Market Quick Take - December 29, 2020

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the major US equity indices closed higher and traded higher still after hours after the US House passed Trump’s proposal for the larger $2,000 stimulus checks with strong bipartisan support, though whether the Senate will vote on the proposal or a different one is to be determined. There is no readily identifiable chart resistance, but the calendar year roll into 2021 is a key milestone, and big round numbers have been influential for both the Nasdaq 100 and the S&P 500 Index, with the next levels there at 13,000 and 3,800, respectively.

Japan Nikkei 225 (JP225.I) - Japanese equities exploded higher in the Tuesday session, with the large cap Nikkei 225 Index up over 2.5% overnight in its strongest session in months and after a long period of subdued trading that was capped just below the 27,000 level, which now becomes the key trend support after this huge move.

AUDUSD and EURUSD – the USD fell after the House yesterday approved Trump’s proposal for $2,000 stimulus checks, and if the Senate moves forward with something on this scale, it accelerates the sense that the government’s overt money printing (mostly absorbed by Fed QE purchases) could boost inflation down the road unless recipients of stimulus choose to add to their savings (which they in part did with the original stimulus checks). If the economy experiences a strong comeback on a successful rollout of vaccines in coming months, personal spending on pent-up demand could bring a rush of inflationary pressures and with it very negative real interest rates in the US (and a lower US dollar) unless long treasury yields are allowed torise significantly. For now, we focus on the roll into the calendar year for the US dollar and note that trend support for these two key USD pairs is 

GBPUSD and EURGBP – the sterling rally in the wake of theBrexit deal has simply not happened, which could mean further near-term downside for GBP on the disappointmentforthose positioned for a rally, especially if GBPUSD can’t fight its way back above the1.3500 level and especially if EURGBPcan’t push back down below 0.9000. In thelonger run, sterling looks cheap, but will look less so if the dynamic described above for the US (negative real interest rates as inflation rises on a huge fiscal impulse) is also seen in the UK.

Treasury yield curve steepened slightly with 10-year yields closing 1bp higher (10YUSTNOTEMAR21). Despite light trading volumes yesterday, the Treasury auction of 2- and 5-year notes went well. Treasury yields ended up slightly cheaper with the 10-year yields closing at 0.93%.  Today the Treasury will end the week with a 7-year auction.  

Italian BTPs rally with 10-year yields falling 4.6 basis points to 0.536% (10YBTPMAR21) - The Italian General Confederation of Enterprises yesterday released data that suggest that 390,000 businesses closed for good in 2020 because of the pandemic. It is becoming obvious that a V-shape recovery is less likely and that the economy will continue to need the support of the ECB throughout next year.

What is going on?

High yield US corporate credit spreads to US treasuries hits new cycle low. A Barclay’s measure of US high yield credit spreads hit 361 basis points yesterday, down 15 basis points from last week’s close and at a new cycle low since late February. By comparison, this yield spread benchmark peaked out at 1100 bps in March and was still as high as 500 basis points at one point in early November. One focal point for credit traders next year will likely be whether a hoped return of “normalcy” in the wake of a hopefully successful vaccine rollout will see the focus switch from liquidity to solvency, but for now, financial conditions have rarely been easier.

The price of EUcarbon permits (ECX EUA – CFIZ1) jumped to a record €33.4/ton yesterday after Europe set stricter pollution limits that will punish the use of fossil fuel. This at a time where unseasonal cold weather and lower wind generation has given the contract a further push with Dutch benchmark TTF gas rising to a two-year high. The contract has risen 35% this year, putting it ahead of gold as one of the best commodity-linked assets. Morgan Stanley expects that by 2025, prices may need to more than double to €76/tons as the EU attempts to cut emissions by at least 55% of 1990 levels by 2030. 

Money managers are gearing up for additional broad commodity gains in 2021. In the week to December 22, the last full reporting week of the year, they increased bullish bets on 24 major futures contracts by 40k lots to 2.4 million, the biggest net long in almost four years. Energy and agriculture both accounting for a 1 million lots with the remainder split across five metals contracts. Top five in terms of biggest bullish bets being WTI & Brent crude oil(617k), corn (266k), natural gas (252k), sugar (190k), soybeans (189k) and gold (137k). The buying, especially during the second half, has been driven by a weaker dollar, strong Chinese demand for key crops, weather worries, reflation hedges and general assumption that supply for some key commodities may struggle to meet the expected vaccine led recovery. 

What we are watching next?

In the US, the Georgia Senate run-off elections – there are still two US Senate seats up for grabs in the state of Georgia, and polls for both races are impossibly tight (and we have all grown accustomed to not trusting US polls), which means there is still considerable drama on whether the Democrats under the incoming Biden administration might just have control of the Senate if they are able to win both seats (which would split the Senate 50-50, enabling VP Harris to cast the tie-breaking vote.

Will the US Senate pass the $2,000 stimulus checks approved by the House? - Some House Republicans joined Democrats to approve a bill by a more than two-thirds majoriythat would replace thecurrent $600 stimulus checks with President Trump’s proposed $2,000 checks, while also expanding the eligibility of who can receive the checks to higher income limits than the recently passed package and would also include adult dependents. All told, the stimulus check alone would cost nearly half a trillion dollars, or more than 2% of GDP. Many Republicans in the Senate spoke against the larger checks, and it is unclear whether Senate Republican majority leader McConnell will avoid bringing the House bill to a vote or move forward with an alternative proposal. Regardless, Republicans are in a bind if they are to go against Trump, who enjoys overwhelming popularity among Republican voters - and Democrats are in favour of more stimulus..

Economic Calendar Highlights for today (times GMT)

1400 – US Oct. S&P CoreLogic Home Price Index
2100 – South Korea Jan. Business Survey for Manufacturing / Non-manufacturing
2230 – Weekly storage report from the American Petroleum Institute
2300 – South Korea Nov. Industrial Production

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