Market Quick Take - February 19, 2021

What is our trading focus?

• Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – We are seeing some divergence across US equities, as small caps both rose more quickly into recent highs and have sold off more steeply over the last few session - especially yesterday, with a 1.5% loss in the Russell 2000 Index. In the major indices, the divergence is slightly smaller, with the Nasdaq 100 a bit weaker recently relative to the S&P 500 index. The Nasdaq 100 traded down to its 21-day moving average, currently just below 13,500 before bouncing strongly into the close, while the S&P 500 Index bottomed out about 25 points above its 21-day moving average near 3,856. The 21-day moving average is a short term trend indicator we are using for assessing whether the indices are possibly in for a larger correction.
  
  
• Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin spent yesterday consolidating after its run above 52,000, while Ethereum likewise has consolidated slight after a run to new highs near 1,950 yesterday.
  
  
• Applied Materials (AMAT:xnas) - announced stronger than expected earnings for the quarter and forecast that demand for the next quarter would be very strong as chipmakers scramble to acquire the chip-making equipment that Applied Materials produces. AMAT shares closed down 2% yesterday after recently notching an all-time high. The earnings call was after the close of trading yesterday.
  
  
• USDJPY - The USDJPY pair recently rushed higher on a surge in US treasury yields, but the progress higher has been halted and the pair has now consolidated back toward the 200-day moving average area around 105.50 that stopped a prior surge higher – this area looks the key for establishing whether the recent rally was merely a short squeeze or the start of a new rising trend, driven by the focus on rising yields. If the pair closes back below 105.00 here, it begins to look like the longer scale down-trend will hold for now, but the situation is technically pivotal.
  
  
• EURGBP and GBPUSD - sterling has been trending higher recently quite consistently against the EUR, with EURGBP reaching as low as 0.8650 and the weaker US dollar yesterday meant that GBPUSD mounted a strong about-face and raced back higher toward 1.4000, a level it last traded in April of 2018.  The trend is the sterling bulls’ friend here and one of the more consistent trends going across FX in recent trading, possibly in part on the rapid roll-out of UK vaccines. Last night, the UK Feb. GfK Consumer Confidence reading registered its highest reading in eight months - the highest reading since Covid swept across the UK last spring.
  
  
• Gold (XAUUSD) - spot gold dipped briefly below the key range support near 1,765 overnight, but had bounced back closer to 1,775 as of this writing. The recent rise in yields and the preference in the commodity space for industrial metals and other pro-cyclical commodities have left gold neglected. This 1,750+ area is important for the precious metal to maintain to keep the focus on the potential for an ongoing secular up-trend. From here, the most supportive development would be increasingly negative real interest rates, as inflation reading rise far faster than bond yields.
  
  
• Crude oil futures finally turn into a two-way market as the 65-dollar handle in Brent proved too much and the April front futures contract tumbled below 63.00 overnight before bouncing. The US WTI future also corrected lower as the huge production interruptions from bitter cold weather in Texas began reversing, though we need more data on how quickly normal production can return as the disruption affected 40% of US oil output.
  
  
• Iron ore (SCOc1) price at highest since 2011 on China post-holiday demand outlook. New high of 175.05 a ton for delivery into CFR Qindao, up 5% since Wednesday and 9% for YTD. This comes on the back of strong outlook from the likes of Fortescue and BHP Group. The future trades @165,20 in Singapore.
  
  
• US nominal yields remain flat but real rates continue to rise (TLT, IEF). Nominal yields struggled to sustain trading above 1.3% as economic data failed to support the reflation date. US Claims for unemployment benefits surprisingly closed implying that a full recovery scenario may be not in motion yet. Worryingly, real rates continue to rise posing a serious threat to risky assets. Yesterday’s 30-year TIPS auction was weaker the previous ones showing that investors might not be rushing to buy inflation hedges. In the short term we expect US nominal yields to resume their rise to test their strong 1.5% resistance level.
  
  
• European sovereign bond yields rise lead by Italy (BTP10). Despite Draghi won two confidence votes and he’s now Prime minister of Italy, BTPs sold off driven by higher Treasury yields. BTPs lead European sovereign losses yesterday for the first time in a week. We remain positive on Italian debt and believe that as soon as the market stabilizes, we will see spread compression resuming.
  
