Market Quick Take - March 1, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)–US equities probed to new lows Friday and managed to stabilize somewhat off the lows, with the Nasdaq 100 Index even closing slightly higher on the day, while the broader S&P 500 slipped to a new low close, although equities bounced back overnight in the Asian session. For resistance levels, the 21-day moving average in the S&P 500 comes in around 3,868, while the downside swing level is perhaps 3,772 (risk of a capitulation toward 3,656 on a break below). The pivotal area for the Nasdaq 100 appears to be the 12,700-12,775 area that has served as support on four prior occasions andsurvived a break on Friday. Below that, the focus could switch to the 12,070 area, site of an important Fibonacci retracement.  

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - crypto curencies suffered an unusually bad weekend, with Bitcoin falling below 45k and all the way tio 43k before finding support and rising back toward levels trading ahead of the weekend, with Ethereum likewise suffering new selling pressure before pulling back above the 1,400 level in Asian trading hours overnight.

EURUSD – EURUSD reversed sold off hard on Friday after Thursday’s attempt above notable resistance around 1.2190 was rejected. A couple of prior sharp sell-offs were quickly gathered up, but the US dollar is far stronger across the board this time than during prior sell-off, and the 1.2000 area bears watching for a possible breakdown as the bulls may not survive a second attack on this level after they successfully defended an attack on the level early in February. Another break lower could send the pair into the 1.1600-1.1900 range again. Fed speakers, US data and US treasury yields will be important indicators for the action, though the ECB’s Schnabel following up with concerns on rising bond yields in the EU suggests that the ECB may be quicker to move against rising yields than the Fed.

AUDUSD and USDNOK – the Aussie has proven the highest beta currency, together with the Norwegian krone (NOK) to the swings in sentiment late last week, with broadly faltering commodity prices added to the volatility in other markets,which brought down both AUD and NOK hard against the suddenly surging US dollar. The damage on the charts is significant, as AUDUSD reversed well back throughthe previous high above 0.7800, with 0.7800-50 possibly now serving as resistance for a another leg lower toward 0.7565 or even the old highin the 0.7515 area. Likewise, USDNOK reversed hard after trying new lows and is perched at the interesting 8.70 resistance area, which, if broken could lead to a test back toward the 200-day moving average, currently at 9.022.

Gold (XAUUSD) is rebounding from its worst month in four years as the market maintain a major focus on yields. Last week’s brief jump in US 10-year real yields to –0.55% helped sent gold below key support at $1765/oz. However, the lack of follow-through selling and renewed real-yield weakness has the potential of turning a negative into a positive. Especially if the yellow metal soon manages to recover back above the mentioned level. A renewed yield spike may not have the same negative impact as last weeks on speculation the Fed will be forced to introduce yield-curve control. The combination of YCC at a time of rising inflation could be the trigger for much higher precious metal prices. 

Crude oil (OILUKMAY21 and OILUSAPR21) trades higher in line with recovering risk sentiment following the biggest slump since November. Focus this week beingthe critical OPEC+ meeting on Thursday where a decision must be reached on how much production can be increased from April. With the market tightening and the price up by 30% since Saudi’s unilateral production cut in early January, the market will be looking for additional barrels. The question that the market needs answered is a) whether OPEC+ will released the next tranche of 500,000 b/d out of the 7 million currently held back and b) whether Saudi Arabia willkeep parts of it 1 million b/d cut away from the market for longer. 

US Treasury yields may consolidate this week, but risks for another selloff remain (TLT, IEF). The $1.9 trillion aid package passed the House of Representatives on Saturday and now it is going to the Senate for a final vote. We expect US Treasuries toconsolidate this week ahead of the Senate vote on the 14th of March. However,it’s important to acknowledge that the selloff might not be over yet and that if 10-year yields break above 1.65% another convexity hedging selloff might be triggeredpushing 10-year Treasury yields close to 2%. Powell’s speech on Thursday will be key in order to understand whether the Fed is starting to worry about fast rising rates.

Lagarde speech today will set the tone for European sovereigns (IS0P, BTP10). The market is looking for reassurance that the European Central Bank will not allow European sovereign yields to go higher as the selloff in US Treasuries intensifies. Today’s Lagarde speech will be key to set the tone for the week ahead. Tomorrow Germany is to issue 10- and 25-years Linkers while Spain and France will issue long-term bonds on Thursday. If the ECB doesn’t send a decisive message, bidding metrics for this week’s bond auctions might turnweaksending yields further up.

Spiking Gilt yields may be leading towards 1% (IGLS). Ten-year Gilt yields may be on their way to 1% as they are fast rising amid growth expectations and a relaxed Bank of England. We believe that Sunak’s budget announcement on Wednesday might be a catalyst to lead yields to break above 0.85%, causing a fast rise towards 1%. At that point, we believe that the BOE will not be able to ignore any longer the pace at which cost of funding is getting higher for UK corporates, and int might consider intervening.

