely predicted.

US CPI chart showing inflation spike.Table showing y-o-y CPI percentage increases.

Market reaction: Nasdaq futs predictably fell, benchmark 10-year yields rose to 1.65%. 10-year TIPS breakeven inflation rate rose to 2.591%, the highest since 2013. S&P 500 futs were weaker too but pared some losses ahead of the open. NDX set to open around 13,175, a wee bit above yesterday’s lows under 13,100. Vixx spiked above 23 before settling into the mid-22s.

The FTSE 100 tumbled to day lows at 6,950 on a broad algo-like reaction to the data before rallying to 7,000 again investors woke up and remembered that higher inflation is net good for the UK market since it’s weighted to cyclicals not tech. Strong inflation readings ought to support the UK blue chip index. The dollar caught some bid initially, with DXY spiking to 90.67 on higher yields before giving them all back in short order to sit around 90.30 at pixel time.

Cluster of indices charts showing reactions to US inflation spike.

EURUSD moved in a wide range on the release and is now trending to the upside.

EUR/USD chart from 12th May 2021.

US pre-market: selling unabated

US futures looking lower ahead of the cash equity open on Wall Street with NDX at 13,120 and the S&P 500 around 4150, implying about a 30pt lower open for the broad market. Dow being called about 200pts lower at 34,520. European stocks have extended losses with all the main bourses over 2% lower on the day. The USD is offered with the dollar index testing yesterday’s lows at the 90 round number support. Despite all the inflation chatter Treasuries not moving much with 10s barely holding 1.60%. Tesla is -7% in the pre-market and I expect ARK to have another bad session. Apple also -2% on high volume, with Palantir and Nio both -9% among the most active traded ore-mkt. Virgin Galactic called down 20% after losses of $0.55 a share were twice what was expected. Novavax declined -13% as it delayed plans to seek vaccine approval until the third quarter.

Just a few random thoughts and pointers here about what’s going on.

Inflation expectations are key – although we’ve not seen bond react too much thus far (Fed put) this is bound to be impacting the discount rate, which is going disproportionately affect growth/momentum. US 5y break evens at 2.71% or thereabouts are a multi-year high and being replicated to an extent in moves in other markets. Due to the pandemic (shut downs, savings) and the policy response (ultra- low rates, massive monetary growth and fiscal stimulus aka helicopter money), we have a perfect storm of wage-push, cost-push and demand-pull pressures that won’t be as transitory as the Fed thinks. Ultimately it goes back to the question asked by the great Paul Tudor Jones about a year ago: can the Fed suck all this money back out of the system as quickly as it injected it. The answer then was almost certainly no, and post the recent policy shift and vast pro-cyclical stimulus it is clearly absolutely no. So we have inflation worries and, as described on multiple occasions last year, the worry is that the Fed allows inflation expectations to become unanchored as per the 1970s. Too much spending, too much free money and too much dislocation for anything but. Higher taxes might help but they seem ‘too’ well targeted at the higher end of the spectrum to tamp anything down.

On the inflation and macro outlook, there is a degree of trepidation post jobs report and pre-CPI with that hot China PPI number sandwiched in between not helping. Can’t stress enough that the jobs report indicates inflation (be it of the stag kind or not) as wage push comes to fore and outstrips raw material/supply chain pressures and demand side pressures.

Stocks that are held long by hedge funds by definition part of problem. The GS hedge fund VIP index underperforming broader market. Could be related to prime brokers tightening leverage post Archegos. We may be witness a self-fulfilling HF selling cycle, that is, the more stocks fall the more the dealers sell and HF are ultimately forced to liquidate.

It’s a bit indiscriminate – lots of the big reflation plays off heavily which suggests this is a ‘sell everything’ kind of day (which could be why bonds are not moving as impetus to buy and drive yields down is offsetting the inflation stimulus to sell and drive yields up). This seems very similar to the sort of tech bleed we saw last September when we thought the macro picture was understood and tech looked a little overbought, whilst broader markets were not so much since it was well before the big Nov rotation began. If similar to that period then we might expect a similar 10-15% move off the all-time highs back to the March lows around 12,200, and it could take three months to regain. That is assuming there are not deeper problems ahead – a Fed taper tantrum is still ahead.

