Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Equities put in a strong performance yesterday and continued slightly higher overnight, in part on blowout Netflix results for Q4, while in China, Alibaba shares surged after former CEO Jack Ma made his first public appearance since the cancellation of the Ant Group IPO some four months ago. Today marks the end of the tumultuous US presidency of Donald Trump and is Inauguration Day for president-elect Joe Biden.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - many would have thought that Yellen’s testimony and comments on tighter cooperation between the Fed and the Treasury would not have been good for technology stocks due to higher probability of reflation. But yesterday’s session showed quite the opposite with Nasdaq 100 soaring briefly past 13,000 to finish just below the big level but resuming the momentum in today’s session trading at 13,057. The 13,097 level is the record close level from 8 January and obviously key resistance level for further upside. The broader S&P 500 futures are struggling to get past 3,800.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - the run higher in Ethereum finally lost some steam overnight after posting a high yesterday well above 1,400, with initial focus on the previous high just above 1,300 for support. Bitcoin, meanwhile, etched out a near perfect triangular consolidation before challenging the lower bound of that formation, though it also looks as though the 35,000 level is an important support from the last six trading sessions.
EURUSD - the run of US dollar strength was reversed yesterday, as the currency weakened almost across the board on a new surge in risk sentiment as US earnings season gets under way and ahead of today’s Inauguration Day. With the recent low coinciding with an important retracement support, USD bears may look to get involved here again with stops below the 1.2150 lows for a test back toward the 1.2349 high.
EURGBP and GBPUSD – sterling recently pulled stronger before spending several sessions dithering about what to do next. It’s time for a follow through higher in sterling and lower in EURGBP for this move to have had any significance and the first focus for a break lower is the 0.8860-75 area, which contains multiple intraday lows stretching back to early summer last year. A move below there could open up for a run to 0.8600 or even 0.8500. In GBPUSD, the focus is on the cycle high just above 1.3700, with the 1.4000 and even 1.4200 level the next possible ports of call if the US dollar rolls over.
Gold (XAUUSD), silver (XAGUSD) and copper (COPPERUSMAR21) all advanced to trade near the highs of their recent ranges after Treasury Secretary nominee Janet Yellen’s called on lawmakers to “act big” on stimulus (see below), thereby signaling a renewed focus on the reflation trade. The dollar weakened while 10-year real yields dropped to –1.04%, the lowest since January 8. Whether these latest comments are enough to kick some life back into these markets remains to be seen. For now, a break above $1864/oz is needed for the outlook to improve while in silver the levels are $25.55/b and $26/b.
Crude oil (OILUSFEB21 & OILUKMAR21) also liked the “act big” comment from Yellen and is trading higher for a second day, thereby staying within the established uptrend from the November lows. The market shrugged off another downgrade to global demand growth from the International Energy Agency who said that renewed lockdowns to contain the pandemic would weigh on consumption during the current quarter. The market remains bid on a combination of Saudi production cuts and the prospect for more fiscal stimulus, increased mobility and continued monetary easing eventually supporting demand. The biggest short-term risk is whether these have been fully priced into the current price level.
Appetite for ultra-long maturities pushes investors towards 50-years OAT issuance (10YOATMAR21). France has received the highest volume of orders for its first 50-year government bonds since April 2016. The order book reached over EUR 75bn, and the bonds will price at +7bps over comparable bonds. It shows how attractive longer duration are to investors now that European sovereigns are near-zero and negative yields for long maturities. Sentiment in ultra-long maturities is also fostered by the ECB’s monetary meeting that is going to be held tomorrow as new restrictions and lockdown measure will unequivocally worsen the economic outlook pushing the Central Bank for more stimulus.
The US yield curve steepens further as the US Treasury might also be considering issuing ultra-long maturities (10YUSTNOTEMAR21). In front of the Senate Finance Committee, Janet Yellen said that the US Treasury should consider issuing-long debt to take advantage of historic low interest rates. The remarks caused traders to sell 30-year Treasury bonds, currently the longest available, and the US yield curve to steepen with the 5s30s spread rising above 140bps. Today the inauguration on Joe Biden could reverse this trend in the short/term, if violence rises to unexpected level.
