Market Quick Take - December 1, 2020

Macro 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  The market mood improved quickly yesterday and overnight after a weak start in Asia this week, with a strong surge in after hours as the final month of the year gets under way and on strong Manufacturing PMI out of Asia overnight, as well as fresh vaccine hopes. Today sees final PMI manufacturing data for Europe and North America, as well as an appearance by Fed Chair Powell before a Senate committee.


What is our trading focus?

  • Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures are charging ahead again after a weak start to the week yesterday. The key resistance level is the 12,412 which is the all-time high close from 2 September. Adding to risk sentiment in equities is the stubbornly low US 10-year yield and much stronger November PMI figures from China and South Korea overnight.

  • Bitcoin Tracker ETN (BITCOIN_XBTE:xome) and Ethereum Tracker ETN (ETHEREUM_XBTE:xome) - Bitcoin and Ethereum both managed a full recovery to the recent highs and Bitcoin even managed a brief test to all-time highs just short of 20,000 before pulling back a bit overnight. The crypto space is garnering enormous attention on the recent run-up in the price and the contrast with gold’s stumbles is glaring as the debate rages on whether crypto assets can prove a better store of value than precious metals.

  • EURUSD – EURUSD pulled exactly to the 1.2000 level yesterday before sudden selling materialized that may have been linked to end-of-month rebalancing flows, as there was no identifiable trigger to the action and the pair recovered a portion of the losses overnight. We continue to watch the EURUSD topside for breakout potential if the market mood remains positive and the US manages to avoid a fiscal cliff into year end. The upside could prove more potent if the path to an EU budget deal opens up. Fed Chair Powell testimony and any implications for the December FOMC meeting could also prove important in the meantime.

  • AUDUSD – AUDUSD reversed back lower after a test of the 0.7400+ top of the cycle yesterday, possibly on end-of-month flows that supported the US dollar. The Reserve Bank of Australia meeting overnight generated few headlines of note, with no change in policy expected or delivered, but with the bank expressing a cautious outlook that perhaps looked a bit more dovish than anticipated, judging from the softness of AUD in the crosses like AUDNZD and AUDCAD. Still, the recovery Down Under was deemed “better than expected” by the RBA. From here, AUDUSD is likely an excellent proxy for the global growth outlook and reflationary narrative in commodities, and we continue to watch the 0.7400 area if the mood remains positive for potentially unlocking the zone to 0.8000+, while a move south of 0.7200 would be needed to flip the narrative to a more cautious stance.

  • Moderna (MRNA:xnas) soared some 20% yesterday on the company’s announcement that it had applied for an emergency FDA vaccine authorisation and could start its first injections by December 21, while also claiming that it could produce 20 million doses by the end of December and between 500 million to 1 billion doses in 2021. The vaccine requires that two doses are given, one month apart.

  • China A50 Dec (CNZ0) - Chinese equities have shrugged off the risk-off event yesterday that the Trump administration would likely add SMIC and CNOOC to its defense blacklist. The China A50 futures are up 2% in today’s session hitting the highest levels since 2008. We maintain a positive view on Chinese and emerging market equities in 2021.

  • Brent crude oil (OILUKJAN21) and WTI crude oil (OILUSJAN21) remain on the defensive after the OPEC+ meeting was postponed until Thursday.  Faced with rising prices, robust demand in Asia but weak in Europe and the U.S. some OPEC producers led by the UAE wants to increase production while the Saudis and Russia favor postponing the previously agreed January increase. Being just months away from an expected recovery in fuel demand, the group is likely to find a compromise. Failure could send the price lower by up to five dollars while forcing a reduction in the near 200 m barrels of long positions speculators added during the three weeks to November 24.

