Weekly analysis

A powerful combination of factors lining up here against the Aussie and in favour of the JPY as the commodity complex has come in for a broad correction here.Was the reminder overnight in the form of the May CPI data out of Japan that Japanese real yields remain quite strong, while negative yields reign elsewhere. Looking for the risk of a JPY back-up for some time, but none unfolded until now, and the move could extend if long yields remain pinned lower and the sell-off in equities broadens (huge divergences last week in the US, with the median value stock down and quite badly, even as growth and momentum cheered the fall in longer yields). There’s certainly room for a considerable back-up in the JPY crosses without “breaking” anything, although any such move would likely have to see further downside pressure on long safe-haven yields and a significant further correction in commodities prices. AUDJPY is still within the multi-month range, but the focus looks lower if this move doesn’t immediately back up, perhaps eyeing the 100-day moving average, currently at 80.40, or even more to the downside if the market conviction in the trades that have proven so successful since the pandemic lows are in for a more significant consolidation.  

AUDUSD is a decent proxy for this latest USD move lower as well as the ramp since the pandemic lows in key commodities prices that are drivers of Australia’s economy, including especially iron ore. In the recent cycle is China’s ban on importing thermal coal from Australia and some discussion that China may halt LNG imports as a next step after halting strategic economic dialog talks “indefinitely” recently. The weak US payrolls on Friday drove the pair above the prior 0.7800-25 resistance, but the price action has gone nowhere since, restrained chiefly by weak risk sentiment. Meanwhile, the RBA, while it has teased the July meeting as being in play for adjustments in guidance, remains in wait and see mode together with the Fed, so short term Australia-US yields spreads, and even 10-year yield spreads, for that matter, are not signaling huge support for a move higher  10 years a bit more so recently than the 2 year swap spread, which mid-range from the early March peak  Tactically, if the pair closes back below 0.7750, traders will have a bearish reversal on their hands, while we likely need a new jolt lower in the US dollar that shifts the fundamental indicators more sharply against the greenback to get the bullish case back on track.  

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The UK is a week away from its scheduled reopening but it is expected that the Prime Minister will announce today that the date will be delayed by up to 4 weeks, with focus on easing the pressure on hospitals after another surge of cases related to the Indian (Delta) variant. The UK is expecting to have vaccinated all adults by the end of July and allowing for more immunization is thought to be one of the main reasons for delaying the reopening date.

The Pound has been holding up pretty well despite the increased likelihood of a delay, given it was likely already discounted leading up to this week. GBP/USD remains confined to its one-month range as bulls hold on to support just below the 1.41 mark. Traders are likely to focus on the large amount of economic data coming out of the UK this week, with special attention to the inflation data released on Wednesday. After strong readings in the US and China, expectations are for a 1.8% increase in consumer prices over the last year, which would bring inflation close to the Bank of England’s 2% target. 

A stronger reading will likely be supportive of the Pound as investors become more convinced that the central bank will start to act sooner rather than later as economic recovery gets underway. The BoE’s Chief Economist Haldane was top news last week when he made hawkish comments about the UK’s economic recovery and inflation expectations, leading to believe that the MPC could start announcing policy changes as soon as their next meeting on August 4th.

Despite an attempted break lower on Friday, downward momentum in GBP/USD has not improved much, but there is scope for the pair to attempt a new break below the lower bound of its current range at 1.4075. If we break below this level then there is pretty much a clear path towards 1.40. Alternatively, if bullish momentum increases then immediate resistance may be found at 1.4186, followed by the horizontal 1.42 line before testing the upper bound of the range at 1.4245. 

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Copper reached a record high above $10,300 per tons on the London Metal Exchange and $4.72/lb in New York. Copper is front and centre in the rally that is currently driving raw materials to multiyear or even record highs. Being an integral part of the green transformation process through the rollout of millions of electricity-hungry vehicles over the coming years, copper has surged higher on a combination of both physical but also paper demand from investors looking for inflation hedges in markets with a strong fundamental outlook. An outlook that according the Glencore could see the need for 50% higher prices in order to provide mining companies the economic incentive to increase the search for additional supply.

Copper’s strong uptrend during the past year has seen the price not only double but even accelerating since its latest correction last month. On daily charts, RSI divergence seems to be building which could indicate the short-term risk of the uptrend becoming exhausted, however, a trend change is not in the cards.

Gold finally managed to mount an attack strong enough to take it above $1800. While lower U.S. real yields and a softer dollar provided the fundamental tailwind the yellow metal needed support from in-demand silver, one of the best performing commodities this week. During the past month, the continued rally across industrial metals have supported silver relatively more than gold. This can be seen through the gold-silver ratio which has been declining since late March.

In order for gold to continue higher, it first needs to establish support above $1795 before chasing after long-term trend following short positions. The next level of upside interest is $1851, the 200-day moving average and 61.8% retracement of the January to March sell-off.

All sectors apart from precious metals and livestock recorded strong gains led by crude oil, copper, corn and coffee. In response to these developments hedge funds and large money managers increased bullish bets across 24 major commodity futures by 3% to 2,358k lots.

