Market Quick Take - January 7, 2021

What is our trading focus?

• Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures traded slightly lower during the Capitol Hill event and volatility never picked up in a dramatic way. This is unusual in many ways as it deviates from past experiences of this kind, but more importantly it underscores the point, that markets are difficult to understand and cannot always be understood through news. S&P 500 futures is back to all-time high levels indicating that equities have chosen to bet hard on the USD 2,000 check that could come to Americans and that growth will be strong due to the vaccine rollout. As we have said before, equities are priced for perfection over the next two years and especially the speculative US technology stocks, so investors must be alerted to rising US interest rates as that will likely be the trigger of the next equity market correction.
  
  
• China A50 (CNF1 – Jan 2021) - momentum in Chinese equities continues overnight with CSI 300 futures and China A50 futures up another 2.4%. Despite the incoming Biden administration will continue to tough line against China investors are betting that the increased stimulus from the Democratic sweep in Georgia will create a lot of growth for China as the country is still the world’s factory and thus a main beneficiary of stimulus done in the US and Europe.
  
  
• Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - crypto assets accelerated higher with strong new price gains taking Bitcoin north of 37,500 and Ethereum above 1,200. For the first time, crypto currencies reached the market cap milestone of $1 trillion, with Bitcoin making up some 68% of that market cap. Bitcoin is now dominating Ethereum again in daily settled value, likely due to the increased interest in Bitcoin investments and the large ETH transaction fees.
  
  
• AUDUSD and EURUSD – The US dollar pulled back from new lows in places on the surge in US yields, but outside of USDJPY noted below, significant damage was not done to the USD bearish case on the charts, which would require a larger USD resurgence. Tactically, however, EURUSD may need to maintain the 1.2300 area to avoid a larger consolidation lower, and likewise the 0.7750 area for AUDUSD could prove tactically pivotal if tested.
  
  
• USDJPY – as noted in yesterday’s Quick Take, we argued that USDJPY faced an interesting test in following other USD pairs lower as the JPY is often very sensitive to the direction in interest rates. With yesterday’s significant spike higher in US rates above key levels like 1.0% in the US 10-year treasury benchmark and above 1.75% for the 30-year, the USD found some support, particularly in USDJPY pair, which rebounded smartly yesterday above 103.00 after trading as low as 102.60. Further aggressive rises in US yields could continue to support the USD versus the lowest yielders.
  
  
• Crude oil (OILUSFEB21) and (OILUKMAR21) rose for a third day in response to a Saudi pledge to cut production and a bigger-than-expected drop in US crude stocks. Adding to this a general elevated level of risk appetite in the belief that a new Biden administration will provide relief against the virus which is leaving growing trail of death and lockdowns around the world. With a vaccine-led recovery in global fuel demand still months away the market is currently, and despite the Saudi cut, at risk of dislocating from current fundamentals. Brent is currently being driven towards $55/b, the bottom of the 2019 consolidation range.  
  
  
• Gold (XAUUSD) tumbled yesterday in response to a sharp selloff in US government bonds, that took the yield on 10-year Notes back above 1%, before rebounding in response to the ugly scenes in Washington. Yields are higher due to rising inflation expectations ahead of a Biden presidency which is expected to trigger increased stimulus and spending. Key support once again being $1900/oz with resistance at $1960/65. Silver (XAGUSD) meanwhile has recovered half it lost yesterday supported by copper (COPPERUSMAR21) hitting the highest since 2013 on a strong combination of tightening supply and rising demand.
  
  
• Treasury yields continue their unstoppable rise, next level they could break is 1.1% (10YUSTNOTEMAR21). The US yield curve continue to steepen and bondholders are losing money by the day. Treasuries with long duration are the most vulnerable. In just three business days, 30-year yields moved up by 20bps resulting into a loss of around 4.4% for bondholders. As inflation expectations continue to rise and Democrats have assumed control of the Senate, we can expect yields to continue to rise with the 10-year soon testing 1.1%. However, it is important to note that in the FOMC minutes was discussed an eventual tapering, meaning that the Federal Reserve monitors closely the rise in yields.

What is going on?

• Trump mob descends on Capitol Hill in attempt to thwart certification of Biden victory. In unprecedented scenes, the mob of Trump supported smashed through barricades and broke into the building by shattering windows and occupying the assembly chambers and offices of Congressional members. Markets were somewhat reactive during the worst of the scenes, but seemed to brush off the happening as a curious anomaly, though one can’t help but note the level of political dysfunction that has descended over America and what comes next both inside and outside the houses of Congress from here after this event that will be recorded as a watershed moment in US history.
  
  
• US FOMC Minutes suggest a Fed wanting to stay the course – there seemed to be a general confidence in the minutes on the status of the US recovery, particularly given the renewed surge in Covid-19 cases, with even one mention of the need to eventually taper if the economic continues to develop robustly. Notably, the minutes are from an FOMC meeting that came before the $900 billion stimulus bill was passed and before the Democratic majority in the Senate was confirmed yesterday, which will bring, in all likelihood, $2,000 stimulus checks soon after Biden’s inauguration.

What we are watching next?

• The US yield spike is the most significant thing going – how does market absorb this if it continues? – US treasuries were sold heavily yesterday, also before the Trump mob descended on Capitol Hill, but that event could hardly be though to inspire trust. As well, the calling of both Senate run-off elections in Georgia in favour of the Democrats saw prominent Democratic politicians promising the $2,000 stimulus checks once the new Congress is in session, now that Democrats have the majority in the Senate by a 1-vote margin provided by Kamala Harris’ tie-breaking powers as VP. The key next levels for the US 10-year benchmark after breaking the 1.00% level are 1.50%, while the low of the pre-Covid range for the 30-year was near 2.00%, som. Net of other factors, rising US long rates represent a tightening of financial conditions and a headwind for aggressive valuation models in growth- and speculative stocks.

Economic Calendar Highlights for today (times GMT)

• 0930 – UK Dec. Markit/CIPS Construction PMI
• 1000 - Euro Zone Nov. Retail Sales
• 1000 – Euro Zone Dec. Confidence Surveys
• 1000 – Euro Zone Dec. CPI Estimate
• 1330 – Canada Nov. International Merchandise Trade
• 1330 – US Weekly Initial Jobless Claims / Continuing Claims
• 1330 – US Nov. Trade Balance
• 1400 – US Fed’ Harker (FOMC Non-voter) to Speak
• 1430 – US Fed’s Barkin (FOMC voter) to Speak
• 1500 – US Dec. ISM Services Index
• 1500 – Canada Dec. Ivey PMI
• 1530 – US Weekly Natural Gas Storage Change
• 1700 – US Fed’s Bullard (FOMC Non-voter) to Speak
• 1800 – US Fed’s Evans (FOMC Voter) to Speak
• 2050 – US Fed’ Daly (FOMC Voter) to Speak

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