Conte will continue to lead Italy until the next election in 2023, BTPs will continue to tighten over the Bunds (10YBTPMAR21). Conte has won a confidence vote in Senate yesterday, however he failed to secure an absolute majority implying that it will be difficult for the government to pass any new legislature. The BTPs will benefit from this outcome, 10-year BTPs yields have opened a couple of basis points lower, and they will continue to fall to try the lowest yield they hit of 0.50% for the 10-years and 1.36% in 30 years.
Netflix (NFLX:xnas) - the world’s largest paid video streaming service delivered strong numbers last night after the market close seeing its shares soaring by 12%. Q4 net change in paying subscribers rose by 8.5mn vs est. 6.1mn which was what the market was looking for. Q4 revenue at $6.64bn was in line with estimates and EPS of $1.19 vs est. $1.38 was a disappointment. Q1 guidance was a tad better on revenue but worse on net change in paid subscribers. However, two positive factors contributed to the positive reaction in the stock. Guidance on Q1 EPS was $2.97 vs est. $2.12 and the company said that it is close to being sustainable on a free cash flow basis with guidance on zero free cash flow in 2021. Netflix also boasted that it has double the revenue per user as Disney in streaming and that it will invest aggressively to close the gap with Disney in animation.
ASML (ASML:xams) - the world’s largest manufacturer of photolithography systems to the semiconductor industry reports this morning Q4 revenue of €4.25bn vs est. €3.75bn with a gross margin of 52% vs est. 49.9%. The company guides Q1 revenue of €3.9-4.1bn vs est. €3.52bn. ASML also maintains its guidance on its 2025 revenue opportunity target and sees double digit growth this year as demand for computer chips continues to boom.
What is going on?
US Treasury Secretary Yellen testified yesterday in nomination hearing - (virtually) before a Senate Panel and cited low interest rates as an enabler for expanded public spending to counter the crisis unleased by the Covid pandemic. Yellen spoke in favour of Biden’s large stimulus plan, a rise of the minimum wage and better medical and family leave policies, together with food assistance. She also emphasized the need to act on climate change. Her remarks on supporting a strong and stable US dollar were already flagged by the release of her prepared remarks before the hearing. Signaling where priorities lie, Yellen said that the first order of business is getting past the pandemic, not changing the US tax code. Her rather tough remarks on China make it clear that a shift in attitude toward China is a lasting legacy of the Trump era.
Israel says first dose of Pfizer vaccine is less effective than hoped – the country leads the world in administering vaccines for any country with a population of its size, with over 25% of the country now having received its first dose of the Pfizer vaccine. But the country reported a record of new Covid cases on Monday, with a high positivity rate above 10% of those tested (pointing to high community levels of the virus), and a health official said that the results after the first dose of the vaccine appeared lower than the 52% effectiveness claimed by Pfizer. This puts a question mark over the UK approach of delaying a second dose to administer a first dose to as many as possible first. Only twenty percent of those in Israel having received the first dose have also received the second dose.
Alibaba shares up 9% as Jack Ma returns to public. The former CEO and co-founder of Alibaba Jack Ma has been out of public view for months since his critical comments of the Chinese government’s handling of the Ant IPO (the financial arm of Alibaba) and the following antitrust probe of Alibaba’s business practices in the Chinese e-commerce market. Jack Ma showed up in a video with rural region teachers over video link where he made comments about spending more time on philanthropy in the future. According to a research report from Citigroup, many of the bank’s most wealthy clients have exited positions in Alibaba after the antitrust probe as it questions the future growth potential of the e-commerce giant.
What are we watching next?
Inauguration of Joe Biden and how the market treats it – Today is Inauguration Day for incoming president Joe Biden, who is said to have readied a blitz of executive orders for everything from moving forward with a more aggressive Covid vaccine roll-out to freezing the construction of the border well between the US and Mexico. There has been considerable concern about the risk of public disorder, with Washington DC security tight, but after demonstrations supposedly planned for last week amounted to virtually nothing, these fears are possibly overblown.
Q4 2021 earnings season kicks into gear this week
While Goldman Sachs delivered strong earnings, it was not enough to lift the shares. Bank of America delivered good Q4 results and was rewarded. Yesterday’s most important earnings were from Netflix, and came after the market close, showing overall strong numbers although there were a few disappointments. The earnings season continues today with ASML already posting strong results in Europe. The list below highlights all the most important earnings to track for the rest of this week with the ones marked in red being the one with the most impact on macro and sentiment in equities.
Economic Calendar Highlights for today (times GMT)
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