Given the strength of the recovery a relatively small increase that was led by crude oil (25k), gas oil (17k), natural gas (+11.7k), corn (21.9k) and sugar (12.5). Other contracts such as copper (-6.3k) and both wheat contracts (-5.7k) were sold despite recording strong price gains. Potentially a sign that investors despite being dictated by the price action to be long are feeling somewhat uncomfortable with prices at multi-year highs and breakeven yields (inflation) that has been drifting lower during the past three weeks.  Commodity is the best performing so far in June driven by rising commodity prices. While rising oil prices have stolen attention lately we explain why investors should ignore the this rally in oil and gas majors. Instead we think investors should look long-term and bet on copper as it will become the new oil of our future greener society.

The energy sector today is still dominated by “old oil” companies and we have recently got questions about whether to invest in this industry since the industry has become cheaper relative to the overall market. While it is true the energy sector has become cheaper against the overall equity market and the outlook has improved with the rollout of Covid-19 vaccinations, the overall energy sector is trading at 12-month forward EV/EBITDA of 6.5, which is above the average since 2005. This period includes many years of far better fundamentals in terms of return on capital than what the industry can generate today.
The “new oil” that will fuel the green transformation and electrification of our economy is copper, which is much more intensely used than in our old industrial economy. Commodity analysts are split on the demand-supply balance, but from an equity perspective it matters more long-term what the demand outlook is. 

The five largest companies in terms of market value in the S&P 500 (Apple, Microsoft, Amazon, Facebook, Alphabet, and Tesla) are the most important earnings for sentiment this week.

This week seven out the 10 largest companies in the S&P 500 will report earnings representing 15% of the MSCI World Index. Besides these mega companies hundreds of the world's most important companies across banking, energy, health care, social media and online advertising will report earnings. It is basically make or break for global equities this week, and the show starts Monday with Tesla where expectations are so high that it is almost an unbearable task for the management to deliver despite recently strong Q1 delivery numbers.  

Tesla expectations are high for Q1 results with revenue at $10.4bn up 74% y/y, but down from Q4 2020, driven by strong demand for electric vehicles. Tesla’s outlook is key, and investors will be looking at any signs of weakness from increased competition and pricing pressure in China.

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European banks have a considerable upside potential over the coming year if the mean reversion in the German 10-year yield continues amid rising global inflation. A steeper yield curve and positive yields in Europe could take European banks' price-to-book ratio back to the recent historical average of 0.8x and then beyond. The industry has improved over the past years with Deutsche Bank being.
Our view is that the value vs growth, higher inflation, and higher interest rates, will continue the mean reversion happening in the German 10-year yield and help European banks move back to the average price-to-book ratio since 2009 of 0.8x and likely beyond to 0.9x helped by macro policies. This means from current levels that European financials could see a 20-40% upside over the coming 6-12 months.

Gold’s inability to build on the previous weeks strong rejection below $1680, now a double bottom,helped trigger a 16% reduction in the net-long to 64.8k lots. The reporting week ended before Thursday’s technical breakout above $1765, a development that is likely to have attracted fresh fund buying from momentum and trend following strategies.

Gold (XAUUSD) ticked higher in Asia overnight after closing above the key resistance-turned-support area at $1760-65/oz on Friday.  Partly driven by a continued rise in global corona virus cases worldwide supporting safe havens like Treasuries and gold. Continued focus on dollar and yields as well as geopolitical developments between the U.S. and Russia. Important resistance levels, using Fibonacci, at $1785 (double top) and $1818.

Bank of Japan (BOJ) Governor Haruhiko said on Monday that each recession has different characteristics   that the difference in the severity of the downturn among industries, business types and occupations.

The Japanese yen has been very weak over the last twelve months on the argument that a global reflation is JPY negative, particularly with the steepening of global yield curves on the anticipation of a durable inflation cycle settling in at a time when Japan’s central bank has moved to explicitly cap its ten year yield at 0.25%. This has kept the yen very sensitive to rising long yields, especially this year and the rise at the longer end of the US and other yield curves. But a couple of developments here are reminding us that the JPY weakness has perhaps extended too far To these JPY-supportive factors we have to add the reminder overnight of Japan’s seeming immunity to rising prices elsewhere, even as its currency has been very weak over the last twelve months. The headline April CPI number was out at -0.4% year-on-year (-0.5% expected) and the core ex Fresh Food and Energy was -0.2% vs. -0.1% expected. Real yields in Japan, in other words are positive in April when US yields went to worse than -400 basis points in that month! The last missing piece that would drive a more determined JPY consolidation higher and possibly even a notable spike, as I discussed in a recent post, would be anything that spooked credit and saw a widening in credit spreads in corporate- and emerging market debt, something that has been largely absent as a factor since the pandemic broke out last year, although we are seeing some modest widening of US corporate credit spreads over the last couple of weeks.  

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The March Ivey PMI just missed a record reading at a stunning 72.9, imitating the strength in the ISM surveys south of the border recently, even as Canada’s vaccination effort badly lags that of the US. But a bit of trend exhaustion and crude oil bogged down into a range has seen an interesting recent reversal in USDCAD after a poke all the way below 1.2400 in March. Inverted head and shoulders formation with the sloping neckline coming in not far above 1.2600. The commodity dollars could be in for another round of consolidation lower before putting up a stand further down the line. A break of resistance here would likely shift the focus to the big 1.3000 area.