Chief Macro Strategist
Summary: Global markets, with the notable exception of China on its anti-monopoly push, largely remained on the rally track yesterday before easing back lower overnight. Even US mega-caps bounced back after their sell-off earlier this week. Elsewhere, the USD and JPY edged back higher, while the Chinese currency is back close to a one-week low versus the US dollar.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - after a remarkable start to the week and unprecedented shifts in value versus growth that occurred in the wake of the hopes generated by the Pfizer Covid-19 vaccine, the market was a bit more “normal” yesterday with an across-the-board rally. Still, the Nasdaq 100 is in the shadow of its early week sell-off and would need to retake 12,200-12,400 to force the focus back higher. The S&P 500 likewise needs to work well back above 3,600 to avoid an ugly weekly candlestick (currently a shooting star).
STOXX 50 (EU50.I) - European equities have gained the most from Pfizer’s Covid-19 vaccine news but today the rally has ended. At least in early hours of trading. Yesterday’s low of 3,421 in STOXX 50 futures is the key support level today if risk breaks down.
EURUSD – EURUSD super major is working into its last important retracement levels where it must make a stand or find itself in danger of an outright reversal back toward the 1.1600 lows. The 1.1725 area is the 61.8% retracement of the rally wave that topped out in the wake of the US Election result last week. The ECB’s Lagarde waxed rather dovish in a speech yesterday (see below).
USDCNH – the USDCNH exchange rate is up toward the highs of the week above 6.62 - also a notable prior low back in October – as the US dollar has firmed somewhat. But possibly also weighing on the Chinese currency is the Chinese authorities anti-trust push and delay of the Ant Group IPO, which may mean a reduced enthusiasm for pouring in to mainland equities. The USDHKD rate even managed to lift off the low of the managed band in recent weeks, perhaps on the same development. The next major chart area higher if the very persistent downtrend consolidates looks like 6.75.
Brent crude (OILUKJAN21) and WTI crude oil (OILUSDEC20) ended a three-day rally with a sharp reversal after the focus switched from vaccine hopes to virus fears with the case count surging in major economies. OPEC made a fourth consecutive cut to its 2021 world oil demand rebound while the market continues to price in a much-needed delay of the OPEC+ January production hike, not least considering the 1 million b/d rise in Libyan production since August. Focus today the one-day delayed U.S. inventory report together with IEA’s Oil Market Report for November. In Brent a break below $43.50/b may signal a move back towards $40/b.
Gold (XAUUSD) continues to find support ahead of key support at $1850/oz with the focus firmly on the dollar and U.S. bond yields where 1% on 10-year Notes have become a major focus. Overnight yields moved lower again with vaccine hopes turning to virus fear with a fresh wave of coronavirus infections in major economies partly offsetting a stronger dollar. During the past six weeks, ETF investors have maintained an unchanged exposure around 111 million ounces with no signs of the bullish trade getting exhausted. Resistance at $1895 and $1908.
10-year Treasury yields approached pivotal 1% level only to retreat to 94bps by end of day. Today’s 30-year auction will dictate sentiment in the long part of the yield curve (10YUSTNOTEDEC20). 10-year yields to 99bps only to retrace by end of day. Today the Treasury is going to auction $27bn of 30-year Treasuries and it will set the tone for the steepening in the long part of the yield curve. The Federal Reserve will probably let rates rise for the moment being, however if 10-year yields break the main line in their decennial descending trading channel at 1.50%, we might see the Fed intervening.
Lagarde’s speech at the ECB’s annual forum sparks European sovereigns’ rally led by the periphery (10YBTPDEC20, 10YOATDEC20). As the ECB sees more scope for stimulus and to expand its PEPP program, sovereigns from the periphery rally. The periphery is leading the block once again. Within this space we believe that 30-year BTPs trade richer compared to their peers. For more click here.
Burberry (BRBY:xlon) - first half results show comparative sales of -25% vs est. -27% with management still seeing headwinds in FY21 2H. On a positive note, the last quarter of the first half result saw comparative sales of only -6% vs. -10% expected. The company is also saying that will reduce markdowns to restore profitability.
What is going on?
ECB President Lagarde said the next stimulus will rely on further QE and loans – and there was no mention of interest rate cuts as a tool for delivering support to the economy. She claimed that the PEPP and TLTRO programmes have “proven their effectiveness” and her comments lead observers to believe that the December ECB meeting could see a larger than previously anticipated increase in the QE programme, and perhaps an extension of its duration, as well as expanding generosity on the terms and maturity of additional TLTRO loans to banks. Lagarde mentioned that the EUR exchange rate could affect the inflation outlook.
Regarding US President Trump’s challenge of the election results, the Republican attorney general of Arizona said yesterday that it is “highly unlikely” the state will end up going to Trump after the results showed him losing the state. A judge in Maricopa County, Arizona’s largest, rejected a Trump legal team move on claims by polling workers on rejecting ballots in the count on weak evidence. In Georgia, which Trump lost by a very narrow margin, a hand recount of votes has been ordered.
What we are watching next?
Moderna (MRNA:xnas) is expecting results for its vaccine candidate in coming days. The technology and delivery mechanism for the vaccine candidate is very similar to the one used by Pfizer (PFE:xnys), and experts consider it likely that the drug will see a similar rate of effectiveness around 90%
US political uncertainty. The longer the US President Trump holds out and refuses to concede, the higher the risk that this eventually begins to get picked up on the market’s radar. The complacent view is that fellow Republican politicians are nominally supporting their president as they nervously eye his base supporting their own political fortunes and will give the legal challenges time to play out. The bigger political uncertainty will then quickly revert to the two Senate run-off elections in Georgia, where the Democrats can get a control of the Senate if they win both seats.
Q3 earnings season continues this week. Below list shows the largest companies reporting for the rest of the week:
Economic Calendar Highlights for today (times GMT)
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