- Rising yields increase reflation bets again
- Tesla falls despite record profits
- Bitcoin recovers
Key Events
US futures on the Dow, S&P, NASDAQ and Russell 2000 wavered in pre-New York open trading on Tuesday as increased optimism from strong corporate results is being offset by a resurgence in coronavirus cases in developing countries. European stocks are fluctuating between slight gains and losses, following an Asian session which mostly saw declines.
Copper extended its rally toward a 2011 high. Gold was also higher.
Global Financial Affairs
Contacts on the Russell 2000 are outperforming for the second day in a row.
In Europe, the STOXX 600 Index was little changed at the time of writing. The FTSE 100 was no different, even though major stocks listed on the UK’s main benchmark recorded profits that beat forecasts.
HSBC (LON:HSBA) boasted quarterly earnings that more than doubled, and the global lender saw a return to profits, with a 79% rise in pre-tax profit to $5.78 billion, pushing its stock price up 2.6% and extending an advance for a third day. Technicals, however, warn of a potential reversal.
The stock has been developing a descending triangle—a visual demonstration of how supply has been gaining on demand. If this continues into a downside breakout it would signal a top.
BP (LON:BP) enjoyed a quarter of rising oil prices, and the oil major said it would start a share buyback program. The stock jumped 2.5% higher, and was the top performer on the index. However, since then it has pared gains to about 1.7% after the company warned of “a high degree of uncertainty.”
Japan’s Nikkei 225 fell 0.5%, underperforming other regional benchmarks, after the country’s central bank reduced its inflation forecast as coronavirus restrictions dent sentiment. China’s Shanghai Composite was the only major regional index in the green, but only +0.04%.
Overall it appears that investors are taking a wait-and-see approach ahead of the Fed’s decision and press conference on Wednesday. As US economic conditions improve, traders continue to wonder if there will be any let-up in the Fed's consistent strategy of extended support of the market.
On Monday, during the New York session, most US stocks scored fresh record highs thanks to robust corporate results, combined with the belief that the Fed won’t change its staunch support for the most expensive stock market in history, despite the country’s economy heading back to pre-pandemic levels.
While the Russell 2000 continued to outperform, gaining 1.2%, it is still 2.7% below its Mar. 15 all-time high and may be developing a bearish pattern.
The small cap index has been trading with a H&S top, while the RSI has been providing a negative divergence, falling in contrast to the price’s rise.
On Monday, both the NASDAQ, which gained 0.9% and the S&P 500, which rose 0.2%, registered records. Most of the main 11 industry groups gained, with Energy and Consumer Discretionary shares jumping the most. The Dow Jones fell 0.2%
Tesla (NASDAQ:TSLA) posted record net income of $438 million on the back of revenue which surged 74%. $101 million. A portion of the EV manufacturer's net income was due to Bitcoin’s rally, and CEO Elon Musk said his company sold 10% of its more than $1 billion Bitcoins to demonstrate its liquidity as a form of alternative payment to cash.
Still, Tesla was sold off in late New York trading, in what we consider to be profit-taking.
According to the Chief Investment Officer at UBS Global Wealth Management, Mark Haefele, “muted stock-price reaction to the robust numbers is largely due to already-elevated expectations gong into the reporting season."
While that may certainly be true across the broader market, we think there is significant, additional upside momentum for Tesla’s stock.
The shares completed a back-to-back bullish flag, after already completing a H&S bottom.
While the market narrative is expecting increased inflation due to the recent rise in yields, we think a reverse is more likely, including in yields on the 10-year Treasury note.
Rates have topped out and added yet another bearish pennant, beneath which they are finding resistance since last week. We can also see the falling momentum, which could very well pull the rug out from under reflation traders, leading yields lower.
Rising yields pushed the dollar higher, after the greenback plummeted, having completed a rising wedge.
However, as the USD reaches the support of the preceding massive falling wedge since the March peak, we might see it take on its Mar. 31 high.
Gold managed to hold on to a small advance despite dollar strength and yields moving higher, suggesting bullish positions remain at play for the precious metal, following the small double bottom.
But as gold reaches the top of its falling channel, it will face more resistance.
Bitcoin climbed for the second day, but to a much smaller extent.
We expect this rise to be part of a return-move after completing a bearish wedge, and that prices will return to the $40,000 level.
Oil climbed after OPEC+ projected a strong recovery beyond the near-term demand destruction due to India’s COVID-19 surge.
Technically, though, we expect oil to fall. It is nearing the top of its falling triangle and is therefore likely to slip back toward $58. A downside breakout will likely target the $48 level.
Up Ahead
- Earnings season continues with Microsoft (NASDAQ:MSFT) reporting results after the market close today.
- Federal Reserve Chair Jerome Powell holds a press conference on Wednesday following the Fed meeting.
- President Joseph Biden makes his first address as president to a joint session of Congress on Wednesday.
- On Thursday, US GDP is forecast to show growth strengthened in the first quarter, bolstered by government stimulus.
Market Moves
Stocks
- Futures on the S&P 500 Index gained 0.1%.
- The STOXX 600 Index was little changed.
- The MSCI Asia Pacific Index fell 0.4%.
- The MSCI Emerging Markets Index was little changed.
Currencies
- The Dollar Index advanced 0.1%.
- The euro dipped 0.1% to $1.2072.
- The British pound declined 0.1% to $1.3881.
- The onshore yuan was little changed at 6.484 per dollar.
- The Japanese yen weakened 0.2% to 108.30 per dollar.
Bonds
- The yield on 10-year Treasuries advanced one basis point to 1.58%.
- The yield on two-year Treasuries advanced one basis point to 0.17%.
- Germany’s 10-year yield dipped less than one basis point to -0.26%.
- Britain’s 10-year yield gained less than one basis point to 0.759%.
- Japan’s 10-year yield climbed less than one basis point to 0.085%.
Commodities
- West Texas Intermediate crude gained 0.8% to $62.42 a barrel.
- Brent crude increased 0.7% to $66.13 a barrel.
- Gold weakened 0.1% to $1,779.15 an ounce.