What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity volatility has come down from the first couple of trading days and the recent trading sessions have seen little action in the broad indices. Nasdaq 100 has reversed from yesterday’s selling trading just below 13,000 which is the big psychological level for US technology stocks. With the US 10-year yield down yesterday the whole interest rate sensitivity discussion related to growth stocks has been put on standby for now. S&P 500 futures are trading above 3,800 again this morning with the 3,815 level as the key breakout level to the upside.
- AUDUSD and EURUSD – the US dollar was pushed back lower yesterday, perhaps in part due to some Fed officials pushing back against talk of tapering asset purchase (see more below), with EURUSD pulling back above 1.2200 and AUDUSD recovering the majority of its losses from the 0.7800+ top. The rally puts in an important pivot support for these and other USD pairs – for these two, the Monday low of 1.2132 in EURUSD and for AUDUSD, the Monday low of 0.7666. EURUSD has a bit more work to do to get back on the rally track as it trades below the 21-day moving average this morning of 1.2230. US yields are an important focus after the 10-year yield topped out and rolled over yesterday on a reasonably strong US 10-year auction result.
- GBPUSD and EURGBP – sterling firmed sharply after Bank of England Governor Bailey pushed back against negative rates yesterday, with GBPUSD rallying all the way back to within reaching distance of the cycle highs as the US dollar also weakened. That high of 1.3704 will be the focus, as well as whether the broader USD bear move is set to return. Other sterling pairs suggest it is also about whether isolated sterling strength is set for a major breakout as EURGBP closed at its lowest level since November, where the range low stretching well back into 2020 comes in at 0.8861.
- An already buoyant grain market received a fresh boost yesterday after the US Department of Agriculture lowered by more than expected its forecast for global supplies. The monthly world supply and demand report (WASDE) was outright bullish after the report lowered supplies next September for soybeans and especially corn, thereby raising worries about shortages in 2021. Corn (CORNUSMAR21) trades up 8% on the week after surging past $5/bu while soybeans (SOYBEANSMAR21) broke above $14/bu, both reaching fresh seven-year highs. Wheat (WHEATUSMAR21) also near a seven-year high rallied on the prospect of Russia tightening export restrictions to safeguard its food supplies.
- Strong demand in Treasury auction slows down rise in yields, today the Treasury will sell 30-year bonds (10YUSTNOTEMAR21, TLT, IEF). Yesterday selloff in US Treasuries slowed down as investors flocked 10-year note sales. Before the auction 10-year notes touched 1.18%, just 10 basis points off March’s high. After the Treasury auction, the US benchmark continued to rally and closed the day with a yield of 1.13%. Today, the Treasury is going to sell $24bn 30-year bonds, which are currently trading at 1.86% after having touched 1.91% yesterday before the 10-year auction.
- Italian BTPs sell-off might continue as the government is risking to fall this afternoon (10YBTPMAR21). The Italian yield curve moved up yesterday as a government crisis looks more and more likely. Ten-year and 30-year BTP yields moved up by 8.5bps and 9bps respectively. We believe that Matteo Renzi's threats to pull out from the government are not credible, and even if the government fall, Conte will be able to form a new coalition without his junior ally. The current selloff in Italian sovereigns might represent the perfect buy opportunity for investors in order to enter cheap and benefit from further tightening caused by ECB policies.
- Plug Power (PLUG:xnas) - shares were up 22% yesterday on the news that the company has entered a joint-venture with Renault to make hydrogen delivery vans with production set to start in early 2022, but also the fueling infrastructure. The move extends the strong momentum this year that has been fueled by strong sentiment for green stocks and especially those with exposure to fuel cell and hydrogen technology. Plug Power recently announced a $1.5bn strategic investment from South Korean SK Group.
- Zoom Video Communications (ZM:xnas) - shares zoomed 6% higher yesterday after starting the session down due to the initial reaction to the company’s $1.75bn offering of new stocks priced at $340 per share. The company had $1.87bn in cash and equivalents as of 31 October 2020, so the company does not need the capital for operations as Zoom has delivered positive free cash flow of $1.04bn in the past 12 months. While the news has been thin on that the company plans to do with the capital our guess is it is to fund acquisitions and aggressive development ramp-up to expand the offering from video communication in order to compete with the major software companies.