  • Gold (XAUUSD) and silver (XAGUSD) have moved higher after finding buyers ahead of key support at $1763.50/oz on gold and $21.68/oz on silver. This despite another big reduction in total ETF investments on Monday where total gold holdings dropped 400k oz to 107.7 million. Some support has emerged from U.S.-China frictions and a drop in U.S. ten-year real yields to a one-month low at -0.96%. In addition, HG copper (COPPERUSMAR21) at a seven-year high is starting to provide some support via silver with the XAUXAG ratio down 3% from Monday’s peak. Resistance in gold at $1793/oz followed by $1805/oz.

  • Inflation linked debt is going to outperform Treasuries for the second year on a row (TIPS). Year to date, TIPS have returned more than 9% while Treasuries have returned around 8%. While Treasuries performance depend on the benchmark interest rates, which has a “floor” at zero, TIPS don’t have that and the 10-year TIPS are offering now close to –1% in yield. On top of that, as soon as inflation is on the rise they will start to pay to compensate against inflation.

What is going on?

  • Hungary and Poland continue to insist they won’t sign on to EU budget on “rule of law” provisions with Poland asking for “new solutions” and Hungary’s Orban equating accepting the terms of the budget with “suicide”. German Chancellor Merkel is heading the negotiations with the two countries and unanimous approval by all EU governments is required for the budget and emergency recovery package to proceed. By Wednesday this week, a decision is said forthcoming on whether a deal can be struck and if not, a December 10 summit will be held with the leaders of Poland, Hungary and Germany. France has threatened the two countries with isolation if they continue to resist and Polish business groups and employers’ situation sent a letter to Polish leader Morawiecki yesterday.

  • Exxon Mobil is writing down assets worth $17-20bn in Q4. The write-downs are related to natural gas fields in North and South America and would be the biggest asset impairment in oil history since BP’s oil spill in Gulf of Mexico in 2010 resulting in an impairment of $41bn.

What we are watching next?

  • Fed Chair Powell testimony today before Senate committee – Powell will be out today testifying before a Senate committee and tomorrow before a House committee and is likely to plead for further stimulus in the near term to bring immediate further fiscal support to the economy in order to bridge the gap between the current risks to the economy from renewed restrictions and the hoped for aggressive roll-out of the vaccine over the course of the coming months. The market will look for hints that the Fed is ready to do whatever it can to support the economy with further easing measures at the December FOMC meeting, or for a sense of whether Powell views monetary easing as an inappropriate tool to address the current risks to the economy (since financial conditions are already extremely accommodative.)

  • The vaccine roll-out: how quickly can this be rolled out and how quickly will it materially impact behaviour? The Moderna vaccine news (see above) presents us with the prospect of millions having received the second shot of the vaccine by late January and with the Pfizer roll-out effort likely happening on a similar time frame. So by late January and into February, we should have a robust sense of the pace of the vaccine rollout, the efficacy of at least these first two vaccines and a sense of how quickly we can remove Covid-19 considerations from forward projections for the economy.

Earnings releases this week are running low as we are off season. But the releases below are worth following:

  • Today: Bank of Nova Scotia, Bank of Montreal, Salesforce, Veeva Systems, Trip.com
  • Wednesday: Royal Bank of Canada, National Bank of Canada, Snowflake, Synopsys, Crowdstrike, Splunk, Okta, Zscaler
  • Thursday: DocuSign, Marvell Technology, Dollar General, Kroger

Economic Calendar Highlights for today (times GMT)

  • 0815-0900 – Euro Zone Nov. Final Manufacturing PMI
  • 0930 – UK Nov. Final Manufacturing PMI
  • 1000 – Euro Zone Nov. Flash CPI
  • 1330 – Canada Sep. GDP and Q3 GDP
  • 1445 – US Nov. Final Markit Manufacturing PMI
  • 1500 – US Nov. ISM Manufacturing
  • 1500 – US Fed Chair Powell to Appear before Senate Banking Committee
  • 1700 – ECB President Lagarde to Speak
  • 1700 – US Fed’s Brainard (Voter) to Speak
  • 2300 – Australia RBA’s Lowe to Speak before Parliamentary Committee
  • 0030 – Australia Q3 GDP
  • 0630 – New Zealand RBNZ’s Orr to Speak

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