Market Quick Take - February 1, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures are higher in early trading driven by strong equity markets in Asia with Japanese and Hong Kong equities up 2%. US 10-year yield is also slowly climbing back all in signs that the reflation trade might be resuming following two strong upside surprises to inflation numbers in the US and Europe. With the ongoing short squeeze and coordinated retail investor activity in certain stocks the focus is very much on Nasdaq 100 futures which sit just above the 13,000 level this morning.

EURUSD - after three weeks of coiling around in a tight range, perhaps this week will be the one that finally sees EURUSD make up its mind and either re-commit to the uptrend that has been in place since last summer with a break above 1.2200 or see a break of the key 1.2050 area and a challenge of the final up-trend support areas into 1.1900. It is difficult to tell where the market is looking for a catalyst when incoming data is widely ignored, although we assume the pair will be somewhat sensitive to risk sentiment, with the USD outperforming if global equity markets suffer a deeper consolidation. Some talk of rate cut potential by the ECB last week has contributed to holding the EURUSD in the lower range.

EURGBP - this is the preferred pair for expressing sterling direction. The recent downside action has taken the pair below the prior range low near 0.8860, but has not yet led to a major follow-through lower, something we will look for this week as a sign of a further repricing of sterling higher. It has been impressive to note sterling's resilience and some of that may be attributable to the UK more rapid Covid vaccine roll-out as the EU has suffered setbacks in acquiring a vaccine supply and in the roll-out itself. One key source of doubt for sterling buyers is the Bank of England's attitude toward negative interest rates, as the BoE needs to more clearly signal at its meeting this Thursday that it has no interest in taking rates negative for the sterling rally to post a more notable rally, perhaps starting with a EURGBP drop to 0.8600.

Silver (XAGUSD and SILVERMAR21) jumped overnight after taking center stage in the retail investor frenzy that has swept through markets this past week. A questionable belief that bullion banks hold a massive naked short in COMEX silver futures that can be squeezed, was a major focus across social media this weekend. As a result, the future jumped by 8.7% to $29.25/oz on the Asian opening, thereby breaking the downtrend from but not breaking the August peak at $32,16/oz. Bullion dealers in coins and small bars have seen a dramatic surge in demand with premiums blowing out. With this in mind, the focus today is to watch the exchange for physical (ETP) spread between spot silver and the futures for signs of stress in the system. Big moves in silver, however, is not unusual after witnessing 3 bull and 3 bear market moves last year ranging from 21% and 156%.

Job data in the spotlight as Treasury yields resume their rise (10YUSTNOTEMAR21). Treasury bonds fell together with the stock market last week and continue to trade within tight range as there is not a clear path to a recovery and the fiscal stimulus is stalled by Republicans. However, this week’s job data might surprise on the upside and give a push to yields with the 10-year Treasury yield resuming to trade above 1.1%.

Italian government crisis continues as a new coalition struggles to be formed (10YBTPMAR21). Amid last week’s selloff in European sovereigns, Italian BTPs were the most resilient. Investors who picked up Italian BTPs as the spread versus the Bund widened a few days ago, are waiting for a government to be formed before taking profit. Although an agreement between parties seems unlikely so far, Matteo Renzi, head of the small party which caused the government to fall in the first place, suggested Draghi as next Prime Minister. Although the President Sergio Mattarella has already sounded out Draghi, this is a possibility that could cause even more spread compression versus the Bund.

What is going on?

Robinhood keeps restriction list on certain stocks to curb speculation. On Friday, Robinhood had compiled a list of 50 stocks that were restricted in terms of trading accessibility due to violent short squeeze and subsequent volatility across all equities. Following the company’s capital increase the list has been reduced to only 8 names which are GameStop, AMC Entertainment, BlackBerry, Koss, Express, Nokia, Genius Brands International, and Naked Brand. Clients can only buy one share in GameStop and five options contracts as of Monday.

ExxonMobil and Chevron have had preliminary talks about a merger. This would be one of the biggest mergers in history and form a giant within the oil and gas industry. According to Wall Street Journal the talks have been preliminary and not resulted in anything, but it underscores an industry under pressure to increase profitability and one of the logic steps is to increase scale of economics and reduce operational redundancy in the industry. This is a signal that mergers and acquisitions could be running high this year in the energy industry.

US inflation measure surprises to the upside. Friday, the US Dec. PCE Deflator (an inflation gauge most favoured by the US Federal Reserve) was reported slightly higher than expected at the headline with a reading of +0.4% MoM and +1.3% YoY vs. +0.3%/+1.2% expected, respectively and the PCE Core was reported at +0.3% MoM and +1.5% YoY, versus +0.1%/+1.3% expected, respectively. There has been a consistent upside surprise in inflation data in recent weeks, both in Australia, Europe and the US, and the focus on inflation will continue to pick up as the "basing effects" of the oil-price and other price crashes of last March and April come into view in coming months.

What are we watching next?

Does volatility calm this week or stay very elevated? Considering the modest correction in US equity markets last week, it is remarkable that measures of volatility are so elevated, as the recent episode of squeezing of the most shorted US stocks has clearly spooked the broader market and injected considerable uncertainty. The VIX implied volatility index closed Friday at 33, normally a level one would associate with considerable market stress, and yet the S&P 500 had only corrected about 4% from the recent high as of the Friday close.

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.

• Monday: Thermo Fisher Scientific
• 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)

• 0815-0900 – Euro Zone Final Jan. Manufacturing PMI
• 0930 – UK Jan. Manufacturing PMI
• 0930 – UK Dec. Mortgage Approvals
• 1000 – EU Dec. Unemployment Rate
• 1500 – US Jan. ISM Manufacturing
• 1700 – US Fed’s Kashkari (non-voter) to speak
• 1800 – US Fed’s Kaplan (non-voter) to speak
• 1900 – US Fed’s Bostic (voter) to speak
• 0330 – Australia RBA Cash Target announcement

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