The Yuan and Inflation | Morning Express
E-mini S&P (June) / NQ (June)
S&P, yesterday’s close: Settled at 4199, up 6.00
NQ, yesterday’s close: Settled at 13,665.50, down 34.75
Fundamentals: U.S. benchmarks are pointing higher and the Federal Reserve’s preferred inflation indicator is due at 7:30 am CT. This comes on the last session of May and ahead of the long Memorial Day weekend. After two flush attempts, through May 13th and 19th, all major indices held an extremely constructive technical landscape, and this paved the way for higher prices. In the end, the month of May brought choppiness mirroring that of March, just as we anticipated at the onset of the month. Remember, the S&P finished March by probing a fresh record high.
The Core PCE Index for April is expected at +2.9% YoY and +0.6% MoM. Each would be a shade under that from Core CPI. The report begs to set a tone on the session and the U.S. Dollar is gaining ground ahead of it. A hot read would certainly force the taper discussion, whereas something at or below expectations would encourage the Dollar to reverse such gains.
The Treasury landscape was firm through midweek, hitting the highest level since the May 7th payrolls miss. Similarly, the U.S. Dollar Index stuck its neck to the lowest level since January 7th. However, each has pared back due to a melting pot of reasons. Added supply via 5-year and 7-year auctions, coupled with the risk-on grind higher in equities has certainly pressured Treasury prices and inversely underpinned rates. Although Fed committee members have remained persistent in their patience, deflecting the inevitable timeline for a taper, the European Central Bank has been seen as more dovish. This factor has forced the Euro to reverse course by about 1% from Tuesday’s high. Lastly, there is traction in Washington for a watered-down infrastructure plan. Yesterday, Republicans countered President Biden’s revised $1.7 trillion plan with a $928 billion proposal that is being “seriously considered”. The idea of printing less money is supportive to the Dollar.
Amid all the macro narratives, earnings have continued to beat expectations, supporting this rally. Yesterday, the top thirteen companies by market cap that reported all beat both top and bottom expectations. The largest, Salesforce, is up 5% ahead of the bell. (Disclosure: Blue Line Capital owns Salesforce)
Technicals: Yesterday’s strength in the S&P probed a breakout from the bull flag pattern we pointed to. The follow through overnight is working to secure a bullish breakout, but as we noted, we want to see a close above major three-star resistance at 4208.75-4210. Such would pave a path of least resistance to 4238.25-4241.50. The NQ, which rallied more through last week, has a similar setup but is being contained through a quieter week by major three-star resistance. This level has kept a closer lid on the tape at 13,790-13,818 and sellers seem to be coming in front of it. All the while, the Russell has been a leader over the last 48 hours, just as we anticipated. For the S&P, our rising momentum indictor brings a point of balance at 4205. Below here, support comes in at yesterday’s settlement and then again at a base it built through the final hour at 4194.25. For the NQ, our Pivot is 13,685 and strong major three-star support remains at 13,625-13,657. Overhead, strong resistance in the Russell from a trendline comes in at 2295.
Resistance: 4208.75-4210***, 4226.75**, 4238.25-4241.50****
Support: 4199**, 4194.25**, 4183.50-4186***, 4150-4154***
Resistance: 13,790-13,818***, 13,953**, 14,035-14,064****
Support: 13,625-13,657***, 13,543-13,570**, 13,455-13,486**, 13,346-13,388***
Crude Oil (July)
Yesterday’s close: Settled at 66.85, up 0.64
Fundamentals: Crude Oil is breaking out but must secure it on a closing basis. The strength comes despite plans for OPEC+ to revitalize production with 350,000 bpd coming back for June, which came on the heels of a 350,00 bpd add for May. However, it is the July increase that hits the radar next week as members meet again. OPEC+ is expected to ratify an 840,000-bpd increase for July, just as Iran talks advance. If a Nuclear Deal is reached, Iran could bring back another 600,000-bpd beginning in August. We found the initial selloff due to added Iran supply a terrific buy opportunity because initial reports said they could add as much as 2-4 mbpd to the global supply. Of course, the higher target was coming from Iran themselves and the more realized benchmark is 1-2 mbpd by the turn of the year. Given U.S. and Europe reopenings, Memorial holiday driving expectations and TSA precheck numbers hitting above 1.8 million per day, the demand landscape is outpacing the fear of added production. The last component to this strength is certainly not the rebound in the U.S. Dollar Index of course, but the Chinese Yuan strength. A stronger Yuan is a bellwether to the commodity landscape, their currency can now purchase more goods for less and we know they want to hoard natural resources.
Technicals: Crude settled above major three-star resistance at 66.45-66.70 by a small margin and follow through today is paramount in securing a bullish breakout that should test the psychological $70 mark. Our rising momentum indicator now aligns with that major three-star level, and which act as a Pivot and point of balance today; steady action above here is very bullish. However, a close below here would open the door for price action to slip back into the thick of the week’s consolidation range.
Resistance: 67.98***, 70.00***
Support: 65.90**, 65.36**, 64.45-64.62***, 63.58-63.65***
Gold (August) / Silver (July)
Gold, yesterday’s close: Settled at 1898.5, down 5.3
Silver, yesterday’s close: Settled at 27.94, up 0.063
Fundamentals: Gold and Silver had mixed reactions to a firmer inflation read then expected. Core PCE came in at +3.1% YoY and +0.7% MoM, a shade higher than he 2.9% and 0.6% expected. The U.S. Dollar gained ground while Gold and Silver traded lower initially. However, we see these results as a relief to markets that may have feared a hot read. We have not had a chance to dive into the components of the report, but by our belief, this is certainly not hot and sets up to be transitory in the coming months. As we discussed in the S&P section, there are several factors buoying the U.S. Dollar Index right now as it is 57% the Euro. However, as it pertains to the metals camp, the most important currency factors have nothing to do with the Euro, it is Chinese Yuan strength, and this cannot be seen via the Dollar Index.
In the end, China wants to hoard natural resources. They have even talked down prices in order to buy at better levels. This narrative is not going anywhere, anytime soon.
Technicals: Gold has done a terrific job battling above major three-star support at 1877-1882 and tested this area with a low of 1884.3 just ahead of the PCE data. It has since reversed higher, regaining the 1900 mark. Our Pivots are our momentum indicators, both Gold and Silver are regaining their respective levels at 1897 and 27.82; continued action above here today paints a path of least resistance higher into the weekend.
Resistance: 1914.3***, 1935**, 1945-1950***
Support: 1893-1894.5***, 1877-1882***, 1862-1864** 1843-1850***
Resistance: 28.47-28.55***, 29.36***, 30.00
Support: 27.63-27.68***, 27.36***, 26.94***
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