Market Quick Take - December 22, 2020
Head of FX Strategy
Summary: Markets managed a recovery yesterday after an ugly sell-off in risk sentiment, but the scale of volatility gives cause for unease into the last trading days of the year, as thin market conditions can mean large and unpredictable moves. The last remaining orders of business before year-end are the shape of a Brexit deal, if any, and US President Trump signing off on the stimulus package agreed in Congress.
What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the US equity market sold off steeply yesterday on the news of a significant Covid-19 mutation on the loose, but managed to claw its way back to close the day with relatively modest losses, even if sentiment slipped again overnight. Volatility of this magnitude after reaching a new market top is not a comforting development. The technical focus now is on whether the lows posted yesterday in the major indices, like the 3,600 area in the S&P 500 index and the 12,460 area in the Nasdaq 100 Index fall. Next Fibonacci levels lower for the S&P 500 area 3,530 and 3,410 and for the Nasdaq 100 are 12,182 and 11,645.
- Bitcoin (Bitcoin euro-ETN ticker is BITCOIN_XBTE:xome) suffered a steep correction yesterday, which coincided with significant volatility in precious metals and risky assets, perhaps suggesting to some degree that not even Bitcoin will prove immune to market-disruptive developments and generally poor liquidity. The lows yesterday were found ahead of the 38.2% retracement of the latest rally wave at 21,730 and the 20,000 area is a key pivot zone, having marked a major high on the way up and as it is a psychological round number.
- DAX (GER30.I) - European equity futures are still under pressure this morning hovering around the close from yesterday after a failed attempt to rebound higher. The smaller than hoped for US fiscal deal and the lingering uncertainty over the mutated Covid-19 strain in the UK are holding equities back. It is most likely at this point that markets will remain quiet at low volatility until after New Year.
- AUDUSD and EURUSD – the EURUSD super major sold off in sympathy with the general safe-haven seeking in the US dollar, although euro weakness was less pronounced versus the US dollar than in more risk-sensitive currencies. After a run below 1.2175 area likely triggered a run on stops, the pair quickly recovered yesterday. Still, the correlation with yesterday’s downdraft in risk sentiment suggests this pair will correlate with every other USD pair on any further downdrafts in risk sentiment. Meanwhile, AUDUSD stumbled badly yesterday, selling off in sympathy with broader weak risk sentiment, but also as the spread of Covid-19 saw the government setting up hard internal borders during the holiday season. Support came in just ahead of 0.7450 and the pair will likely remain a proxy for global risk appetite. A slip below 0.7400 would begin to challenge the bull trend. Elsewhere, a steep correction in iron ore prices in China are a source of further concern for Aussie if prices continue lower.
- GBPUSD and EURGBP – if fisheries are the last remaining bone of contention in the Brexit talks, a deal would seem more likely than not in coming days, possibly for a last-minute approval by the UK parliament on December 30. The combination of Brexit nervousness and a thin market and spiking USD yesterday saw enormous volatility in GBPUSD, suggesting traders should mind the volatility risk and consider trading directionally via long options rather than in the spot market. We are concerned that a breakthrough could lead to a more modest sterling rally than many expect, but first things first – deal or no deal?
- Crude oil (OILUKFEB21 & OILUSFEB21) trades lower on concerns that the latest Covid-19 mutation could speed up transmission of the virus and lead to new restrictions on movement, thereby delaying the recovery in global fuel demand. This at a time where Russia has already indicated that they support another increase in OPEC+ production from February on top of the 500,000 barrels/day already agreed for January. Brent support at $49/b ahead of the first major level at $46/b, the 38.2% retracement of the vaccine-led rally from early November.
- Gold (XAUUSD) and silver (XAGUSD) witnessed some wild swings on Monday as lack of liquidity and sharp movements in the dollar and equities off-set support from U.S. stimulus and worries about the latest virus mutation. Silver’s 9% top to bottom swing once again highlighting the risks associated with trading ahead of Christmas and yearend where reduced liquidity often exacerbates the market reaction. Gold needs to hold $1850/oz in order to avoid another wave of profit taking. Copper (COPPERUSMAR21) meanwhile slipped further after reaching a 7-year high while Iron Ore (SCOF1) traded in Singapore gave back most of Monday’s strong gains with the market seeing a limited impact to supply of the weekend accident at a Vale mine in Brazil.
- Treasuries closed unchanged following the rally caused by news of a new strain of Coronavirus (10YUSTNOTEMAR21). Ten-year yields fell 5bps as the market learned about the new strain of coronavirus vaccine. This pushed the price of the 20-year Treasury auction higher, as the yield offered was 1.9bps below market expectations. We expect the US yield curve to resume its steepening as soon as a Stimulus package is passed.
- Gilt yields break and close below support line at 0.20% (GILTLONGMAR21). As the market was wrapping its head around the consequences of a new strain of Coronavirus, the market searched for shelter in the Gilts. Ten-year yields broke their resistance line and fell as much as 8 basis points since the previous close, but stabilized during the afternoon and closed at 0.20%, below the support line. We expect Gilts to continue their rally as a Brexit deal is not reached yet and uncertainty rise amid a surge of a new strain of Coronavirus.
What is going on?
- Apple is planning to build a self-driving car for roll-out in 2024 - sources suggest that the ”iCar”would run on Apple-developed battery technology and is working on its own sensing technology like lidar, while also relying on outside vendors. Given the current pace of the electric vehicle market it seems to be too late for Apple which is likely also the reason behind the muted reaction.
- The Bloomberg Commodity Grains Subindex reached a fresh 2½-year high overnight with the early December correction already a distant memory. Soybeans at a six-year high is once again driving the rally due to strike action and dry weather worries in Argentina, the world’s biggest exporter of soy products. Reuters reporting that more than 100 cargo ships were kept from loading agricultural goods in Argentina on Monday after a wage strike by grains inspectors and oilseeds workers extended into a second week. In addition, Russia is still assessing plans to impose export duties on oilseed and other grain products in order to protect domestic supplies.
What we are watching next?
- US stimulus package signed in Congress, and now a lame duck, disgruntled Trump must approve - normally this would be considered a formality, but President Trump is in a foul mood and continues to lash out at the election result and was in favour of larger stimulus checks. So, there is some modest level of suspense until the deed is done and the $900B stimulus package (and importantly, an additional normal federal budget of $1.4 trillion) is signed into law.
- Brexit situation weighs heavily – the UK position on fisheries has been softened in the latest talks between the UK and the EU, as the UK offered a larger quota than previously and extended the offer on the transition period to five years from three (the EU’s position has been ten). If it is only fishery terms at stake, surely we see a deal, with UK Prime Minister hoping that an emergency parliamentary session planned for December 30 can sign a last hour Brexit deal. Still, trade and travel disruptions are already descending across the UK, with Toyota set to halt plants in the France and UK, grocery chain Sainsbury possibly forced to bring in food shipments via plane and train, and hundreds of lorries lined up at the port in Doer.
Economic Calendar Highlights for today (times GMT)
- 0830 – Sweden Nov. Retail Sales
- 1330 – US Final Q3 GDP Estimate
- 1500 – US Dec. Consumer Confidence
- 1500 – US Nov. Existing Home Sales
- 1500 – US Dec. Richmond Fed Manufacturing Survey
- 2350 – Japan BoJ Meeting Minutes
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