We’ve run up a fair bit and the technical setup was extended with US stocks in particular looking overbought. Although broken the 50-day line NDX yet to see real dislocation yet with the March lows still not tested yet. These are important levels to watch and for now we wait for the big tech/FAANG + Tesla + ARK nexus for the key market guide.

NFP miss: does it mean anything?

US jobs growth cooled with just 226k created in April, well below the 1m+ expected. The blowout number from March was also revised lower by 146k to 770k. Wages rose more than expected.

What does it tell us, if anything?

1) Don’t read too much into this print – the US economy is by most measures booming. Payrolls are a lagging indicator and at the mercy of a huge number of factors. Payrolls can sometimes produce a monthly print way off the reservation. Moreover, +266k is a good number in normal circumstances and the country is still in the throes of the pandemic – expectations might have gotten a little elevated for this number (guilty). Too much hype maybe a factor here in some of these market moves on the announcement – the narrative doesn’t really change IMHO.

2) If slower employment growth is something to consider, then it will simply keep the Fed easier for longer. This was reflected in the surge in tech/growth and a reversal of the reflation trade (ie Dow lower, NDX higher) in the futures market. Overall, this ought to be a net positive for risk assets like stocks, albeit it may create yet more churn and rotation, which makes it messier. As per point one, however, this print does not mean that suddenly WFH stocks are about to suddenly get out of their funk, or FAANGS are more attractive than they were yesterday. Similarly, it does mean that the reflation trades are less appealing. If anything, it simply has created a more useful entry point for some – as can be seen by the fading of the initial kneejerk on the Dow and elsewhere.

Chart showing USA 30 index response to NFP release May 7th 2021.

3) There has been some evidence that poorer folks are better off than they were thanks to stimulus cheques. These won’t last forever, but there is an argument that ongoing government support create a moral hazard around incentivising people back into work post-pandemic. A question that does need to be asked by the Fed and Treasury is how their policies are going to improve productivity and generate real employment gains.

4) Even if yields and the value/cyclical equity market plays recover – as they seem to be doing in the first half hour of trading on Wall Street today – the print does not do an awful lot for USD. Bonds were bid, and yields moved sharply lower, with the 10yr down under 1.5% in short order. The sharp move lower in yields lifted gold and sent the US dollar lower to breach the late April low and snap the rising trendline. If we can use this print as anything to go by, then it means the Fed is inching further away from a taper than the ECB which ought to be supportive for a long-awaited EURUSD rally to 1.25.

Yields response to NFP release May 7th 2021.

5) Rising wages underscore a sense that employers are struggling to find workers. Lower paid jobs that were lost in the pandemic are coming back, but they may not be as low paid as they used to be. This suggests further upside pressure on inflation over the coming months as businesses seek to attract staff. The problem for the Fed becomes this: if inflation picks up and employment does not recover quickly enough, its’ current policy stance will be questioned and the bond market will start to flex its muscles.

NFP review: numbers disappoint but stimulus drives sentiment

  • Stock futures hold gains, yield curve steepens
  • Second straight disappointing payrolls number
  • Move to fast-track Biden stimulus package drives sentiment

Stocks are set for fresh record high opens on Wall Street and a 5th straight day of gains – something we haven’t seen since August. A soft jobs report has done little to upset the underlying risk-on sentiment that stems from the milking stool of equity market strength: vaccines, stimulus and earnings growth.

Although in line with expectations, really it was another disappointing number from the US jobs market. Nonfarm payrolls rose +49,000 in January, following the -227,000 decline in December, which was revised down from the initial -140,000 print last month. So things look worse in the labour market than maybe we thought but futures are looking right through this with Joe Biden’s $1.9tn stimulus package coming over the hill. The dollar is offered and the yield on US 10-year Treasury notes has leapt with spreads widening along the curve.  2s10s spread at 1.06%, highest for four years, with 5s30s at 150bps,  the widest since 2015.

