Market Quick Take - January 12, 2021

What is our trading focus?

• Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures pulled back sharply yesterday, erasing the entire extension above the old highs prior to the rally, and putting the major indices at delicate levels that need to hold to confirm the trend. The levels are around 12,900 in the Nasdaq 100 index and perhaps 3,750-75 for the S&P 500. Later in the week, equity traders will need to begin balancing incoming earnings results and guidance with expectations on how the economy and earnings will develop as vaccine roll-outs get under way in earnest in Q1.
  
  
• Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - crypto assets stabilized and bounced back after Bitcoin sold off nearly all the way down to $30,000, a correction from the top late last week of over 25%. Ethereum suffered a sell-off of similar magnitude, but has already retraced more than half of the lost territory as of this writing. Some are linking the recent more frequent mention of “tapering” of Fed QE purchases as aimed squarely at speculative phenomena like the meteoric rise in Bitcoin and other crypto assets as well as Tesla stock.
  
  
• AUDUSD and EURUSD – the US dollar remained broadly firm, with AUDUSD trading below 0.7700 at a new 5-day low close. The next trend support there is arguably 0.7600-25, although yesterday saw the pair finding support in the very narrow rising trend channel. Major trend support is the 0.7400 area that was critical on the way up. For EURUSD, the sell-off extended well below 1.2200, with first retracement support around 1.2065, and the major trend support coming in psychologically at 1.2000.
  
  
• USDJPY – the USDJPY pair is often the most sensitive to moves in US yields and traded near the top of its very well-defined trend channel yesterday, where key resistance arguably come in around 104.50. If this area is broken, it would represent the first G10 USD pair to suggest a trend reversal for this cycle and would likely coincide with a further rise in US treasury yields at the long end of the curve.
  
  
• Gold (XAUUSD) and silver (XAGUSD) continue to stabilize following the biggest drop in two months. The dollar rally has paused while US 10-year bond yields reached a new cycle high overnight. Rising nominal yields is a drag, but as long it is being driven by expectations for higher inflation, the (negative) impact on precious metals will eventually start to fade. During the latest rout gold has confirmed trendline support at $1815/oz while staying mostly above its 200-day moving average at $1840/oz with focus now on resistance at $1870/oz. Silver meanwhile has started to claw back some of the 5% it lost relative to gold with the first level of resistance at $25.7/oz.
  
  
• US Treasury yields continue to rise, market attention turns to 10y auction today (10YUSTNOTEMAR21). The belly of the US yield curve rose sharply with 7- and 5-year yields rising as much as 5bps on the day. The 3-year Treasury auction closed marginally cheaper; however, demand was solid with the bid-to-cover-ratio rising as investors were looking to reduce duration. Fed’s Bostic’s speech fostered bearish sentiment in Treasury as it said that it is open to tapering as soon as the end of 2021 if there is a strong recovery. The selloff will likely continue with the 10-year yield trying the 1.2% resistance level. Key levels ahead are: 10-year Treasury auction today and 30-year auction tomorrow, and Bostic speaking again on Thursday.
  
  
• Odds for an interest rate cut continue to rise in the United Kingdom as the economy faces double dip recession (GILTLONGMAR21, GILS). Bank of England’s Tenreyro was vocal yesterday about an interest rate cut, however it failed to convince the market that this tool will be enough to support the British economy and ignore a recovery as Gilts continued to selloff throughout the day.
  
  
• Tesla (TSLA:xnas) and NIO (NIO:xnys) - Tesla shares were down 8% yesterday in what at first seemed like a correlated move to the decline in Bitcoin highlighting the same speculative vein. But part of the explanation could also have been Tesla’s main competitors in China, NIO, reporting a new sedan called ET7 with deliveries starting in Q1 2022. But the real positive surprise was the upgraded battery pack showing better performance and longer range. NIO shares were up 6%.

What is going on?

• A buoyant grain market awaits the monthly release of world supply and demand forecasts by the U.S. Department of Agriculture today at 1700 GMT. Soybean (SOYBEANSMAR21) is hovering near a six-year high while corn (CORNMAR21), following its best run in a decade, continues to challenge the key $5/bu level. The report is expected to show reduced US inventories for soybeans, corn and wheat while a drop in oilseed and corn output in Brazil and Argentina would trim global stockpiles of both crops, already projected at the lowest in at least five years. Speculators began 2021 holding a near record net-long in corn and soybeans futures as rising demand and hot, dry crop weather in South America have reinforced concerns about tightening world supplies.
  
  
• US President Trump and VP Pence meet, send no signs of Trump resignation or removal by VP Pence, which means that the Democratic House leadership will likely move forward with articles of impeachment tomorrow in an attempt to remove Trump from office and prevent him from ever serving again after having “incited insurrection”, as well as due to his role in asking for an official in Georgia to “find more votes”. The US Senate would then have to impeach Trump with a two-thirds majority for the impeachment to result in a trial and removal from office (largely symbolic as any trial would likely not take place until after the end of Trump’s term on January 20.
  
  
• Carnival reports preliminary Q4 results showing a net loss of $1.9bn. The cruise line operator’s average monthly burn rate was $500mn in Q4 compared to $9.5bn in cash on the balance sheet as of 30 November indicating that the company has enough liquidity to get through 2021. The CEO says that the company expects all ships to be operational by year-end and that demand for 2022 is strong with cumulative advance bookings for 1H 2022 ahead of 2019. This is a good indication of what to expect for the general leisure industry when vaccines normalize our daily lives. Shares were down 1.5% yesterday on the news.
  
  
• Cryptocurrency platform Bakkt to go public through a SPAC deal. The company is owned by the Intercontinental Exchange and has plans to launch an app in March that will let users buy and sell cryptocurrencies and manage loyalty points and gift cards according to Financial Times. The company will have an enterprise value of $2.1bn. The deal comes after Coinbase, the most established name in the industry, has just announced its plan to IPO in a more traditional way.

What are we watching next?

• The ongoing development in US long yields – after the first week of the year saw US 10-year and 30-year treasury yields break above the key range highs of 1.00% and 1.75%, respectively, the ongoing development in US yields is important for the outlook across asset classes, as higher yields represent a tightening of financial conditions, which is benign if this is due to an improvement in the outlook and a strong economy, but comes at an interesting time as many speculative assets have had a remarkable run and could prove very sensitive to a persistent run higher in yields. Yesterday, the 10-year treasury benchmark yield posted another new high for the cycle at 1.15%.
  
  
• Q4 2021 earnings season starts this week. Q3 2020 earnings season was the big comeback for corporate earnings and the market expect the momentum to continue in the Q4 earnings season. Friday is the most important day when JPMorgan Chase, Citigroup, and Wells Fargo report Q4 earnings and more importantly provide the market with an update on loan losses and the US economy.

Economic Calendar Highlights for today (times GMT)

• 1100 – US Dec. NFIB Small Business Optimism survey
• 1435 – US Fed’s Brainard (Voter) to speak at AI symposium
• 1500 – US Nov. JOLTS Job Openings
• 1600 – US Fed’s Rosengren, Kaplan and Kashkari to speak at event
• 1700 – EIA's Short-term Energy Outlook
• 1700 – USDA’s Jan. World Agriculture Supply and Demand Estimates
• 1800 – US Fed’s George (non-voter) to Speak on economic outlook
• 1900 – US Fed’s Rosengren (non-voter) to speak on economic outlook
• 2130 – API's weekly US petroleum stock report

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