Market Quick Take - February 23, 2021

What is our trading focus?

• Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the move in US 10-year yield to near 140 basis points was too much for the market with risk suddenly accelerating to the downside with the Nasdaq 100 futures down 2.7% and S&P 500 futures down 0.8%. Both US equity futures have recovered this morning so today will be an important session for the equity market as risk seems very fragile. Yesterday, the push in the Nasdaq 100 was clearly driven by the risk-off moves in Tesla, Bitcoin, and Ark funds strengthening our view that positions across these instruments are highly correlated.
  
  
• Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - yesterday saw crypto currencies suffering on of their enormous bouts of volatility as Bitcoin traded in a 10,000-dollar range, bottoming out below 48,000 after the weekend high above 58,000 and trading near 50,000 this morning. The volatility in Ethereum was even greater in percentage terms as it fell more than 20% from recent highs to below 1,600 before finding support. Some credit these moves to a delayed reaction to Elon Musk comments at the weekend that Bitcoin and Ether prices “do seem high”, but another interesting development was US Treasury Secretary criticizing Bitcoin as inefficient and highly speculative.
  
  
• AUDUSD - the Aussie is clearly a high beta currency here to the impressive moves in commodities prices, which are dominating currency traders’ attention far more than the swings in risk sentiment. By clearing the old highs above 0.7800, that area becomes the new support and the next chart focus. Is the round 0.8000 level and then the multi-year high of 0.8136. On the other hand, given recent volatility in equity markets, this normally risk-sensitive currency will likely prove exceptionally vulnerable to any sudden setback in the steep ascent in, for example, copper and iron ore prices.
  
  
• EURUSD – the EURUSD pair is garnering a bit more interest than it otherwise has recently as it pulled sharply higher yesterday to within striking distance of the important sub-1.2200 pivot high from late January and closed back above its 55-day moving average. This, despite the ECB’s Lagarde was out indicating that the central bank is already uncomfortable with European bond yields showing some life as the French 10-year OAT yield, for example, rose as high as –3 bps yesterday versus averaging below –30 bps from October through January. This is a pivotal “stand and drive higher or fall” area technically for EURUSD here between 1.2150 and 1.2200.
  
  
• NZDUSD and NZD crosses - please see RBNZ preview below in “What are we watching next?” – we see significant risk that the RBNZ tries to make a forceful statement on the NZD exchange rate at tonight’s meeting.
  
  
• Gold (XAUUSD) - trades back above $1800/oz supported by a weaker dollar, ECB concerns about rising EU yields and as mentioned yesterday, signs of a renewed safe-haven bid as rising real yields begin to challenge the bullish stock market sentiment. The expiry today of March options could see options traders try to keep the price close to the $1800 strike. A challenge silver (XAGUSD) hasn’t got, and supported by the rally among industrial metals it broke resistance at $28 thereby driving a drop in the Gold-Silver ratio (XAUXAG) to near the lowest close in this current cycle.
  
  
• Raw Sugar (SUGARNYMAR21) and Arabica Coffee (COFFEENYMAY21) both jumped yesterday on concern that excessive rains in Brazil may reduce output, thereby offsetting the negative price impact of the weaker BRL on political turmoil. Sugar reached 17.50 cents/lb, the highest price since 2017 while coffee at $1.3625/lb touched a December 2019 high. Dryness during Q4 had already reduced expectations before the current deluge have added further support to prices. Due to lower lockdown demand from bars and restaurants, coffee has struggled to join the rally across other commodities. Something that may now change as the focus turn to supply.
  
  
• The European Central Bank boosts sentiment in European sovereigns (BTP10, IS0P, 10YOATMAR21). Lagarde said that the ECB is monitoring bond yields in the Euro area referring to the fast rise they embarked on since US Treasury yields have been rising. The ECB has also stepped up purchases under the Pandemic Purchase Program to €17.2 billion the most since the 15^th of January. European sovereign yields fell with French and German government bonds leading the bloc. We expect trading in European rates to consolidate in the next few days.
  
  
• HSBC (HSBA:xlon) - FY20 adjusted pretax profit came out at $12.2bn vs est. $11.7bn but is skipping its previous 2022 ROTE target of 10-12%. The CEO Quinn is sounding optimistic, and the bank expects activity to pick up significantly in the second half of the year. HSBC is also seeing future growth in the Asia region and will continue divert more capital towards this part of the business. Shares were up as much as 6% intraday in Hong Kong but has since fallen to only being up slightly.

What is going on?

