Market Quick Take - January 28, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)–US equities were in risk-off mode with Nasdaq 100 futures dropping 3.3% from the open to close and the S&P 500 dropping into negative territory year-to-date. The selling is continuing this morning with Nasdaq 100 futures sitting psychologically just above the 13,000 level which obviously is the key level to watch. If risk-off mode continues today, then the road is likelyopen to the 12,800 level. The VIX Index moved from 23.82 to 37.21 yesterday indicating massive nervousness across equity options suggesting we could see big moves in US equities over the coming sessions.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome)–crypto currency volatility picked up yesterday as Bitcoin poked below 30,000,butmanagedto avoid a new low below the low posted earlier this month. Since posting those lows, Bitcoingas suffered a roller coaster ride but nearly managed to scrap its way back to 32,000 this morning. The action in Ethereum was similar, if somewhat less dramatic, as the lows yesterday were still above 1,200.

USDJPY–yesterday was a surprising day for USDJPY traders as the JPY generally failed to garner any notable bids on a very ugly day for risk appetite and safe havenseeking in sovereign bonds. Some of this may be on Japan’s recent difficulty in dealing with a new Covid resurgence, its closed borders and the threat that the summer Olympics may have to be cancelled again, but it could be as well that the JPY has changed character slightly in the most recent cycle because of the strong performance in the country’s equity market since early November, I.e., that the JPY has become more pro-cyclical than in the past. Regardless, USDJPY is also interesting as it is now threatening the upside of the descending channel that has defined the chart for some 8-10 months, with any move above the 104.50 area beginning to suggest an upside breakout.

AUDUSD–there was only mutedcontagion across asset classes from the huge gyrations and volatility spike in US equity trading yesterdayIndeed, while the biggest acceleration in equity volatility since last March did see a significant USD rally, it was merely a larger than usual up-day for the greenback. Still, the move does begin to stress the tactical downside risks for a trade like AUDUSD, where the important 0.7600-25 area is coming into view, arguably the last support/pivot area ahead of the 0.7400 area that was critical on the way up that will likely be visited if we see a further setback for risk sentiment in the near term. 

Crude oil (USOILMAR21 & OILUKMAR21) finished lower following a roller-coaster day. Initial support from a surprisingly big US weekly stock draw of almost 10 million barrels, due to a major reduction in net-imports, ended up being offset by the general deleveraging hittingmarketsas the VIX surged the most since Marchand the dollar rose. In addition, the Covid-19 outbreak continues to hurt fuel consumption across the world from Los Angeles to China where travel activity has declined ahead of the Lunar New Year. Near term focus on the VIX and the risk of furtherdeleveraging across markets. Brent currently in a tight $54.5 to $56.50/b range. 

Gold (XAUUSD) put in another disappointing performance yesterday, trading lower with rising stock market volatility and a stronger dollar while the renewed slump in US bond yields have reduced the reflation focus. As expected, the FOMC maintained its focus on support with Powell saying it would take “some time” to reach a level of economic activity that would justifytapering.Trading back below its 200-day moving average, abreak below the 1,804 low of last week could trigger a fresh round of stop-losses for consolidation lower, while $1882 and more likely 1,900 are the minimum starting points for trying to shift the focus back higher.

Ten-year yields flirt with 1% level(10YUSTNOTEMAR21). Yesterday, as the market opened, and prices for some penny stocks skyrocketed, the 10-year yield fell below 1% for a little while. We believe that this is a clear indicator that the market is looking for safetyand seeking repair from the stock bubble. To weight on Treasury yields it is also the delays in the fiscal stimulus and noise surround the delivery of a vaccine. Until these hurdles are not solved, the reflation trade will lose steam.

Apple (AAPl:xnas) -shares were down 3% in aft-mkt trading despite strong Q1 earnings with revenue at $111.4bn vs est. $103.1bn and EPS of $1.68 vs est. $1.42. Regarding concerns over semiconductor supply constraints, Apple said that the current quarter would see demand/supply balance which is better than what some feared. Investors likely reacted negatively to the fact that the company did not provide any guidance.

