Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: Global equities reached another record and Treasury yields rose in early Monday trading with reflation being the focus after Janet Yellen pushed for a robust and quick relief package and coronavirus cases slowed across the world. The dollar traded steady after Friday's slide while the pace of US inflation implied by the bond market rose to its highest level since 2014. Most commodities trade higher with Brent crude oil touching $60 per barrel, corn a fresh seven-year high with platinum leading the metals. Slowdown in Asian activity expected with the Chinese Lunar new year starting on Thursday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures are pushing into new all-time high territory in early trading extending last week’s gains. With US 10-year yields also climbing to just above 1.18% it shows that the market is for now seeing rising interest rates as a growth and inflation trade impacting bonds in the short-term increasing the relative attractiveness of equities. However, at a certain interest rate level, our guess is still that the high growth pockets of the equity market will begin to be severely impacted.
EURUSD – trades steady after Friday’s weak US job report helped send it back above €1.20 and, in the process, carving out a bullish candlestick pattern which may signal a reversal higher. However, the pair is already encountering some resistance at €1.2050, a level that has produced several highs and lows during the past few weeks. US treasury yields from 10-30 years remain a key coincident indicator for the USD and with 30-year testing 2% this Monday, further euro strength may not be that easily achieved.
Crude oil (OILUSMAR21 & OILUKAPR21) continues higher with Brent crude oil touching $60 a barrel for the first time in a year. The strong combinations of tightening supply led by Saudi Arabia’s unilateral decision to cut production in February and March and the prospect for an improved demand outlook with the rollout of Covid-19 vaccines have triggered one of the strongest starts to a year on record. Adding to recovering fundamentals the markets are also seeing continued inflows from macro-orientated funds seeking a hedge against inflation. Having rallied by 70% since the November vaccine announcements and retraced 61.8% of the 2018 to 2020 sell-off, there is now, according to top trader Vitol, a risk of the market “getting ahead of itself in terms of post-vaccine euphoria”. The combined net long in Brent and WTI held by speculators rose 18k lots to reach a one-year high at 698k lots in the week to February 2.
Bailey speeches today and Wednesday may provoke more Gilts selloff (IGLT). Baileys said last week that he sees potential for a consumer spending spree in the second half of the year, however will the central bank be as confident it will happen if Gilts yields continue to rise? Once 10-year yields break above their upper trend line at 0.50%, they will find resistance at 0.65% (for more click here). While yields remain at historic low levels, if they rise too fast, they may hamper the anticipated consumer spree.
Draghi looks likely to have broad political support to form a new government, talks with parties will continue today (BTP10). The spread between the BTP and the Bund is poised to continue to tighten as it seems that Draghi has broad support from parties to form a new government. While the market focuses on 10-year BTPs, the longer part of the Italian yield curve is benefiting the most. 30-year BTP yields tightened around 20bps in just two weeks representing a gain of 4%. We see the 30-year BTP Bund spread to continue to tighten to 120bps as Draghi consolidates his position in the Italian government.
Thirty-year US Treasury yields look likely to test the 2% resistance level ahead of Consumer Price Index data coming on Wednesday (IEF, TLT). The 30-year yields opened the week at 1.99% and are set to rise as Treasury Secretary Yanet Yellen pushed for Biden´s $1.9 trillion fiscal stimulus package on Sunday provoking inflation expectations to rise. The Treasury is issuing 10- and 30-year bonds on Wednesday and Thursday, it is important to understand if demand is supported as investors try to lock in rising yields or if there is indigestion as the yield curve to continue to rise.
What is going on?
Speculators reacted to last week’s dollar strength by reducing their short against ten IMM currency futures and the Dollar Index by 11% to $31.9 billion, a seven-week low. The bulk of the change during the week to February 2 occurred in EURUSD where the combination of longs being cut and fresh shorts added helped reduce the euro net long by 17% to 137k lots (€17.1 bn), the least bullish since mid-November. Changes in the other crosses were muted except for the Swiss francs where speculators increased their net long by 45% and, despite trading a touch lower, the CAD long reached a one-year high.
Position changes in COMEX Silver futures in response to the social media driven rally and subsequent dump was captured in last week's COT report. Producers (miners) increased their net short hedges while speculators (hedge funds) reduced long positions. Swap dealers or banks meanwhile cut their net short by 8% to -19.8k. Overall a week where the major players reacted smartly to an unfounded surge that was not supported by either gold, dollar or yields.
South Africa is halting the of AstraZeneca vaccine against Covid-19. The South African mutation of the original Covid-19, which is the one that is worrying scientists the most, is becoming a serious problem for a successful and quick rollout of vaccines against the Covid-19 pandemic as the AstraZeneca vaccine is cheaper and easier to distribute for many countries. This is bad news and could impact the economic outlook for the global economy in 2021.
What are we watching next?
China PPI on Wednesday for latest read on reflation. With Blanchard, Summers, and Yellen flagging inflation worries over stimulus, combined with last week’s rise in commodity prices across agriculture and energy, on top of bottlenecks in global manufacturing the China PPI figures on Wednesday will be important for inflation expectations. The index climbed to –0.4% y/y in December up from –3.7% in May 2020 and is expected to move into positive in January highlighting that inflationary pressures are building from the world’s largest manufacturing hub.
Earnings releases to watch this week
The Q4 earnings season continues this week with around 120 companies of the 2,500 companies we track during the earnings season reporting this week. The names marked in bold red are the ones, that we believe are most important for overall sentiment or sentiment in a specific segment of the equity market.
Economic Calendar Highlights for today (times GMT)
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