Market Quick Take - February 5, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures are continuing their rebound with Nasdaq 100 futures trading around 13,600 this morning in Europe after touch 13,618 a new all-time high for US technology stocks. Given the steadily rise in US 10-year yields it is striking that high growth stocks have not been hit on their momentum. The market has decided that the move is still predominately driven by growth instead of inflation forces, which we believe is ultimately wrong, which for now is holding everything together. Our main thesis remains that of reflation and that long-term interest rates will come up significantly from current levels and correct equities.

EURUSD – as the week draws to a close and we have a look at US January labour market numbers later today, EURUSD has edged well below 1.2000 and in the coming sessions will need to decide whether the uptrend will suffer a full reversal, perhaps driven by US economic outperformance, poor EU performance in rolling out Covid vaccinations while its countries are largely still in lockdown mode, and rising US long yields, or whether to make a stand, starting with a pullback above 1.2000. US treasury yields from 10-30 years may be a key coincident indicator for the USD.

EURGBP – followed through strongly lower in the wake of the Bank of England decision yesterday, which included a clear indication that the bank will not be pursuing a negative rate policy any time soon. The reaction in sterling crosses was quite enthusiastic and across the board and suggests a real trending move may be afoot here for sterling, taking EURGBP, for example, as far as 0.8500 or even lower in coming weeks. With Covid numbers improving rapidly in the UK, the next key will be the scale of the activity bounce-back as lockdown and quarantine measures are lifted.

Gold (XAUUSD) and silver (XAGUSD) weakness continued yesterday after the dollar reached a two-month high and bond yields rose. Silver almost retraced its Social Media inspired rally before finding support at $26 level. Biggest short-term challenge for silver is the risk of further ETF selling after investors bought 3,500 tons in just three days, equivalent to what had been purchased the previous seven months. Despite seeing the current yield rise being driven by a metals supportive rise in inflation expectations, the loss of momentum and the shenanigans in silver this past week has for now left the sector low on confidence. Key support in gold being the November low at $1765 with resistance at $1805 followed by $1835. Focus today the monthly US job report.

The BTP-Bund spread fell to 100bps for the first time since 2015 (10YBTPMAR21). News related to Mario Draghi pushed the BTP higher and for the first time in nearly six years the spread between BTP-Bund fell to 100bps. Although the arrival of Draghi in Italian politics has accelerated this spread compression, it was a trend that was established well before as ECB monetary policies continue to be incredibly aggressive. We believe that this trend will continue, and we are particularly bullish the 30-year BTP-Bund spread.

The 5s30s part of the yield curve is the widest in nearly six years and continues to widen (30YUSTBONDMAR21). The 30-year yields hit a high of 1.95% yesterday, and there is room for yields to continue to rise as the economy recovers faster than expected. Today’s nonfarm payroll might be a catalyst for further selloff in the long part of the yield curve as jobless claims look in decline. Better than expected nonfarm payrolls might push the 30-year yields above the 2% level.

What is going on?

Bank of England signal little interest in Negative Rate policy, does not fully remove it as option - rate expectations for the end of this year rose some four basis points yesterday as the Bank of England yesterday indicated that it didn’t want to signal any anticipation of employing negative interest rate policy, that implementing them inside the next six months would introduce operational risks anyway, but that financial institutions should ensure they are prepared for them anyway. The Bank did lower is 2021 GDP projection to 5% from 7.25%, but that mostly on the scale of Q1 lockdowns, and the comments on the economy’s performance and anticipated spring-back post lockdown were quite positive. Sterling pulled higher across the board as noted above.

Huge improvements in some Covid numbers in the US and the UK even as variant concerns loom - with the US numbers perhaps the more remarkable, given the more lax attitude toward locking down there. The 7-day moving average of daily US Covid positive tests has dropped by nearly half from its peak just over three weeks ago and the currently hospitalized metric is in freefall. Similarly, UK new hospital admissions for Covid are down more than 25% in the 11 days through Feb 2 and the moving average of cases despite the more contagious variants there is down sharply. The US has administered about 11 shots per 100 people while the UK has concentrated more on getting the first shot out and has reached 16 shots per 100 people. In coming weeks, we’ll have to watch not only the progress of the vaccine, however, but also whether new Covid variants complicate progress.

A strong week for the energy sector with crude oil trading higher by 8% while natural gas has surged by 17% on the outlook for cold weather and a strong weekly reduction in stocks. Brent crude oil meanwhile is marching toward resistance at $60/b, the 61.8% retracement of the 2018 peak to the 2020 low. Driven by a tightening market on expectations that OPEC+ is committed to support further price gains by restraining global supplies even as demand outlook improves as the vaccine-led recovery in global mobility increases. Speculative demand remains firm with added support from renewed reflation focus as bond yields rise further.

The UN FAO’s Global Food Price Index jumped 4.3% in January; a year-on-year rise above 10%. The index which tracks quotes for 95 different food items split into five different categories reached its highest monthly average since July 2014. The latest increase reflected strong gains in sugar, cereals and vegetable oils. It’s eight consecutive monthly increase, the longest rising streak in a decade was driven by substantial buying of corn by China as it seeks to restore its grain reserves, dry weather concerns in South America, Russian export tax on wheat and lower-than-expected production of key crops in the US. To top it all up we are seeing a record amount of speculation in key crops while continued disruption in the shipping industry has driven freight prices for grains and oilseeds to their highest levels since October 2019.

Ark Invest funds hit $50bn in aggregate AUM. This makes this US fund manager the fastest growing in the US with assets up from $3bn at the same time last year. Ark Invest has become famous for their investment research focusing on disruptive technology and being willing to invest in loss-making businesses. The massive inflow of capital to Ark Invest has created a tailwind for certain high growth stocks and investors should be aware of the opposite effect if the flow reverses.

What are we watching next?

US Jan. employment data today and how reactive the market is to it – January was the peak Covid month, history will show us, and yet many of the most recent US data points have been quite strong, even on the employment front, as yesterday’s weekly Initial jobless claims data point came in stronger than expected and was the lowest in four weeks. The strength in the US data and anticipation that the next round of stimulus and the imminent end of lockdowns will generate a significant further boost to the economy and long US rates may be behind the US dollar’s comeback and clearly behind the rise in US long yields. That latter development can only extend so far, however, before beginning to dampen sentiment for risky assets. So the strength of today’s US nonfarm payrolls and market reaction in both US treasuries and equities – perched as they are at all-time highs in early trading today, will be an interesting test of the narrative and sentiment across markets.

Earnings releases to watch this week
Yesterday saw stronger Q4 earnings across US and Europe, with the week ending today a few important earnings with Linde and Sanofi in Europe being the most interesting for the equity market to watch.

• Today: NTT, Linde, Sanofi, Estee Lauder, Deutsche Telekom

Economic Calendar Highlights for today (times GMT)

• 0830 – Sweden Dec. Industrial Orders
• 1215 – UK Bank of England Governor Bailey, others to speak
• 1330 – Canada Jan. Unemployment Rate / Net Change in Employment
• 1330 – Canada Dec. International Merchandise Trade
• 1330 – US Jan. Change in Nonfarm Payrolls
• 1330 – US Jan. Unemployment Rate
• 1330 – US Jan. Average Hourly Earnings
• 1330 – US Dec. Trade Balance
• 1500 – Canada Jan. Ivey PMI

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