Summary: The US equity market ripped higher to significant new all-time highs on Inauguration Day for US President Joe Biden, the US dollar dropped against pro-cyclical and EM currencies, and treasuries traded sideways. President Biden immediately moved to unwind a raft of Trump-era policy in a blitz of executive orders. Treasuries traded sideways despite the ebullient mood, while precious metals rallied sharply.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities ripped higher on the best day on an Inauguration Day since Ronald Reagan was re-elected in 1985 for his second term. The action took the major indices well clear of the recent highs, which now become support (arguably the 13,000 area in the Nasdaq 100 Index and the 3,825 area in the S&P 500) as traders watch for whether the price action lurches soon into the backfilling that has been prevalent in the rising trend channel over the last six weeks.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – Bitcoin sold off and is challenging below the 35,000 area that has generally supported the price action in the prior several days, also breaking below the lower bound of the consolidation triangle of the last few weeks, though this has yet to trigger a larger run lower, where the 30,000 level looms as the next support. Ethereum, meanwhile, is struggling near the prior highs just above 1,3000, a break of which could set in motion a large consolidation, possibly even to the 1,000 level, which held on a daily closing basis after breaking on the way up earlier this month.
EURUSD – one of the less interesting USD pairs at the moment, as the euro gets less out of surging risk sentiment like we saw yesterday. The pair is still somewhat in the shadow of the recent sell-off and needs a move above 1.2200 to show firmer signs of reverting to the uptrend. The recent 1.2050 area low is the important lie in the sand. Italy approved another EUR 32B expansion of its debt with a new fiscal package after the currency government survived a near-death experience that will see it stumbling along for no. The country and is projected to post a deficit of nearly 9% of GDP this year, only a modest improvement from last year’s estimated 10.5-8% deficit level.
AUDUSD – the pair surged back toward the cycle high from earlier this month on a renewed surge in risk sentiment, which is still some ways off at 0.7820. Australia posted a strong jobs report for December overnight, with unemployment declining to 6.6%, better than the 6.7% expected, and it is notable that the country’s participation rate has pulled back to the level prevailing before the Covid crisis broke out last year, although the recover in full time employment has lagged the recovery in part-time employment and the youngest portion of the labor market suffers from a higher unemployment rate as key industries in the services sector are still shut down due to Covid.
Gold (XAUUSD), silver (XAGUSD) jumped ahead of the swearing in of Joe Biden as the dollar declined and investors positioned themselves for more fiscal stimulus. Semi industrials such as silver and platinum (XPTUSD) saw total ETF holdings reach record levels. Latest thoughts on gold and reaction to the new Biden administration in this interview. Having retraced 38.2% of the early January 155 dollar slump, the next level of resistance at $1882/oz followed by $1900/oz.
Crude oil (OILUSMAR21 & OILUKMAR21) trades softer after reaching a one-week high in response to a weaker dollar and stock market exuberance. The weakness was led by a report from the American Petroleum Institute with data showing a surprise 2.6 million barrels build in US crude inventories. A continued build in gasoline stocks further raised pandemic-led demand concerns, not only in the US, but now also in China where lockdowns are spreading ahead of the Lunar New Year travel period. Limiting the downside are the weaker dollar, US stimulus hopes and Saudi Arabia’s unilateral production cuts. Brent currently stuck in a $54.5/b to $56.50/b range.
The ECB meeting today might not deliver (10YBTPMAR21, 10YOATMAR21, BUNDMAR21). This afternoon the ECB will update the European economic outlook, which is deteriorating because of the new lockdown measures that have been imposed due to a new strain of Covid-19. Although a deterioration of economic conditions should push the ECB to act, we do not believe that the central bank will add stimulus or tweak the PEPP program in this occasion. Indeed, the government crisis in Italy is resolved, while government bond yields in Netherland and Estonia stabilized. Lack of more stimulus might weight on the BTPs which continue to selloff as the government received approval to increase its deficit by € 32bn.
Sandvik (SAND:xome) - advanced technology engineering company from Sweden with a large geographical footprint in the world. Q4 result is in this morning and better than expected with orders of SEK 22.1bn vs est. SEK 21.8bn and revenue in line with estimates. The company saw 15% y/y growth in its mining division highlighting the strong demand in this industry and a sign of our reflation theme. Sandvik has also proposed dividend per share SEK 4.50 vs est. SEK 4.02 indicating a positive outlook.
What is going on?
Joe Biden sworn in as 46th President of the United States – and in his speech, appealed to unity to move the country forward. He also signed a raft of executive orders to unwind moves made by the Trump administration, rejoining the Paris climate deal, the WHO, and ending Trump’s border wall construction between the US and Mexico. He also extended a moratorium on evictions of people not paying their rent and revoked approval of the Keystone XL pipeline that would have aided delivery of heavy Canadian crude through the US.
The Bank of Canada sounded a more positive note on the coming strength of the recovery post-lockdowns - which helped the CAD sharply higher versus the USD, though the performance was largely in line with its commodity dollar peers as markets were in a positive mood yesterday. The 2-year rates in Canada rose a bit over a basis point, so somewhat limited belief in the market that the Bank of Canada will do much about its more positive outlook in terms of rate hikes.
Strong Q4 US earnings so far with a 91% positive surprise ratio. The Q4 earnings season is off to a good start and many companies have much more positive outlooks compared to Q3 despite the new restrictions in Q4. Expectations are that 2H will see a significant increase in activity indicating that companies are factoring in a successful vaccination rollout which naturally makes it a key downside risk for markets if governments fail to successfully rollout the vaccines.
What are we watching next?
Back to the focus on the Joe Biden stimulus package – and whether the $1.9 trillion dollar package has the votes to pass Congress. Already, one Democratic senator (the unique Joe Manchin of West Virginia) who had earlier spoken out against the $1,400 additional stimulus checks, has now declared his support for “getting more money out”, though he is not in favour of untargeted relief (i.e., that everyone gets check regardless of need). He is no budget hawk and favours trillions in outlays for infrastructure investment.
Q4 2021 earnings season kicks into gear this week
Yesterday’s earnings releases in the US were strong with only one negative earnings surprise from United Airlines. The positive earnings surprise ratio is currently 91% for the S&P 500. The earnings season continues today with the most interesting results expected from Sandvik, Intel, and CSX. Sandvik is an advanced technology engineering group with a global footprint and high cyclicality in its business so an interesting earnings release to watch from a macro perspective. The list below highlights all the most important earnings to track for the rest of this week with the ones marked in red being the one with the most impact on macro and sentiment in equities.
Economic Calendar Highlights for today (times GMT)
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