The decision to move on stimulus without Republican support really changes the game. As I said yesterday, Biden wants to act fast and does not want to spend his first 100 days in office horse trading with the GOP over relief plans. The price of this could be any hopes of bipartisanship in future and we may need to wait until 2022 for the big green/infrastructure package as a result, and it may prove harder to deliver. For now thought dumping an extra 10% of GDP in stimulus is being lapped up by the market.

Unemployment fell to 6.3% from 6.7% but the decline in the participation rate is a concern. U6 unemployment fell to 11.1% from 11.7%. Average hourly earnings rose +5.4% year-on-year vs 5% expected. The two month net revision took the total down by -159k. The US still has some 9.8m fewer jobs than it had in February 2020 before the pandemic struck. Permanent job losses are a concern – the number of permanent job losers, at 3.5 million, changed little in January but is 2.2 million higher than in February.

S&P 500 not bothered: Biden is going for it on stimulus.

S&P 500 not bothered: Biden is going for it on stimulus.

Cable higher and hugging the trendline.

Cable higher and hugging the trendline.

Wall Street opens at record high

  • Wall Street opens at new record highs, stimulus eyed with jobless claims up
  • Sterling, euro bid with dollar on back foot
  • Signature Aviation soars on bid

US stocks opened at record highs as progress towards a fiscal relief package indicated Congress leaders are close to signing off on a $900bn programme that includes $600 cheques and enhanced unemployment benefits. Steny Hoyer, the No. 2 Democrat in the House of Representatives, said earlier he was hopeful for a Covid relief package within hours. The S&P 500 hit 3,723 for a new intra-day high and the Nasdaq Composite also notched an all-time high.

The solid start on Wall Street lifted the spirits in Europe. The FTSE 100 turned green after languishing in the red all day albeit 9pts scrubbed due to ex-dividend factors. European markets were broadly higher with the DAX +1% and Stoxx50 +0.85%. Benchmark US yields fell after some disappointing unemployment data.

Sterling trades stronger but a little off its highs after running through stops at $1.36 earlier in the session to take out a fresh two-and-a-half-year high. There are signs of progress on the Brexit front with a possible deal ready for the weekend. MPs are rising for Christmas but will come back to ratify any deal. The European Parliament set a Sunday deadline to see the text in order to ratify it in time. Clock ticks etc, still up in the air but the market favours a deal. Michael Gove says less than 50% chance of agreeing a deal but various sources from Brussels painted a slightly more upbeat picture. Sterling grew in stature with significant dollar weakness the main theme of the day.

The Bank of England left rates on hold and delivered no surprises. The MPC voted unanimously to keep the main lending rate at 0.1% and the stock of asset purchases at £895 billion. There was not a lot in this meeting for the market, though we did get a very clear indication from the Bank that it would ease policy in the event of a no-deal Brexit.

US unemployment claims exceeded expectations again. Initial claims rose to 885,00 for the week ended Dec 12th, up from 862k in the previous week and ahead of the roughly 800k expected by economists. Claims remain above the level seen in 2008/09 but are down from the >6m or so we saw at the peak of the pandemic.

EURUSD made fresh highs above 1.2250, rising to meet trend resistance at the upper end of the rising channel.

 

Gold continues to find bid above the 200-day moving average with bulls looking for a confirmed thrust north of this line to mark a trend reversal.

Gold continues to find bid above the 200-day moving average.

 

Equities

Signature Aviation shares rocketed 40% to 373p after a bid from Blackstone, which indicated a possible cash offer of $5.17 per share, which equates to 383p as of the Dec 16th fix at 1.35 GBPUSD exchange rate. Shares were trading a little cheap due to the pandemic but have good exposure to a rebound in air travel over the coming years. There remains an absolute ocean of private equity money ready to be deployed and we are starting to see that take shape – UK listed shares have value because of the Brexit discount.

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