Market Quick Take - February 17, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities suffered weakness yesterday after posting new all-time highs early in the session, likely spooked by the sharp rise in US treasury yields, where every benchmark from 5-years and out the curve posting significant new highs for the cycle. The move could continue to hold equity markets in check and even trigger a more significant reversal is yields advance further in aggressive fashion from here. Hardly any damage has been done so far, even if traders should keep a close eye on treasury yields, with concern notching higher if the 21-day moving averages come under fire for the major indices, currently near 3,850 for the S&P 500 and 13,450 for the Nasdaq 100 Index.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin launched its first attack above 50,000 yesterday, faded back below and is trading solidly back above at 50,600 as of this writing. Key round level breaks are important to sustain for keeping expectations of higher prices alive. Ethereum seems somewhat more bogged down, unable to maintain above 1,800 for recently, somewhat disappointing, given Bitcoins new record highs.

USDJPY and EURJPY – the major USD pair broke to new local highs and closed above the 200-day moving average (near 105.50) yesterday for the first time since a brief spike last June – also associated with a rise in US treasury yields of the time. It is clear that global safe haven yields will be the key coincident indicator on the radar for whether this move holds higher after yesterday’s significant move. It is also worth keeping an eye on whether the JPY remains the biggest loser on further yield spikes if risk sentiment begins to sour, as many other JPY crosses powered to notable new highs for the cycle in recent days as well.

EURGBP and GBPUSD – with notable USD strength coming in yesterday, the GBPUSD attempt toward 1.4000 has been beaten back, but sterling still remains firm in the crosses, with EURGBP notching new lows for the cycle and the range on the chart all the way down to the post-Brexit sub-0.8300 lows theoretically open.

Gold (XAUUSD) - slumped by 35 dollars yesterday after taking a double hit from an accelerated rise in Treasury yields combined with a stronger dollar. Rising yields matter for non-interest-bearing bullion and the jump to 1.3% in 10-year Notes helped send gold closer to critical support at $1765/oz, the November low and 50% retracement of last year’s March to August surge. The short-term outlook remains challenging with gold being the most interest rate sensitive metal and hard asset. The fact it has been falling while inflation expectations have been going up is worrying and most likely due to the market expecting even higher yields and dollar. Should $1765/oz fail to hold, the market will then focus on $1725/oz, the 38.2% retracement of the rally that began back in August 2018. The next 48 hours will be key to gold and with that also silver’s short-term direction.

Shopify (SHOP:xnas) - this provider of a cloud-based e-commerce platform has been a poster child for the rising fortunes of cloud-based solutions providers since the breakout of the pandemic last year, rising nearly five times from the lows last March, and 30% as of yesterday’s close since the beginning of this year. It reports before the open of trading today and is priced for perfection at some 70 times trailing twelve months of sales, so it will inevitably prove volatile on today’s report and on any guidance that management provides.

Palantir (PLTR:xnys) shares for the data-mining company dropped heavily yesterday by some 13% after reporting another operating loss in Q4 amid expectations that the company would breakeven. Making matters possibly worse for the company’s stock, which was caught up to a degree in the recent “short squeeze” kerfuffle, Friday will see the end of the lock-up for insiders to trade their shares, possibly leading to more volatility and losses if insiders want to cash out.

Treasury yields keep rising amid the reflation trade (TLT, IEF). Ten-year Treasury yields rose by 10bps, the biggest move seen since last November during the US elections, and closed the day at 1.3%. Since they have broken above 1.2% yields have entered a fast-trading area where they will find support at 1.5%. If you would like to learn more about key levels, click here.

Following a weak demand for 2057 Gilts, 10-year yields close the day at 0.61% (GILS).  The UK yield curve steepened fast after demand for the of 30-year Gilts was the lowest in four months. Today Gilts will remain vulnerable to the release of the Consumer Price Index data and the auction of £2.5 billion 2035 bonds.

Italian bond yields rise following the new 10-year benchmark auction, today Draghi seeks confidence vote (BTP10). Demand for the new Italian 10-year benchmark dropped as Italy was able to tighten price of the new issuance. Despite the bid/cover ratio was above six times, the market sold off on the news. We believe that sentiment in Italian sovereigns will improve today as Mario Draghi seek a confidence vote at the Senate.

What is going on?

Yields are rising globally, not just in the US as reflation bets abound. UK Gilt yields have also risen sharply and those in Australia and New Zealand also rose sharply overnight, with an Australia 10-year government bond now yielding 1.40%, up from around 1.00% at the beginning of the year. At some point, rising long yields, if they continue higher, will temper asset price gains as valuation models for equities will demand far higher earnings yields than in a lower rate regime as yields rise.

Crude oil (OILUSMAR21 & OILUKAPR21) - remain bid with the Texas cold blast and power crisis which according to estimates have cut US production by 3.5 million b/d and refinery capacity by 3 million b/d.  With demand for WTI falling, Gasoline (GASOLINEMAR21) has seen the biggest price jump this week. Given the short-term nature of this outage, the impact apart from the embarrassing fact that millions of people have been left without power, should be limited. Markets overall remains bid from falling Covid-19 cases and OPEC+ discipline in keeping production tight.

Copper price forecasts continue to be raised - Citigroup Inc, Goldman Sachs and Bank of America have all raised their 12-months price target to $10,000 from a current level of $8400/oz. The global decarbonization agenda risks creating a deep global deficit with mining companies having a relative thin pipeline in terms of future production growth.  Copper stockpiles in China are at the lowest in more than a decade. Adding to the physical demand, copper has also experienced increased “paper” demand from investors looking to industrial metals with tight supply for reflation hedges.

What are we watching next?

US yields and FOMC minutes up tonight – it is tough to over-emphasize the importance of safe haven yields and the significance of the recent, and especially yesterday’s move higher in major US treasury benchmark yields, as the 30-year T-bond yield leaped 9 bps and the 5-year yield nearly matched with a rise of 8 bps. While some Fed members have recently stated that current yield levels are not a concern, that was before this latest spike, and the pace of recent yield rises inevitably has their attention, so Fed watching has become a critical pastime again. It is unlikely that much to-do about yields will be made in this evening’s FOMC minutes, as they are from a meeting held three weeks ago, but still the minutes will be worth scrutinizing for any hint of whether the Fed is concerned about the scale of treasury issuance this year that is far beyond the level of their QE purchases and whether there is any discussion or sense of urgency around guiding expectations toward “yield caps” or yield curve control (YCC) to ensure that yields don’t rise.

Earnings releases to watch this week – earnings season continues apace this week, with a number of interesting names to report this week around the world.

• Today: Analog Devices, Baidu, Twilio, Shopify, Rio Tinto
• Thursday: Daimler, Walmart, Applied Materials, Roku, Nestle, Airbus
• Friday: Allianz, Deer & Co, Deutsche Telekom

Economic Calendar Highlights for today (times GMT)

• 1330 – Canada Jan. CPI
• 1330 – US Jan. Retail Sales
• 1400 – US Fed’s Barkin (voter) to speak
• 1415 – US Jan. Industrial Production and Capacity Utilization
• 1500 – US Feb. NAHB Housing Market Index
• 1900 – US FOMC Minutes
• 0030 – Australia Jan. Employment Change / Unemployment Rate

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