  
• Gilt yields rise to 0.62% as Bank of England’s Saunders gives gloomier outlook of the recovery (GILS). Yesterday Saunders alluded to a “jobless recovery” mentioning that the long pandemic has hurt the corporate space. This goes in direct contrast to what we have heard from Bailey who said that he’s expecting a strong recovery from the second half of the year. The BOE official also added that negative interest rates are out of scope for stimulating the economy, but they may be used to affect the yield curve. His comment sent Gilt 10-year yields higher by 5bps closing at 0.62%, closer to the 0.65% resistance line.

What is going on?

• US Weekly Initial Jobless Claims hit a four-week high, and data from previous weeks revised higher - yesterday's weekly print was 861k, far higher than the k expected. And as happened with data from prior weeks, last week’s original reading of 793k was revised higher, this one to a level of 848k and wiping away most of the impression that there was any improvement in this metric of the US labour market, although some survey-based data has shown improvement. The weekly Continuing Claims readings have consistently improved, if at a slow pace, with the latest reading at 4.49M vs. 4.56M the prior week.
  
  
• Consistent with inflation readings elsewhere, the Swedish CPI for January came in hotter than expected, with the headline showing a +1.6% YoY advance and the core registering an advance of +1.7%, both +0.1% higher than expected. Worth noting is that this is despite the Swedish krona proving one of the strongest DM currencies over the last 10 months and before the “basing effects” of the price collapses of March and April of last year likely see much higher readings in months to come.
  
  
• Short US yields dropping close to zero and a further drop could drive systemic stress: while focus recently has been more on the longer end of the US yield curve and the sharp rise in yields there, the very shortest end of the yield curve has been heading lower and it is feared that it could dip into negative territory and trigger systemic disruptions if so. The driver of the development is the US Treasuries plan to draw down its enormous horde of reserves at the Fed, which would drive a massive boost of liquidity and potentially destabilizing effects if yields for US T-bills head into negative territory.
  
  
• Treasury Secretary Yellen indicates tax hike (CNBC interview). “Tax increases would likely be used to pay for part of Biden’s infrastructure package” (Which will be proposed later this year – there is talk of USD 3 tn. over ten years). She also explained her focus on unemployment saying: “...unemployment rate close to 10% if properly measured, plus Biden administration in process of evaluating approach towards China.” Conclusion: Tax hikes coming, government deficit will be kept high for at least ten year (ramp up of USD 300 bn. a year on infrastructure), and expect China containment policy soon.
  
  
• Global PMI is starting to lose momentum. This morning the Markit Australia PMI Composite fell to 54.4 from 55.9 last. New Zealand is often seen as a leading indicator, as it is a small open economy. There, recovery in activity may be starting to plateau.

What are we watching next?

• Next step for bond yields as we note global rise in yields – US treasury yields from 5 years and longer have gone largely sideways since a large surge early this week and have likely helped contribute to more two-way trading in equity markets. So far, while higher yields represent a de facto tightening of financial conditions, other measures of risk appetite are relatively quiet, even if we have seen a very modest widening of credit spreads.  We are convinced that the Fed will eventually be forced to cap bond yields – but whether they would first have to see the negative effects of rising bond yields is a key question - I.e., a “major” equity market correction. Globally, yields are rising nearly everywhere, with the Japanese 20-year rising above 50 basis points for the first time since late 2018.
  
  
• More Feb. flash PMIs up today - the PMIs for the EU and the UK are up this morning and may be largely ignored due to the current scale of lockdowns, although it was interesting to note the stronger UK GfK confidence number overnight. The US numbers will be somewhat more interesting after a strong Services reading in January but a slightly disappointing, if still strong ISM Manufacturing reading.

Earnings releases to watch this week – earnings season continues apace this week, with a number of interesting names to report this week around the world.

• Today: Allianz, Deer & Co, Deutsche Telekom

Economic Calendar Highlights for today (times GMT)

• 0815-0900 – Euro Zone Feb. Flash PMIs
• 0830 – Sweden Riksbank Meeting Minutes
• 0930 – UK Feb. Flash PMIs
• 1330 – Canada Dec. Retail Sales
• 1445 – US Feb. Flash Markit PMIs
• 1500 – US Jan. Existing Homes Sales

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