Market Quick Take - February 16, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)– US equity index futures were up again overnight to new record highs after Asia put in another very strong session. There seems little that can spoil the mood for now, although we have noted the important implications for valuation multiples from US yields rising out the curve, a development that could slow appreciation or worse if yields rise further and in an aggressive fashion from here. The next big round levels to the upside are the 14,000 level for the Nasdaq 100, a mere 100 points above the overnight high, and 4,000 for the S&P 500 index, a bit over 1% higher.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - the two largest coins bounced back strongly from their brief weakness yesterday, with Bitcoin clearly eyeing the round 50,000 level, just as 20,000 and 40,000 provided a significant pause on the way up. There is no major round level equivalent for Ethereum, but the 1,800+ area has proven tough to crack for over a week now.

USDJPY – with yields rising globally at the long end of government yield curves, the yen is trading the weakest of major currencies and USDJPY is now facing down the 200-day moving average just above 105.50 that held it back on the previous squeeze higher. Arguably, a break of this area could set in motion a significant run higher, particularly if the recent break higher in key US Treasury benchmark yields (the 10-year above 1.2% and the 30-year above 2.0%) runs higher as well.

EURGBP and GBPUSD – the key sterling pairs are trending in the pound’s favour, and we ought to include GBPJPY in the mix as well, as that pair recently smashed through the highest levels since the arrival of Covid and of course since the Brexit deal. The next target for EURGBP lower could prove as low as 0.8500 if the positive risk sentiment backdrop extends here, and GBPUSD may slice through 1.4000 if the USD is weak, with the post-Brexit vote high of 1.4377 only some 3% away.

Crude oil (OILUSMAR21 & OILUKAPR21) -holds near their highest level in 13 months while Gasoline (GASOLINEMAR21) trades higher by more than 5% overnight after freezing US weather conditions crippled Texas’s power system with blackouts spreading to other states in central US. Crude oil production from the Permian shale patch has been disrupted while some of the nation's biggest refineries have been forced to shut down, thereby triggering a scramble for fuel. Expect a price setback once warmer temperatures return but overall, the focus will now increasingly turn to the early March OPEC+ meeting as the call for more crude oil is rising.

The market is waiting for the reflation trade to push 10-year yields to test their upper trendline (TLT, IEF). If 10-year US Treasury yields break above 1.22%, this level might trigger stops in the bond future provoking yields to rise fast and hit 1.5%. Yet, the sell-off might even deeper as the 10-year Breakeven rate suggests that fair yields should price at least 100 bps higher. If 30-year yields break sustain trading above 2% they will find next resistance at 2.4% In order to review key levels in 10- and 30-year US Treasury yields please click here.

Gilts lead losses in European sovereigns amid Covid-19 vaccine hopes and the reflation trade in the US (GILS). Gilts opened around 6 bps higher yesterday as news of a fast pace of vaccination accelerated hopes for a recovery. Ten-year Gilt yields will find next resistance line at 0.65%. Italian sovereigns where the most resilient yesterday as the market continues to rejoice the advent of Draghi in Italian politics.

What is going on?

Australia RBA minutes say significant support needed for some time- the guidance from the RBA at its most recent meeting two weeks ago was that it does not expect to raise its policy rate until 2024. It also announced a further AUD 100 billion in QE and argued that its efforts are also providing important support by keeping the AUD exchange rate lower than it would be otherwise. Traders are beginning to second guess The US Federal Reserve’s intentions to keep rates pegged at the current levels for as long as they say they will, but Australia’s short-term interest rate futures (STIRs) suggest the market is largely taking the RBA at its word, as rate expectations have remained anchored for the last two months through late 2023, while US Fed expectations have shifted about 25 basis points higher for the same time frame. Out to five years, Australian yields have risen about 15 bps this year to the US’ 20 bps.

Canada Housing Starts rose to an annualized pace of 282k in January, a record level and indicative of the stimulus provided by extremely low rates. The Canadian economy already featured one of the most levered private sectors in the world and will emerge from this crisis even more indebted - even if for now the low rates provide a boost to asset prices.

Gold (XAUUSD) - continues to fight an uphill battle against rising US bond yields and the continued “everything” rally in global stocks as Covid-19 cases drop and vaccine rollouts gather momentum to boost the prospect for an economic boom. Ten-year bond yields have almost risen to 1.25% while real yields are back above minus 1%.  Most of the metal action, however, is to be found among industrial metals where growth optimism and tightening supply has seen HG copper (COPPERUSMAR21) rise to an eight-year high, while Platinum (XPTUSD) which is 30 times rare than gold, has risen to a six-year high above $1300/oz, after more than halving since November, the discount to gold is now down to just 500 dollars.

What are we watching next?

FOMC minutes up late tomorrow –the Fed has taken pains, after some mixed messages on the potential for a “tapering” of asset purchases late last year, that they do not want to even suggest they are considering tightening policy until the employment level has fallen close to pre-pandemic levels, the outcome far more important than inflation levels. Still, it will be interesting to see how the Fed reacts to any exceptionally hot inflation reads after the “basing effects” of the March-April time frame (when prices collapsed last year) have come and gone. As well, the FOMC minutes will be worth perusing for any discussion of whether higher long bond yields (a kind of de facto tightening of financial conditions) are a concern at this time or would be a concern if they rose significantly further (I.e., any hint that a significant number of Fed members are interested in flagging the potential for a yield-curve control policy - even if it may be too early to look for this now).

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: CVS Health Corp, Palantir
• Wednesday: Analog Devices, Baidu, Twilio, Shopify, Rio Tinto
• Thursday: Daimler, Walmart, Applied Materials, Roku, Nestle, Airbus
• Friday: Allianz, Deer & Co, Deutsche Telekom

Economic Calendar Highlights for today (times GMT)

• 1000 – Germany Feb. ZEW Survey
• 1000 – Euro Zone Q4 GDP
• 1330 – US Feb. Empire Manufacturing
• 1730 – US Fed’s George (non-voter) to speak
• 1800 – US Fed’s Kaplan (non-voter) to speak
• 2000 – US Fed’s Daly (voter) to speak
• 2350 – Japan Trade Balance
• 0100 – Australia RBA’s Kent to speak