What is going on?
- Crude oil (OILUSFEB21 & OILUKMAR21) continues its longest run of gains in two years on a combination of Saudi production cuts and frigid temperatures in Europe and especially Asia raising demand for fuel as a substitution to surging LNG prices. In Asia, spot LNG prices have surged past $30/mmBTu, a more than ten-fold increase from last April. While the pandemic continues to weigh on demand from a mobility perspective, the surge has triggered substitution demand for fuel products such as diesel towards heating, potentially by as much as 1 million barrels/day (Source: Goldman Sachs). Combined with an expected drop in US crude oil stockpiles according to the API, the market has been given enough fuel to drive the price higher.
- Some Fed officials push back against taper talk - after the FOMC minutes saw one mention of tapering and two Fed officials (Bostic and Harker) recently talked up the potential for a tapering, or reduction, of Fed QE purchases as soon as later this year, a number of other Fed officials pushed back against the notion of tapering yesterday, including the non-voting regional Fed Presidents James Bullard, who wanted to see the economy post pandemic before any talk of purchase reduction, Esther George, who said it was “too soon to speculate”, and Eric Rosengren, who wanted a stronger economy first.
What are we watching next?
- US CPI on tap today – while the Fed does focus on the PCE inflation indicator for its measure of inflation, the official CPI release comes out earlier in the month and all inflation gauges will be worth closing tracking in coming months to see if the market’s fears of increasingly negative real rates is borne out with a rise in inflation while the Fed remains committed to keeping the policy rate at zero and allowing the economy to “run hot” as long as employment levels remain below their pre-pandemic peak. The year-on-year comparisons get far more interesting in Mar-Apr due to basing effects of the crash in prices brought on by the pandemic. For the December figure, the headline inflation is expected to rise 1.3% YoY and 1.6% ex Food and Energy versus 1.2%/1.6% in November.
- Will US Congress impeach Donald Trump? - the lame duck president is defiant and his VP Pence has declared that he won’t invoke the 25th Amendment to remove the president from office. Several senior House Republicans are in favour of impeachment, even if a straight party vote in the House could see him impeached. The Senate is more important as 17 Republican Senators would have to vote to convict the president and send him to a trial. Sources report that Senate majority leader McConnell is in favour of conviction. If he is convicted, this will likely matter more for Donald Trump’s political future and whether he will be able to run for office again rather than that he will be removed from power in the final days of his presidency.
- Chinese Trade data for December up tonight – and could continue to show how the stimulus from the pandemic response continues to provide a profound boost to China’s exports. In November, exports rose 21.1% year-on-year, while the December number is expected at +15%. The import side of the equation has not seen similar growth, in part due to the collapse in some commodity prices last year, although that situation is rapidly changing. China posted a record trade surplus of $75 billion in November.
- Q4 2021 earnings season starts this week. Q3 2020 earnings season was the big comeback for corporate earnings and the market expect the momentum to continue in the Q4 earnings season. Friday is the most important day when JPMorgan Chase, Citigroup, and Wells Fargo report Q4 earnings and more importantly provide the market with an update on loan losses and the US economy.
Economic Calendar Highlights for today (times GMT)
- 0900 – ECB President Lagarde participates in Q&A
- 1000 – Euro Zone Nov. Industrial Production
- 1330 – US Dec. CPI
- 1430 – US Fed’s Bullard (Non-voter) to speak
- 1430 – US Fed’s Kashkari (Non-voter) to speak
- 1530 – US Weekly Crude Oil and Product Inventories
- 1800 – US Fed’s Brainard (Voter) to Speak
- 1900 – US Fed Beige Book release
- 2000 – US Fed’s Clarida (Voter) to discuss Fed’s new policy framework
- 0200 – China Dec. Trade Balance and Export/Import figures
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