Market Quick Take - March 4, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) –equities were in for rough sledding yesterday as the Nasdaq 100 closed at a new local low and the S&P 500 closed sharply lower and even poked to the lowest levels in more than a month overnight. A new rise in longer treasury yields is likely the proximate cause and we could have a touchy market around today’s appearance from Fed Chair Powell, who has yet to weigh in on the Fed’s stance on last week’s treasury market dysfunction during the Thursday rout.The 12,725-50 area is important for the Nasdaq 100, having served several times as a support area before breaking yesterday. The next level of note is down near 12,070, the 61.8% retracement of the rally from the November lows. The S&P 500 level of note is at 3,772, a Fibo retracement support that is the last important one ahead of the 3,656 level from early Feb.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - cryptocurrencies bulled higher yesterday before consolidating today, with Bitcoin finding a high yesterday almost precisely at 52,510, which is the 61.8% retracement of the steep sell-off from the 58,000+ high – that is a key hurdle if Bitcoin is to get back on the rally train. Ethereum has yet to achieve as steep a comeback, currently trading below 1,600.

USDCHF – the Swiss franc is not normally a currency prominently on our radar, but the recent major breakout is notable and demands our attention as EURCHF has cleared 1.1000 and could trade to 1.1250 and USDCHF has ripped higher above 0.9000 and even to 0.9200, taking it above the 200-day moving average for the first time since in nearly a year. The drive is a preference for holding currencies with higher yields, especially at the longer end of the sovereign yield curve, and the Swiss National Bank’s holdings of US stocks and gold has suffered considerably of late as well as the franc has been the weakest currency in the G10.

AUDUSD –despite generally weak risk sentiment, AUDUSD trades flat relative to yesterday’s levels, perhaps choosing to focus on the new high for the cycle in iron ore futures out in China, as iron ore is Australia’s largest export. Every day that passes without a follow through lower in the wake of last week’s huge reversal could add a bit of confidence for bulls, who will look for a close above 0.7900 to begin suggesting that the sell-off was an aberration driven by a one-off train wreck in US treasuries last week. Any downside prospects would likelyrequire a major hit to global growth expectations, long Australian yields and commodity prices – and a move south of 0.7700.

Gold (XAUUSD) slumped again yesterday following another surge in sovereign bond yields. It did however once again manage to find support ahead of $1700 with rising stock market volatility creating a small safe-haven bid. A reduced beliefin the Federal Reserve’s ability let alone willingness to introduce yield-curve control to curb long-end yields is hurting sentiment at a time where headline inflations have yet to accelerate. From a longer-term bullish perspective, the metal would need to hold above a major band of support between $1670 and $1690 while a break above $1765 would send a signal of renewed strength and support.

Crude oil (OILUKMAY21 and OILUSAPR21) - It’s D-day in the oil market as OPEC+ meet at 1PM GMT to decide production levels from April and onwards. Having managed to raise expectations for a 1.5m barrels/day production increase, the market is however wary of a Saudi surprise, something they have delivered on several occasions in recent meetings. Oil generally trades higher following a weekly US inventory report that went straight into the history books. The recent freeze in Texas triggered a record 21.6 million barrels jump in crude stocks with record low refinery intake – due to shutdowns - triggering the biggest gasoline stock reduction since 1990. Brent currently stuck in a $62 to $66.5 with OPEC+ and US bond yields (risk on/off) the focus. 

Tesla (TSLA:xnas) and Ark Innovation ETF (ARKK:arcx) - Tesla shares were down another 4.8% yesterday and Ark’s shares tumbled some 6%, suggesting for the moment that these shares have a high beta to the swings in the market, where speculative names sell off more heavily in a rout. Ark’s shares are down over 20% from their all-time top just a bit over two weeks ago. 

What is going on?

Global bond yields rose sharply again yesterday, driving weaker risk sentiment - one development that seemed to serve as the spark to start the days selling in bonds was a Bloomberg story citing sources at the ECB, who apparently said that recent rises in bond yields were not sufficiently large to warrant action now, a somewhat confusing development after ECB President Lagarde and the ECB’s Schnabel weighed in with concerns about bond market developments last week.

Industrial metals showing signs of rally fatigue and with that, the need to consolidate. Rising bond yields have triggered some renewed risk aversity with the Bloomberg Industrial Metal index falling to a two-week low but still up 20% since early November. Nickel has led the decline tumbling 17% during the past week on increased production news from Chinese and Russian mining operations. Copper, the darling of the industrial metals space, given reflation and speculative demand from investors and the prospect for a rising supply deficit as the electrification gathers pace, has seen its tightness ease this week. It is however holding up well and has yet to challenge support, currently at $4.03 on High Grade (COPPERUSMAY21).

UK Budget will be generous short term and wait until 2023 before tightening – UK Chancellor Sunak yesterday announced another £350 billion in measures to help support the economy in the spring budget statement. These will include income replacement and measures designed to support investment. In fact, Sunak emphasized that encouraging investment will be the primary focus once the economy starts opening up more aggressively mid-year due to the UK’s fast vaccine roll-out. Measures to increase taxes, for example raising the corporate profit tax to 25% from 19% currently, to shore up longer term fiscal credibility and reign in the budget deficits (expected at near 10% of GDP in 2021) will not begin until 2023.

What are we watching next?

Fed Chair Powell interview today: does he offer any signs of a policy shift? - there is considerable talk of “Operation Twist” and even outright yield curve control coming soon from the Fed to avoid the kind of volatility we saw last week, but it is likely far too early for the Fed to take such a drastic step as particularly the latter would. More technical moves to address issues with the very short end of the US yield curve are possible soon, as these relate to the issue of the Treasury transferring huge holdings from the Fed to spend on stimulus – some $1.3+ trillion of funds that must be shifted by August 1. If Powell continues to suggest that rising longer term yields are merely a reflection of a more positive growth outlook and are not a concern, the equity market may not like the message.

Earnings releases to watch this week:

Economic Calendar Highlights for today (times GMT)

1000 – EC Jan Unemployment Rate
1300 – OPEC+ meeting kicks off
1330 – US Initial Jobless Claims
1500 – US Jan Durable Goods Orders
1500 – US Jan Factory Orders
1530 – EIA's Weekly Natgas Storage Change
1705 – Fed Chair Powell Discusses the U.S. Economy

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