Market Quick Take - January 5, 2021

What is our trading focus?

• Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - crypto assets had a wild ride yesterday, after Bitcoin corrected nearly $7,000 lower from the highs over the weekend before then lurching nearly $5,000 back higher and then losing about $3,000 of that rally into this morning. Ethereum suffered similar volatility in percentage terms. The scale of volatility after price developments went super-exponential could temper enthusiasm for this asset class for a while as the two-way price action suggests that prices can fall as quickly as they rise at any moment.
  
  
• Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - whether due to the apparent rising risk of Democrats winning both seats in the Senate run-off races or otherwise, US equity markets lurched lower to start the year, though a good portion of the losses were recovered into the close of trading. The move is somewhat unsettling on the sudden scale of range expansion after a number of quiet sessions. Technically, watching the 12,650 area in the Nasdaq 100 – the 21-day SMA that the index just managed to close above yesterday. Likewise, for the S&P 500, the 21-day SMA comes in around 3,692, just below yesterday’s close. That SMA is inching higher today.
  
  
• China A50 (CNF1 – Jan 2021) - Chinese equities are extending their gains overnight with the CSI 300 Index futures up 1.7% while the CNY is holding on to yesterday’s gains against the USD. CSI 300 at 5,366 is getting very close to the high from 2015 at 5,380. If this level is broken the next level is the high from 2007 closing the almost 14 years for Chinese equities. The positive sentiment out of Chinese lifted emerging market equities in yesterday’s session to become the best segment and we expect the same outperformance today.
  
  
• AUDUSD and EURUSD – with risk appetite suddenly in a funk yesterday, the USD bears were unable to prove their point yesterday, and the USD pulled back higher after EURUSD touched above 1.2300 and AUDUSD poked at its cycle high just below 0.7750. Alas, so far this is just noise within the trend and some comfort for the USD bears was that FX seems less reactive to sudden equity market swings than in the past, though if we are set for a solid equity market correction, the USD could yet correct higher to trend support. The key numbers on that front are the rather far away 1.2000 for EURUSD and 0.7400-0.7500 area for AUDUSD. The US dollar could prove sensitive to the Georgia Senate race outcomes as noted below.
  
  
• USDCNH – the Chinese renminbi strengthened yesterday by the most in a long time against the US dollar, with the USDCNH rate falling below 6.50 for the first time since 2018. This came after a period of considerable quiet and relative weakness for CNH as other currencies continued to appreciate versus the US dollar. For perspective, the AUDCNY (on-shore renminbi) touched its highest level for the cycle before this CNY and CNH surge set in, perhaps suggesting that China is looking to keep its currency at the firmer side of the official basket versus other currencies, after that basket precisely touched the two-year range high a few weeks ago. The next major chart point for USDCNH is 6.236, the early 2018 low.
  
  
• The first day of trading in commodities belonged to the metal sector with precious metals led by silver (XAGUSD) and industrials led by copper (COPPERUSMAR21) showing strong gains. A weaker dollar, especially against the Chinese Renminbi and the reflation trade being some of the key drivers at a time of rising Covid angst across the Western world. US 10-year breakevens broke above 2% while real yields dropped below –1.1% both new peaks for cycle. Total holdings in gold ETF’s jumped by the most since September in a sign re-emerging confidence with resistance at $1965/oz, being the next hurdle. Today’s focus squarely on the US Senate run-off elections and its potential for further fueling the reflation focus should the Democrats win both seats and thereby the Senate majority.
  
  
• QuantumScape (QS:xnys) - shares were down 41% yesterday extending the drawdown since 22 December to 62%. The company emerged from a SPAC entity (blank-check company), which has become a very popular way to list a company on a US stock exchange, through a merger on 27 November to become an EV battery developer. The company claims that its batteries could make an electric vehicle run 50% longer compared to the current technology used. However, according to several analysts this has not been proved yet with data on the road making it difficult to justify the current valuation of $18bn, more than most auto suppliers.
  
  
• Treasury yields pinned down by Federal Reserve’s Evan’s speech, but Georgia run-offs may give them a final push to break the pivotal 1% level (10YUSTNOTEMAR21). The ten-year breakeven rate breaking above 2% was not enough to boost Treasury yields as Federal Reserve’s Evan said to prepare for a period of very low interest rates and expansion of the Fed’s balance sheet. To reinforce his message, Evans said that he sees higher bond yields as a good signal synonymous of a stronger economy and that he’s not worried about seeing inflation above 2.5%. If Democrats succeed to win control over the Senate today, we might see 10-year yields soaring and testing the 1% psychological level.

What is going on?

• UK goes into full lockdown – but aims for 2 million vaccine shots a week. The super-spreading variant of Covid-19 on the loose in the UK has taken case counts to record levels and now seen the authorities there putting the entire country in lockdown, with even schools now shut. UK Prime Minister Boris Johnson hopes for shots to be administered to the 14 million most vulnerable citizens by mid-February, allowing an easing of restrictions thereafter. Controversially, UK health authorities have decided to delay the time between the first and second injections.
  
  
• The belief in higher commodity prices in 2021 ran red hot ahead of 2021 according to the latest Commitments of Traders Report (COT) covering the week to December 29. It saw the net-long held by speculators across 24 major commodity futures rise to a record 2.5 million lots, representing a nominal value of $125 billion. Most of last week’s buying occurred within the grains sector with several positions reaching multi-year highs. Overall, the biggest bets are held in crude oil ($30bn), gold ($26bn) and soybeans ($13bn).

What we are watching next?

• In the US, the Georgia Senate run-off elections are up today – close vote could delay outcome – as noted yesterday, the key outcome scenario is whether both seats go to Democrats, which would give them control of the Senate. Some argue that two Democrat wins is good for risk appetite and bad for the US dollar on the logic that Democrats are likely to be more generous on fiscal stimulus, while others fear that they could hike taxes and promote a green agenda that are headwinds for asset markets, even if some sectors would be more favored.

Economic Calendar Highlights for today (times GMT)

• 0730 – Switzerland Dec. CPI
• 0745 – France Dec. CPI
• 0855 – Germany Dec. Unemployment Change / Rate
• 1330 – Canada Nov. Raw Materials /Industrial Product Price Index
• 1500 – US Dec. ISM Manufacturing
• 2045 – US Fed’s Evans and Williams (Both are FOMC Voters) to Speak
• 2230 – American Petroleum Institute’s weekly Inventory report
• 0145 – China Dec. Caixin Services PMI

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