Market Quick Take - November 17, 2020

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - The broader S&P 500 index managed to close at an all-time high close yesterday, though action during the cash session was muted and much of the gains were erased overnight. Momentum remains strong as long as the price action stay above the 3,575-3,550 area. The action in the Nasdaq-100 was a bit more lacklustre as the index struggles with the important 12,000 area and where richly valued companies eye US treasury yields somewhat nervously (extreme sensitivity to higher yields). There was considerably more positive action elsewhere as small caps put in another very strong session yesterday.

Bitcoin EUR (BITCOIN_XBTE:xome) - Bitcoin (XBTUSD) is continuing its rally today trading currently around 16,750. Yesterday, sell-side reports flagged Bitcoin as one the big trades for 2021 likely adding to the focus among investors.

Nikkei 225 (JP225.I) - while most other equity markets have paused in their momentum Japanese equities continued higher again today with Nikkei 225 futures pushing above 26,000. The Japanese economy and equity market are a high beta play for 2021 with stimulus and Covid-19 vaccines coming and in our view this market has considerable room for more momentum. In terms of valuation and debt leverage Japanese equities also score well relative to other equity markets.

EURUSD – the trading ranges are painfully muted in EURUSD and there appears to be a very tight positive correlation afoot with broader risk sentiment in recent weeks that is rather apparent for most USD pair, but particularly to here. Technically, for signs that traders are ready to attempt to find some directional momentum, we note the 1.1900 level to the upside as a major resistance, while the 1.1750 level is the downside trigger after last week’s consolidation.

USDCNH – the Chinese renminbi is powering stronger, as USDCNH posted a notable new cycle low yesterday below 6.58 and dropped farther still in the overnight session. As we have noted, if the rate is allowed to outperform a majority of other non-US dollar currencies, China is sending the message that it is not concerned for now about the official CNY reference basket (the yuan measured against a basket of other currencies) having reached a major range high stretching back to mid-2018 and could allow further notably CNY strength.

Gold (XAUUSD) and Silver (XAGUSD) received another setback, albeit not as big as last week, after Moderna announced a more than 94% success rate for its Covid-19 vaccine. The current period of risk on is likely to hurt sentiment with total ETF holdings down to 110 million ounces, a two-month low. The vaccine can kill the virus but not the mountain of debt accumulated during the pandemic. On that basis we do not see current developments as a gamechanger for gold and the prospects for other metals. In the short-term however investors may look to lighten their positions with focus on key support at $1850/oz.

Treasuries yields muted after news of Moderna vaccine (10YUSTNOTEDEC20). We have seen 10-year yields rising by a couple of basis points and closing at 90bps following Moderna’s news of an effective vaccine. This is a much muted move compared to the one we have seen last week with Pfizer’s vaccine. Rates might not rise because there is expectation that the Fed will control the longer part of the yield curve as yesterday Fed President Clarida said that he doesn’t dislike the bond purchasing program and it can be a tool to achieve maximum-employment and price-stability.

Tesla (TSLA:xnas) - rose some 13% in late trading yesterday after the close on the news that it would be included in the S&P 500 index - the largest ever new member in the index. This automatically benefits the share price over the long run from an indexation perspective as long as investors continue to passively accumulate the most indexed companies as they have for years.

Moderna (MRNA:xnas) - this US biotech company jumped almost 10% higher yesterday after announcing a more than 94% success rate for its Covid-19 vaccine candidate, which uses as a method similar to the Pfizer candidate that showed nearly as good a success rate, although Moderna’s apparently may have a longer shelf life at normal freezer and refrigeration temperature, making the logistics of delivering the vaccine easier. In the study, only 5 participants got sick with Covid-19 versus 90 in a control group and none of the five that both got the vaccine and got sick were severely ill, while 11 of the 90 who got sick in the control group were more severely ill.

What is going on?

US Fed’s Clarida signals possible change to Fed bond buying programme - saying that the Fed could change the amounts of the Fed’s purchases to ensure that inflation is running above 2% for some time before reacting in tightening policy. Some see it possible that the Fed could switch to buying longer dated securities as a king of yield-curve-control.

Warren Buffett dumps banks while adding health care stocks in Q3. Berkshire Hathaway continues to slowly adjust its portfolio of stocks for a different future. This includes reducing banking stocks and adding shares in AbbVie, Merck, Pfizer and Bristol-Myers worth $5.7bn.

Brent crude oil (OILUKJAN21) and WTI crude oil (OILUSDEC20) are the best performing commodities since Pfizer and Moderna released their vaccine news. Both benchmarks have risen by 11% since the news broke, while oil sector stocks given their more forward looking ability has performed even better. While the spot crude oil market remains troubled by renewed lockdowns and rising production, energy companies have raced higher with investors looking for value and recovery stocks. Having suffered the most throughout the pandemic companies from Shell, BP, Total and Chevron have all risen by one quarter since January 6. From an ETF perspective the XOP (Exploration & Production) has risen 27% while the XLE (Large cap energy producers) is up by 25% during this times.

Airbnb finally files for IPO on Nasdaq under ticker code ‘ABNB’. The world’s biggest home-sharing platform also released financial statements showing that gross booking value was down 40% y/y for the nine months ended on 30 September reaching $18bn. Airbnb also posted a net income loss of $697mn on revenue of $2.5bn for the nine months ended on 30 September. The company is currently indicating an offering size of $1bn but that could change during the investor roadshow. We suspect strong demand for shares in Airbnb as the company is a high beta play on the recovery after Covid-19.

Chinese JD.com saw its shares decline 9% on Q3 earnings. Strong sales and better net income were not enough to satisfy investors as lower margins had investors worrying about future profitability. The company was also politically correct on its conference call supporting the new antitrust measures by the Chinese government.

What we are watching next?

US Senate vote on whether to approve controversial Fed nominee Judy Shelton - Shelton is an outspoken critic of the Federal Reserve and its QE program, and an advocate of using Fed policy to devalue the US dollar, although she would only be one of seven board members if approved, something that seems less likely now that another Republican senator has stepped away from supporting her nomination. A vote could take place as early as this week.

Trump concession and moves during lame duck period... At the weekend, lame duck President Trump countered speculation that his stance on the US Election is softening by declaring that “I concede nothing”.  Perhaps more importantly, Trump appears set to make a string of moves in his lame duck period before Biden’s inauguration on January 20 that could be an effort to force Biden into an awkward position in the early days of his presidency on everything from relations with China to the situation in the Middle East, especially Iran.

Q3 earnings season continues this week. Below list shows the largest companies reporting this week:

• Today: Experian, Fortum, NIO, Walmart, Home Depot, Sea Ltd
• Wednesday: AP Moller – Maersk, SSE, NVIDIA, Copart, ZTO Express Cayman, Keysight Technologies, Lowe’s Cos, Target, TJX Cos
• Thursday: Tokio Marine Holdings, NetEase, Ross Stores, Intuit, Workday, Knorr-Bremse

Economic Calendar Highlights for today (times GMT)

1300 – Hungary Central Bank Rate Decision

1315 – Canada Oct. Housing Starts

1330 – US Oct. Retail Sales

1400 – UK Bank of England Governor Bailey to Speak

1415 – US Oct. Industrial Production and Capacity Utilization

1500 – US Nov. NAHB Housing Market Index

1600 – ECB President Lagarde to Speak

1800 – US Fed Chair Powell to Speak

1900 – Canada Bank of Canada’s Macklem to Speak

2340 – Australia RBA’s Lowe to Speak

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