Treasury yields are rising and lifting the USD higher as the market participants see the Fed favouring higher yields. This supports the USD but is also pressuring equity indices around the world. Chinese property giant Evergrande being in debt up to its ears and offering car parking slots instead of returning investor money is adding to the worries. Evergrande has over $300 billion in debt and hundreds of unfinished residential buildings in its hands while angry suppliers have shut down construction sites. The company is trying to pay its bills by offering unfinished properties and parking spaces instead of cash. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
USD started to rally on Friday afternoon Europan time and has remained as the strongest currency in today’s trading. The weakest currencies are CAD, AUD and NZD. The benchmark US 10-year Treasuries yielded 1.37% at the end of the trading yesterday. Previous close: 1.34%.
After selling off strongly on Thrusday gold has once again started to consolidate. Platinum and silver have been much weaker than gold while USOIL has also traded lower. The reason quoted for weakness in oil is the recent rally in USD.
The S&P 500 (-0.16%), the DJIA (-0.18%) and the Nasdaq (0.13%) had a mixed session but the strongest selling pressure seems to have ceased. Three out of 11 S&P 500 sectors finished the day with gains. The energy (-1.13%) and the basic materials (-1.08%) sectors were the weakest. The best performers on our watchlist were AAL, ALGN, FOXA, TPR and ULTA while FCX, WPM, BKR, WYNN and GD endured the biggest losses.
The above chart shows the % performance of each stock. Stocks are presented here with the S&P 500 tracking ETF (SPY, red line) to illustrate the performance of each stock relative to the benchmark index. This allows our readers to see the potential for intraday trading opportunities in these stocks. Often the sudden increase in volatility continues on the second day. You should, therefore, keep monitoring these stocks to see if they will satisfy your criteria for a trade. All % performance charts in this report are courtesy of Tradingview.com.
Today’s main risk event is the US retails sales release. For details on other important macroeconomic releases, see the TIOmarkets economic calendar here.
Buyers defended the SMA(50) area for three days but on Friday they gave in as there was no follow-through buying that would have taken the index above Thursday’s highs. We warned about this last week saying: if we don’t see follow-through buying now then the risk of a downside break increases. A decisive break below the channel low would indicate a deeper retracement would be ahead. Now, the break has happened and the S&P 500 index is heading towards the next key support at 4352. Last week’s low at 4435 is now a resistance level. If the 4352 isn’t enough to support the market, the market might move to the 4232 – 4262 range which is where a projection based on the channel width points to.
LLY didn’t only reach our projection but has remained weak and breached it as the institutional investors stopped directing new fund flows into the stock. No market can keep on moving higher without willing buyers bidding the price up. When we analysed the stock (here) it had broken down technically and was, therefore, a good short trade candidate. LLY has dropped approximately 12% since our analysis and is now (as per Stochastics 5.3.3.), approaching oversold levels in the weekly timeframe. The stock is also approaching a confluence level at 215 – 220. Several technical factors coinciding in this area suggest that those short the stock are likely to take profits (at least partially). This buying could strengthen the stock and invite speculative buying at or near this zone. Therefore, it makes sense to keep monitoring price action in LLY inside this range.
USDCHF rallied strongly on Thursday and Friday after we pointed out how the pair was building up pressure against the resistance levels. Now USDCHF trades above both 0.9242 and 0.9274 levels. These penetrated resistances could attract buyers should the market retrace to the levels. The next significant resistance level is the March high at 0.9472.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||Fed Chair Powell said on Friday (August 27th) in Jackson Hole Symposium that tapering could begin in 2021 but also voiced concerns about the spread of delta variant.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus since the beginning of the pandemic. Now, US lawmakers have agreed to a $1.2 trillion infrastructure spending plan. The Fed officials consider ending the asset purchases in the middle of 2022.|
|Yields||Apart from the recent pickup (that started in August 2021), the Treasury yields have been moving lower since March 2021. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Employment||After two highly positive employment reports (+938K and +943K) the August number (+235K) was a big disappointment but in fact at a level that used to be the norm in the years before the pandemic. This number could delay the Fed taper but isn’t likely to reverse their decision to taper.|
|Inflation||The month on month Core CPI (excluding food and energy) for August was confirmed at 0.1% (0.3% expected) while the headline inflation (y/y) came in line with expectations (5.3%, 5.3% expected, 5.4% prior). The core CPI increased 4.0% on a year-on-year basis after advancing 4.3% in July. Fed’s view that inflation is transitory seems correct.|
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The Next Main Risk Events
- CAD – Canadian Federal Election
- AUD – Monetary Policy Meeting Minutes
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- UoM consumer sentiment 71.0 (72.2 expected)
- New Zealand manufacturing PMI 40.1 (62 prior)
- Democrats looking to repeal Trump’s tax cuts
- China to release zinc, aluminium and copper from its reserves
- New Zealand GDP 2.8% (1.4% expected)
- Australian employment change -146.3k (-90k expected)
- UK August CPI 3.2% (2.9% y/y expected)
- China August retail sales 2.5% y/y (7% expected, 8.5% prior)
- US August CPI y/y +5.3% (5.3% expected)
- RBA’s Lowe: bond purchases likely to end in 2022
- OPEC: global oil demand to exceed pre-pandemic levels in 2022
- Natural Gas at multi-year highs
- US senator Manchin not voting for the $3.5 trillion package
- SNB: Negative rates are still needed to keep the CHF low
- China released some of its strategic oil reserves
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Chief Market Analyst
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