Tesla (TSLA:xnas) - shares were down in the primary session and continued down another 5% in extended trading following the Q4 earnings that delivered EPS of $0.80 vs est. $1.03 and revenue of $10.7bn vs est. $10.4bn. Free cash flow reached $1.87bn vs est. $1.04bn which was a strong number and a big upside surprise. The EV maker put out a strong upbeat tone saying it would grow manufacturing capacity as fast as possible and that it had sufficient liquidity to fund current product roadmap. Semi-trucks will begin deliveries this year and Tesla said it expects overall annual revenue growth of around 50% for many years to come. The solar business also had its strongest quarter since 2018.

Facebook (FB:xnas) - delivered strong Q4 earnings with EPS of $3.88 vs est. $3.22 and revenue of $28.1bn vs est. 26.4bn up 33% y/y driven by second half 2020 tailwinds from the pandemic fueling demand for online advertising. The company said that it sees great uncertainty over advertising trajectory as the economy opens again and it said that following the riot on Capitol Hill that it will reduce political content on its platform.

What is going on?

Short squeeze in US small cap stocks continues.The historic short squeeze with links to a Reddit stock forum called WallStreetBets captured the imagination of market participants again yesterday with GameStop shares rising another 135% closing at $347.51. Other heavily shorted stocks such as AMC Entertainment also went up massively. The narrative so far has been a raid by retail investors organized through WallStreetBets, but other data points suggest that many retail investors have also been net sellers in many of these most shorted stocks. In other words, what we are observing is a complex reaction function with no single one explanation.

The FOMC meeting was not the cause for yesterday’s market gyrations– as Fed Chair Powell generally failed to surprise on all fronts in the press conference and the policy statement changes were too few to mention. It is clear that the Fed is waiting to see how the economy, inflation and employment shape up after the roll out of vaccines before adjusting its guidance and that it is ready to see a surge in inflation once the basing effects come into view in the spring and summer, but it assumes this will fade. In the Q&A, some of the questions were appropriately tough on the risks of financial instability from Fed policy (first question even mentioning GameStop!), but Powell brushed aside this line of questioning, insisting its policies were supportive of its objectives on inflation and employment. Unfortunately, no reporter asked about how the Fed views the risk of a rise in interest rates due to the huge amount of net issuance of treasuries this year, less than half of which the Fed’s QE will cover.

ECB officials says that the market is underestimating another rate cut (10YOATMAR21, 10YBTPMAR21).Bloomberg reported that ECB officials are seriously considering a rate cut. We see this as good news for European debtholders which valuation will continue to be supported for longer. Yesterday, Greece sold €800 million in 26-week bills at a yield of –0.28%, while Slovenia was able to place €4.23 billion of bonds with 60 years maturity at MS +78. Today, Italy will issue notes with 5- and 10-yearsmaturity and it will be important to see whether investors are going to ask for more yield considering the government crisis and the rally the BTPs have experienced this week.

What are we watching next?

Will the Short Squeeze “attack on Wall Street”be shut down soon?  It won’t take many days like yesterday for regulators, exchanges, and/or lawmakers to move to attempt to shutdown the fun for the “Main Street” crowd of Reddit inspired traders bidding up small and most-shorted stocks, when their activities may behind a creeping distrust in the broader market that helped generate at least some of the negative risk sentiment yesterday. Authorities will make an appeal to the “greater good”, i.e., that they are intervening because speculative activity is creating unacceptable risks for individual traders that don’t understand the risks and even damaging broader confidence in markets, but there are risks of a popular backlash if regulators come in with too heavy a hand. How could authorities move? Perhaps via margining requirements on options, suspension of trading in key stocks if “suspicious activity” is seen, or perhaps looking into prohibiting ‘payment for order flow’ a practice used on US exchanges, but in Europe, which makes it possible for US retail brokerage firms to have free commission on stocks and stock options trading.

Q4 2021 earnings season kicks into gear this week
Strong earnings from Apple and Facebook are not enough to lift sentiment this morning in equities and Tesla’s Q4 earnings were a bit mixed. Today the most important earnings release to watch is from Visa which as the leading payments company in the world will provide insights into consumer activity globally.

Economic Calendar Highlights for today (times GMT)

0830- Sweden Dec. Unemployment Rate
0830 – Sweden Dec. Retail Sales
1000 – Euro Zone Jan. Confidence Surveys
1300 – Germany Jan. Flash CPI
1330 – US Weekly Initial Jobless Claims
1330 – US Q4 GDP First Estimate
1500 – US Dec. New Home Sales
1530 – US Weekly Natural Gas Storage
2330 – Japan Dec. Jobless Rate
2350 – Japan Dec. Industrial Production

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