Market Quick Take - December 28, 2020

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)- the US equity market is trading near all-time highs in the futures market overnight, as US President Trump’s signing of the stimulus bill removes the last notable political hurdle of the moment, although we are bearing down on important political risks just after the New Year in the shape of the Georgia Senate run-off races (more below). The high water market from last week for the S&P 500 is the 3,724 level, while the Nasdaq 100 equivalent is 12,789.

DAX (GER30.I) - European equities are 0.6% higher ahead of the open in cash equities driven by the signed US relief bill worth $900bn, vaccination rollout in Europe, and sentiment extension from the signed trade deal between the EU and UK avoiding the ‘cliff Brexit scenario’ that could have added more economic turmoil to Europe. The key resistance level is 13,700 and if cleared could pave the way for a quick momentum extension to 14,000 creating new all-time highs for German equities.

AUDUSD and EURUSD – the USD reaction to the market backdrop and Trump’s signing of the stimulus billis somewhat disappointing for USD bears, as EURUSD has yet to challenge the 1.2273 top, even with the clearing away of immediate Brexit concerns on the agreed deal. AUDUSD has performed somewhat better, although the Aussie has been getting less support now from iron ore prices over the last week or more, while the Chinese currency has likewise gone sideways versus the US dollar for the better part of a month after its impressive run higher.

GBPUSD and EURGBP– a Brexit deal was passed that will see no rise in tariffs on goodsafter the end of the year, and yet sterling is trading largely sideways – yes, higher versus a weak US dollar, but not against the Euro, as EURGBP trades in the middle of the range of the last several months around the important 0.9000 level. Implied volatilities in the options market have collapsed on the lack of drama that will accompany the roll into the New Year, and sterling bulls must be rather spooked that the agreement failed to trigger more upside in the currency, particularly given the supportive backdrop of strong risk appetite.

Gold (XAUUSD) traded higher while silver (XAGUSD) jumped more than two percent after Trump finally signed the stimulus package. The dollar ticked lower while U.S. 10-year bond yields moved closer to 1% driven by rising inflation expectations (breakeven yields). With major central banks expected to provide additional stimulus into an expected vaccine-led recovery next year, the outlook for metals, both precious and industrials, remain supportive given the continued reflation focus. Gold remains stuck in a five-month-old downtrend with a break above $1910 needed in order to challenge it. 

Treasury to issue record $176 billion this week in three auctions (10YSTNOTEMAR21) -  Treasury traders continue to eye the 1% pivotal yield in 10-year Treasuries especially now that a stimulus bill has been signed by President Trump. Today the Treasury will offer 2- and 5- year notes and tomorrow will issue 7-year bonds. Tohelp yields moving towards 1% might be also the Georgia Senate runoff on January 5th.    

Alibaba (BABA:xnys or 9988:xhkg) - shares are down 9% in Hong Kong as Chinese regulators have asked Ant (the financial arm of Alibaba) to come up with a plan as soon as possible to rectify its business and go back to payments only. This means that Ant must unwind its business in insurance, consumer loans and wealth management. Today’s decline extends the 8% decline on Thursday when the China’s government announced a formal investigation into Alibaba’s monopolistic practices. The series of actions against Alibaba is followed multiple changes to antitrust laws and data privacy laws in China the past year. Many commentators are comparing the government assault on Alibaba to Russia’s 2003 take-down of the Russian oligarch Mikhail Khodorkovsky. China’s crackdown on Alibaba has implications for other large private Chinse technology companies such as Tencent, Baidu and JD.com.

Bitcoin (Bitcoin euro-ETN ticker is BITCOIN_XBTE:xome) exploded higher over the holiday weekend, trading north of $28,000 at one point over the weekend for the first time and even at below $27,000 this morning, is up nearly 15% from where it was when most major markets in the US and Europe closed before the holidays last week. The ongoing interest from institutional money has been a key driver of the narrative behind Bitcoin’s rise, but articles like this one from Bloomberg should remind enthusiasts of the risks from harsher regulatory scrutiny 

What is going on?

US President Trump finally caves on stimulus check size, signs stimulus bill- after holding on long enough for millions of out of work Americans to lose their weekly federal benefits over the weekend, Trump finally signed the stimulus bill yesterday, as failing to do so would have set in motion a government shutdown starting tomorrow.  Trump demanded that the stimulus checks be increased to $2,000 from the current $600 level in the bill, but it is not clear that the Republicans are willing to do so.

Alibaba’s Ant is asked to retreat to ‘roots’ in government crackdown. Chinese regulators have demanded Ant to return to its ‘roots’ in payments closing down its businesses in insurance, consumer loans, and wealth management. Very little specifics have been provided and the deadline is specified as ‘as soon as possible’. China is clearly saying no to sprawling technology groups exercising their power across many businesses unified by personal data, which is also the reason why Tencent and Baidu shares have reacted more in today’s trading than on Thursday when China launched its official antitrust investigation of Alibaba. Chinese technology companies are becoming a bigger and bigger part of the MSCI Emerging Markets Index and thus the Chinese crackdown could create an unexpected headwind for EM equities in 2021.

Natural Gas (NATGASUSFEB21) has dropped by 16% during the past three trading sessionswith a current cold blast expected to be replaced by milder weather into the early parts of January. Adding to this demand restraints from current Covid-19 related lockdowns and it seems like the peak winter season is already over for natural gas. Elevated price levels in Europe and Asia will however keep the export window wide open. 

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.

Roll of the calendar year to see consolidation?  - this has been an unprecedented year for financial assets, as equity markets suffered a meltdown of record speed in 2020 on the Covid-19 pandemic that was then followed by an even more impressive comeback on the overwhelming stimulus response from authorities, such that 2020 is one of the best years ever on balance for global equity markets. Market historians looking back to another incredible year – 1999 – in which the S&P 500 closed the year at a new all-time high, will recall that the initial few days of the year 2000 saw a vicious correction. Yes, times were different, and the focus then was on Y2K and the concentrated bubble of the time, but investors need a reminder that even during major bull market runs, one can see significant set-backs.

Economic Calendar Highlights for today (times GMT)

0900 – Switzerland SNB Weekly Sight Deposits
2130 – Delayed release of weekly COT report

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