What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – momentum has faded dramatically over the past week with the 4,167 level looking critical on the downside in the S&P 500 futures. If broken it could initiate a short-term sell-off in US equities. Yesterday’s big beat on ISM Prices Paid led commodity stocks higher while the interest rate sensitive stocks were down across the board despite the US 10-year yield not moving a lot indicating that equities are expecting higher prices and potentially lower margins later into the year.

STOXX 50 (STOXX50E.I) – momentum has come to a stop as well in European equities as investors are digesting the potential direction in German yields which have been moving higher lately. Earnings are strong and the Covid-19 pandemic seems to be coming under control in Europe with the continent opening its economies. STOXX 50 futures are boxed into a tight trading range of 3,925-4,000.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome). Bitcoin has been unable to take out the key 58.1k area retracement, even as it made an intraday go at 59k yesterday, so clearly this is the technical resistance holding the price action back from a fuller recovery. Ethereum, meanwhile, is in its own universe, ramping higher for further record levels yesterday and overnight above 3,400, although price action in the Asian session was quite choppy (3,455 high followed by sell-off below 3,200 only to rebound to 3,380 as of this writing).

Silver (XAGUSD) broke higher while gold (XAUUSD) once again got rejected just below the key $1800 level. Overnight both trades softer with the stronger dollar more than off-setting a 10-week low in U.S. 10-year real yields at –0.83%. Silver took the lead after U.S. manufacturing data cooled in April, thereby and despite surging inflation raising the prospect for lower rates for longer. Gold needs to hold above the 21-day moving average ($1767) in order to mount another attack on long-held short positions. Key levels to watch being $1800 followed by $1818. Silver is currently in an uptrend with resistance at $26.94 followed by $27.34.

Ten-year Bunds yields are poised to turn positive despite of what happens with Treasury yields in the United States (IS0L). Yesterday, 10-year Bund yields broke above -0.20% to a new record high at -0.16% for the first time since March last year. Thirty-year Bund yields rose to 0.38% the highest since July 2019. We continue to bearish European sovereigns and particular Bunds because they remain extremely vulnerable to rises in US Treasuries yields. Indeed, increased purchases under the PEPP program did not break the correlation between Bunds and US Treasuries. Therefore, Bunds are meant to fall as soon as the reflation trade comes back to life in the US. Even if US Treasury fail to take Bund yields into positive territory, the German election in fall will provoke yields higher as the new government focuses on a better European integration and increased fiscal spending.

What is going on?

The April US ISM Manufacturing survey disappointed, and showed hefty inflation pressures. The headline April US ISM Manufacturing survey reading released yesterday was a lofty 60.7, but was expected closer to 65 after the March reading was the highest since the early 1980’s. Interpreting “diffusion” indices is difficult as this is still a very strong reading suggesting strong growth, but the pace of improvement in manufacturing has likely peaked for the cycle. The Prices Paid sub-index was worth its own headline, registering 89.6 the highest reading since the 1970’s, save for two months in 2008, when oil prices rose far above 100 dollars/barrel.

What are we watching next?

Whether the “sell in May and go away” saying is the operative phrase for equity investors. So far, after one session (for the US and with the UK out yesterday and Japan and China on holiday until Thursday), the “sell in May and go away” saying is the proving spot on, but far too early to tell how this month will shape up. Issues on the radar could include concerns that the next rounds of US stimulus will prove smaller than expected and could be offset by changes to the tax code, with yesterday’s treasury rally despite the wild ISM Prices Paid data suggesting that the market may be buying into the “transitory” inflation narrative peddled by the Fed.