Junk bonds on the brink of collapse (HYG). Last week the correlation between Treasury bonds yields and junk bond returns has turned negative indicating that a selloff of risky assets might be next as Treasury yields rise. Year to date, junk outperformed other fixed income instruments as investors picked higher yielding bonds to hedge against higher inflation expectations.

Ark Innovation ETF (ARKK:arcx) - last week was hectic for Ark Invest with fund outflows and a lot of concerns over concentrated positions and the company’s double down on Tesla. Ark Invest has increased its risk disclaimers on its fund documents and it is also been revealed that Japan’s NIkko has paid Ark Invest to mimic Ark Innovation ETF and sell it in Japan and those positions are often held in equal size by Sumitomo Mitsui. We know of similar behaviour in South Korea. It all points to crowded positions and some of them are illiquid. This week is going to be critical for Ark Invest and we will monitor the situation closely.

What is going on?

COT on commodities in week to February 23 - Ahead of the bond market turmoil last week, hedge funds had turned a bit more cautious on commodities. According to the latest Commitments of Traders covering positions held up until last Tuesday, leveraged funds cut exposure to energy and metals. Especially the 19% reduction in copper longs to a 20-week low attracted some attention as it occurred during a week where the metal surged higher by 9%. The agriculture sector meanwhile continued to be bought with thecombined net-long reaching a fresh record at 1.3 million lots ($48 billion). Led by sugar, coffee and soybeans on weather worries in Brazil. 

Australia’s RBA doubles down on bond purchases after recent rise in yields – announcing overnight that it plans to purchase over AUD 4 billion of longer maturity government bonds – which is twice its normal allocation. The RBA maintains a yield target of 0.25% for three-year bonds, a bit unusual among global central banks in exercising control in yields out to that maturity. During the recent rise in global bond yields and soaring commodity prices, Australian longer yields have risen even faster than those in the US, and this clearly has the RBA on the defensive to prevent a spike in yields from spiking the economy.

US House passed $1.9 trillion stimulus package, vote will go to the Senate next week – An  important point within the bill: the Senate parliamentarian declared that the $15/hour minimum wage in the bill cannot be a part of it, as it must be a straightforward spending bill to allow a simple majority vote in the Senate, so the minimum wage hike is not like to make it through. The will needs passing soon if millions of Americans out of work are to avoid losing some benefits set to expire on March 14.For the bill to pass the Senate, every Democratic senator must vote in favour, with VP Harris providing the tie-breaking vote.

What are we watching next?

Any pattern in Fed comments on US treasury yields this week?-last week, US Fed Chair Powell failed to express any concern at all about the recent rise in US treasury yields, attributing them, in semi-annual testimony before Congressional panels last Tuesday and Thursday, entirely to rising optimism about the economic outlook. The treasury market then threw a tantrum on Thursday, registering enormous rises in treasury yields, evenin the “belly” of the curve. Friday saw the move partially reversed:entirely for 2-year treasury yields, but the huge spikes in five- and seven-year yields were only partially reversed. A plethora of Fed speakers are out this week, starting today with Vice Chair Williams and Lael Brainard of the Board of Governors, among others. All Fed appearances deserve attention this week for any signs of a consistent hint that the Fed found last week’s volatility in the US treasury market of concern. 

ECB to release bond buying data today - will be interesting to note for signs of accelerated purchases due to the recent steep rise in global bond yields. As well, last week saw the Italy-Germany yield spread widen back above 100 basis points.

Earnings releases to watch this week– earnings releases last week were broadly good, and the week ended with Berkshire Hathaway reporting over the weekend. Q4 operating income was $5.02bn vs est $4.42bn and most businesses in the conglomerate are getting closer to normal operations including its railroad business BNSF. Berkshire bought back own shares worth $24.7bn in 2020 and Warren Buffett admitted to a mistake of overpaying for Precision Castparts as the company has since written down some of its investment. In terms of inflation, Warren Buffett said that we have seen many false “hopes” over the years. This week, we are getting to the end of the Q4 earnings season. The earnings marked in red below are the most important ones.

Economic Calendar Highlights for today (times GMT)

0815-0900 – Euro Zone Feb. Final Manufacturing PMI
0930 – UK Feb. Manufacturing PMI
0930 – UK Jan. Consumer Credit / Mortgage Approvals
1300 – Germany Feb. Flash CPI
1400 – US Fed’s Williams (Voter) to Speak
1405 – US Fed’s Brainard (Voter) to Speak
1430 – Canada Feb. Manufacturing PMI
1500 – US Feb. ISM Manufacturing
1520 – ECB officials Guindos and others speaking
0030 – Australia RBA Cash Target, 3-year Yield Target

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