Market Quick Take - January 25, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)–strong start to the week with S&P 500 futures pushing above 3,850 showing that momentum continues in US equities despite the weak session on Friday. With US 10-year yield stuck at 110 basis points investors have reduced their alertness to rising interest rates and the reflation trade has suffered. The flipside of this sentiment is US technology stocks which are doing great again with the Nasdaq 100 futures hitting fresh new all-time highs.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome)–diverging fortunes for the two largest crypto currencies at the weekend, as Ethereum managed to post a new all-time price-high overnight north of 1,450 before pulling back a bit, while the Bitcoin price churned over the weekend and only managed to poke at the highs onFriday just below 34,000.

EURUSD–the most traded of USD pairs is nearing a pivotal level as it tries to scratch its way back higher – thefirst hurdle is the 1.2200 area that contains the 50% retracement of the recent sell-off and the 21-day moving average, although a solid rally bar that also easily takes back the 61.8% retracement near 1.2236 would be a more comforting sign for USD bears that the greenback is easing back into a downtrend. The FOMC meeting this Wednesday as well as news flow on the Biden stimulus package, rounded off by the PCE inflation data point on Friday, are the key developments to watch this week after it was rather disappointing recently that a very supportivebackd-drop for USD selling only saw a slightly weaker USD last week.

EURGBP and GBPUSD–sterling is back on the bid again to start the week and has avoided a full reversal of recent gains, though it was disappointing last week that EURGBP was unable to stick lower after posting new multi-month lows that broke a well-defined range low near 0.8860. Alas, the upside hope for sterling remainsas long as the pair avoids a back-up above the 0.8950 and especially 0.9000 levels, while further encouragement can be found in GBPUSD trading back above 1.3700 again this morning. On a call between UK Prime Minister Boris Johnson and US President Joe Biden, the first call to a foreign leader by the latter, Biden failed to mention that anything related to trade was discussed, while the UK account of the call claimed the issue of a free trade deal between the two countries was raised.

Crude oil (OILUSMAR21 & OILUKMAR21) both survived a downside challenge on Friday with Brent finding support at $54.50/b, the recent low. A surprise rise in US crude oil stockpiles of 4.3 million barrels, the first since early December, was being offset by data pointing to a pickup in fuel demand. Also supporting the price has been a pledge from Iraq to cut output in January and February as well as some reduction in shipments from Libya due to a pay dispute. Continued focus this week on the virus and the risk of more lockdowns in China versus the prospect of vaccine-led recovery in global demand.

US Treasuries will continue to trade mixed ahead of the FOMC meeting on Wednesday (10YUSTNOTEMAR21).Following a strong TIPS auction las Thursday, the 10-year Breakeven rate hit the highest level in two years. As the reflation story continues to gain strength, the market will want to have more reassurance from the Federal Reserve that it will not taper in the foreseeable future. The risk that the market is running is that at the mention of tapering long Treasury maturities will selloff. Still, only if the 10-year yields break above 1.2%, a broader selloff will ensue.

Prices of junk bonds rise as investors are pushed towards higher-yielding debt to seek protection against rising US yields (JNK, IHYU).Last week, the average yield of US dollar CCC rated corporate debt fell to a historic low of 6.41% beating the low it touched in 2014. It is clear that corporate high yield spreads are tightening as investors accept lower-quality credit to seek coupon protection amid rising interest rates. This month, junk bond issuance is on the way to beat 2020’ record high volumes.

Another Italian government crisis might be ahead as Prime Minister Conte said to consider early election if he doesn’t get Senate on his side on Wednesday’s vote (10YBTPMAR21).Some of the premier’s allies are starting to believe that early elections might be the only way to resolve the current impasse. Conte said that if the Senate doesn’t pass a justice policy this Wednesday, he will consider early elections, which would bring total chaos in Italian BTPs once again. This week, the Italian government is also looking to issue inflation linkers and zero-coupon bonds on Tuesday and 5- and 10-year bonds on Thursday. 

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