• ECB President Lagarde expresses concern on rising EU yields - she said, “The ECB is closely monitoring evolution of long-term nominal bond yield.” Euro bond yields fell after these comments, which is widely seen as potential rhetorical support for YCC, or Yield Curve Control, in Europe. This means intervention has started in reaction to the fast-rising global yields. Observe Chairman Powell today on the Hill but be warned of further ECB comment over next week or two.
  
  
• The commodity sector continues its ascent to fresh multi-year highs. The Bloomberg Commodity Index (ETF example: AIGC:xlon) trades up 11.7% year-to-date while the more energy exposed S&P GSCI (ETF example: GSG:arcx) has returned 17.4%. All the major commodities except for gold (-5% YTD) trade higher in anticipation of a post-pandemic boom in demand. Supported by tightening supply of several key commodities and increased focus on the green transformation juiced up by massive stimulus supporting hard assets that may shield investors against rising inflation. Speculators have jumped onto the bandwagon and are currently holding a record long across 24 major commodity futures. Biggest movers so far this year are WTI (29%) and Gasoline (28%) while copper, platinum and sugar are all up 18%.
  
  
• US Treasury Secretary Yellen touts digital US dollar, criticizes Bitcoin - this is not new from Yellen, but it was interesting to see her criticism after the recent impressive new highs for many cryptocurrencies. Yellen said that she was concerned about the currencies’ volatility that could hurt investors, said it is inefficient for use in transactions and said that she fears it is often used for “illicit finance”. She also commented positively on the potential for a digital dollar, which could provide lower income Americans with better access to easy payment systems.
  
  
• The Tesla-Bitcoin-Ark risk cluster is hit hard. Tesla was down 8.6% yesterday coinciding with a Bloomberg news article saying that Tesla had made good profits on its Bitcoin holdings. But with Bitcoin being down as much as 16.5% at the lows yesterday and continuing down today the move will obviously illustrate the earnings volatility that Elon Musk has delivered to Tesla. The EV-maker is also the biggest position across all Ark Invest ETFs which added pressure to its biggest fund the Ark Disruptive Innovation Fund losing 6% yesterday. This is exactly the risk cluster that we have been worrying about and wrote about two weeks ago.

What are we watching next?

• Fed Chair Powell Testimony today and tomorrow - We'll watch Fed Chair Powell's semi-annual testimony this week before both the Senate (today) and the House (tomorrow) for any sign that Fed policy is gaining a higher political profile, whether in terms of the Fed underwriting budget deficits on a large Biden stimulus (Republican line of attack?), or in terms of aggravating inequalities and over-pumping asset markets (more likely progressive Democrat line of attack). Also important would be any Powell comments on the recent sharp rise in treasury yields and the commodity complex - as even a statement of "unconcerned" is the Fed making a point.
  
  
• RBNZ to push back against strong NZD at tonight’s meeting? - things are looking good for New Zealand’s economy as the country was one of the most successful in preventing the spread of Covid. But the central bank is likely not very comfortable with the steep back-up in the NZD exchange rate as the exchange rate has gone nearly vertical in recent weeks and is now within 10% of its trade weighted high and near a three-year high. The RBNZ has a tradition for rather aggressive action on currency and could surprise with stern rhetoric or more on the exchange rate at tonight’s meeting.

Earnings releases to watch this week – with HSBC having reported their earnings in Asian time with a positive reaction the market is now awaiting Square (aft-mkt) and Home Depot (bef-mkt) to report today.

• Today: HSBC, Bank of Nova Scotia, Medtronic, Square, Intuit, Home Depot
• Wednesday: HKEC, Reckitt Benckiser, Iberdrola, Royal Bank of Canada, TJX, Booking, Nvidia, Lowe’s
• Thursday: MercadoLibre, AXA, Anheuser-Busch InBev, Bayer, NetEase, Toronto-Dominion Bank, Salesforce, Autodesk, Workday, VMWare, Dell Technologies, Moderna, Safran
• Friday: Deutsche Telekom, BASF
• Saturday: Berkshire Hathaway

Economic Calendar Highlights for today (times GMT)

• 0830 – Sweden Jan. Unemployment Rate
• 1300 – Hungary Central Bank Decision
• 1400 – US Dec. S&P CoreLogic Home Price Index
• 1500 – US Fed Chair Powell to deliver Semi-annual testimony before Senate committee
• 1730 – Canada Bank of Canada Governor Macklem to Speak
• 0100 – New Zealand RBNZ Official Cash Rate Announcement
• 0200 – New Zealand RBNZ Governor Orr to Speak

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