Market Quick Take - February 2, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures continue to climb back from the past week’s drawdown as the reflation trade faltered. Nasdaq 100 futures are trading above 13,300 this morning as sentiment has strengthened with Chinese and other Asian equity markets rallying overnight. Yesterday’s best performing equity theme in our universe was Bubble Stocks up 2.7% indicating risk is back despite rising US 10-year yield indicating investors are betting on growth and lower yields for longer.

EURUSD – yesterday, EURUSD teased the lower edge of the range without breaking it, a very weak performance for the single currency and odd episode of renewed USD strength, given the prior tendency for the USD to trade in negative correlation with risk sentiment. Given that the pair has been coiling in the range for nearly three weeks, a breakout, either above 1.2200 or more close to the current price action, 1.2050, could see an expansion of volatility. EURUSD bulls will be shaken if the psychologically important 1.2000 level falls, though arguably in a local context, a move below 1.1900 is needed to do more severe damage to the up-trend.

USDCHF – this pair has just broken the 0.8920-area neck-line of a very well-defined head-and-shoulders formation as the franc has weakened sharply in recent days, perhaps in a tardy reaction to the renewed upside pressure in US rates (and in sympathy with a very weak JPY), or perhaps on stale conviction on the weakening of the US dollar. Either way, the move is one of the more technically compelling of major USD pairs at the moment, although those looking for a squeeze must recognize that big brother EURUSD will likely need to move in sympathy (breaking 1.2000) for a notable extension of this development, and a major chart point for USDCHF is dead ahead at 0.9000.

Silver (XAGUSD and SILVERMAR21) trades lower after the social media-driven rally based on unfounded conspiracy theories ran out of steam. Silver failed to break the August high and trades lower overnight after the CME raised margins, the dollar trades stronger and after gold (XAUUSD) was left unimpressed by the latest surge. The irony of the whole event is that banks do not hold a major naked short while the biggest winners of the latest surge have been hedge funds who are long silver and have been for months. CME and LBMA monitored silver stocks are currently above 40,000 tons so while the coin and small bar market is signaling tightness, there is plenty of stocks to meet demand. Support at $28/oz followed by $27.65/oz and $26.75/oz. We are bullish gold and especially in silver in 2021, but in order for a move to stick, it has to be driven by sound fundamentals, not conspiracies.

Brent crude oil (OILUKAPR21) and WTI crude oil (OILUSMAR21) trade near the highest in almost a year. Boosted by a general increase in risk appetite as seen through stocks together with an improved fundamental outlook. Saudi production cuts combined with strong Asian demand have, despite lockdowns and reduced mobility, started to bite with the backwardation in Brent rising to a one-year high, a sign that large stockpiles are shrinking fast. Also, in China, the recent liquidity squeeze may be over for now thereby reducing demand risks from the world’s biggest importer. Resistance in Brent at $57.45/b, the January high.

Treasuries with a maturity of more than ten year post a loss of nearly 4% for the first month of the year (10YUSTNOTEMAR21). Treasuries post a loss of approximately 1% in the first month of the year, but it is government bonds with long duration that have suffered the most. This explains the recent hunt for yields that drove the yield of Caa USD Corporates bonds to the lowest level in six years and a surge of leverage loan demand. Although long-term yields have fallen amid a stimulus delay and uncertainty in the stock market, the rise in yields will resume sooner than expected inflicting more losses to Treasury bondholders.

Italian sovereigns rally as speculations rise that a new government will be formed in the next few days (10YBTPMAR21). Polls recently published by a prominent Italian newspaper show that less than 30% of respondents think that new elections would be the most favorable outcome. Most of those polled see a new government led by Conte or by another institutional figure. The name of Mario Draghi has been advanced by Italy Alive party, Matteo Renzi, however it seems that conversation with President Mattarella have not started, yet. The market is starting to price the possibility that a government will be formed in the next few days. If Draghi will become Prime Minister, the rally will be more intense with the spread between 10-year yield and the Bund falling below 100bps.

What is going on?

Robinhood raises another $2.4bn in capital. The main use of the funds is for collateral at DTCC (the industry’s central clearinghouse) as the increased open positions and increased concentration in positions in stocks such as GameStop has increased Robinhood’s credit risk in the financial system.

Panasonic shares up 3% on strong profit guidance. Q3 net income at JPY 81.3bn vs est. JPY 56.7bn and FY operating income guidance is raised to JPY 230bn vs est. JPY 150bn driven by strong demand in its auto segment (batteries for electric vehicles).

US Jan. ISM Manufacturing slightly disappoints, Prices Paid sub-index soars - the reading for January was a still quite strong 58.7, though that slightly disappointed expectations for a reading of 60.0. The Employment subindex registered two months in a row above 50 (at 52.6) for the first time since pandemic disruptions started last year, and the Prices Paid sub index was at a stunning 82.1, the highest reading since early 2011, when oil prices at the time were ramping above 100 dollars per barrel.

Australia’s central bank expands QE, signals it sees no need to move on rates until 2024 - overnight, the Reserve Bank of Australia expanded its QE purchase programme by AUD 100 billion, or about 5% of Australia’s GDP (compares to AUD 123 billion purchased since QE began last year), at a pace of some AUD 5 billion per week, thus extending the programme some 20 weeks and nearly covering the anticipated budget deficit for the year. As well, the RBA statement provided guidance indicating the bank does not forecast raising the policy rate from its 0.1% level until 2024. The AUD was not particularly reactive to this development, somewhat softer in the crosses, although the technical stakes are quite interesting at the bottom of the range here in AUDUSD (here in 0.7600 area).

What are we watching next?

The Bank of England meeting on Thursday one of the few likely to move the underlying currency. The Bank of England meeting this Thursday will likely prove somewhat more consequential than most central bank meetings lately as the Bank is expected to signal more firmly on whether it intends to keep negative interest rates as a policy option as it will announce the results of a comprehensive survey on the policy, even if it announces no sense of urgency in actually cutting rates to negative. Sterling has toyed with breaking higher lately, both against the US dollar and the Euro, and too dovish a signal from the BoE could serve as a headwind for sterling, although forward expectations of the BoE policy rate are slightly negative beyond the June BoE meeting already.

Big week ahead in the earnings season with Amazon, Alphabet, and Alibaba
It is going to be a big week in earnings with 175 companies out the 2,500 companies we track during the earnings season reporting this week. The most important earnings this week are Amazon, Alphabet, and Alibaba as these companies combined are the best picture into consumer activity and health in the two largest economies in the world. Read this week’s earnings preview here.

• Tuesday: UPS, Exxon Mobil, Amazon, Alphabet, Amgen, Alibaba, Pfizer
• Wednesday: Ping An Insurance, Novo Nordisk, Siemens, Sony, GlaxoSmithKline, PayPal, Qualcomm, AbbVie
• Thursday: Unilever, Royal Dutch Shell, Chugai Pharmaceutical, Philip Morris, T-Mobile US, Roche, Merck & Co, Bristol-Myers Squibb
• Friday: NTT, Linde, Sanofi, Estee Lauder, Deutsche Telekom

Economic Calendar Highlights for today (times GMT)

• 0745 – France Jan. Flash CPI estimate
• 0900 – Italy Q4 GDP estimate
• 1000 – Euro Zone Q4 GDP estimate
• 1800 – US Fed Kaplan (non-voter) to speak
• 1900 – US Fed’s Mester (non-voter) to speak
• 2145 – New Zealand Q4 Wage and Employment Data
• 0145 – China Jan. Caixin Services PMI

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: