Market Quick Take - January 6, 2021
Saxo Strategy Team
Summary: US equities and treasuries sold off as the last votes rolled in for the two Georgia run-off elections rolled in, with Democrats looking set to win both seats, but by razor thin margins that will likely require recounts. Any further rise in long US treasury yields would bring with it the risk of rising volatility. In oil markets, a big and independent production cut announced by Saudi Arabia garners respect as oil spiked back higher.
What is our trading focus?
- Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - crypto assets picked up quickly again after the recent stumble at the start of the week, as Bitcoin rose above 35,000 for the first time and Ethereum rose above 1,100 – still short of its record price in early 2018 of above 1,300. JP Morgan yesterday issued a price target for Bitcoin of $146,000 “over time” as the asset grows in popularity as an alternative to gold.
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures have stabilized following the steep selloff on Monday grinding higher with higher lows over the past two sessions. The Georgia two Senate runoffs election counts are mentioned by several sell-side firms and political commentators to tilt towards the Democrats take both seats as there are still many mail-in votes left to count which typically leans Democratic. The Nasdaq 100 futures are selling off by 1.2% as the Democratic sweep could potentially lead to increased regulation of technology companies and higher corporate taxes. On top of that US interest rates are higher on increased likelihood of more fiscal stimulus which are driving down interest rate sensitive growth stocks. The 12,500 level is most likely the key support level to watch for a potential breakout to the downside in Nasdaq 100.
- China A50 (CNF1 – Jan 2021) - momentum in Chinese equities and more broadly emerging markets are extending their gains overnight with the CSI 300 Index futures up another 1% and the China A50 future is up 1.7%. The CSI 300 Index is now at an all-time high while the narrower A50 Index has still not surpassed its 2007 high. The South Korean equity index KOSPI 200 is above 400 up more than 100% from the lows in March 2020 suggesting strong demand for emerging market equities.
- AUDUSD and EURUSD – The US dollar is tilting lower again as the Georgia run-off races for the last two Senate spots are both tilting Democratic. AUDUSD is proving itself a more aggressive method of expressing a weak US dollar view than EURUSD as the former posted a new cycle high above 0.7750 and could be headed to 0.8000-0.8100 in coming weeks if this weak USD trend continues. Meanwhile, EURUSD is also pushing on the highs of the cycle, if with less momentum, above 1.2300, which could set the pair on the path to the 1.2500+ range highs from back in early 2018.
- USDJPY – the USDJPY pair is facing an interesting test here if the traditionally rate-sensitive JPY sees US long yields breaking higher after a long recent period of rangebound and very muted trading below key breakout levels for the US 10-year benchmark (1.00%) and the longer 30-year benchmark (1.75%). Historically, USDJPY has had a high correlation with US long yields. Yesterday, USDJPY closed below 103.00 as it traded in sympathy with the weaker US dollar, taking it to its lowest daily close since last March, when it saw only one daily close below 103.00 during the worst of the Covid-19 panic.
- Crude oil (OILUSFEB21) and (OILUKMAR21) surged higher yesterday after OPEC+ agreed to rollover current production levels and Saudi surprised the market by announcing a unilateral cut of 1 million barrels/day in February and March. WTI returned to $50/b while Brent reached an area of resistance above $54/b. The Saudi move will go a long way to keep the oil market balanced during the coming months as rampant coronavirus outbreaks leads to more lockdowns and reduced mobility. Ahead of EIA’s weekly stock report, the American Petroleum Institute reported a 1.7 million barrel drop in US crude stocks last week but at the same time raised product stocks by more than 12 million barrels. All eyes now on the new virus variant and its potential short-term impact on global fuel demand.
- Gold (XAUUSD) and silver (XAGUSD) trades softer with the Georgia Senate runoff election too close to call. The market had started to price in the prospect for a Democratic win, something that could lead to upward pressure on inflation and interest rates. Overnight the yield on US 10-year Notes broke above 1% for the first time since March. Supporting metals are continued US-China frictions and the softer dollar. Following a strong start to the year, gold has run into resistance above $1950/oz and ahead of $1965/oz, the November high.
- Treasury yields break above 1% pivotal level on expectations of a Democratic Senate (10YUSTNOTEMAR21). The 10-year Treasury yield breaks above the 1% pivotal level as Democrats look on the way to secure the Senate. The 5s30s part of the yield curve has steepened up by 10bps since the beginning of the week. In the meantime, the primary bond market is experiencing high issuance volumes as the corporate world realizes that their refinancing risk is rising with Treasury yields. Now more than ever diversification and the hunt for yield are more important than ever before for US bond investors.
What is going on?
- Georgia run-off elections too close to officially call but seem poised to fall the Democrats. As of this morning, both races are edging in favor of the Democratic candidates Warnock and Ossoff, with the latter race particularly close, but with the pattern of late vote counting from mail-ins seen as likely by the New York Times to deliver the seat to the Democrat. The initial response to this development is risk-negative (kneejerk reaction as Democrats possible move to raise corporate taxes again) and US treasury negative (Democrats seen as in favour of more aggressive fiscal stimulus.) It may take some time for the results to be made official as the margin of victory will be narrow.
- China arrests a US citizen among around 50 others under security law - The arrested individuals included a US lawyer and chairman of the Asian Human Rights Commission who was thought to be involved in helping others that were arrested in organizing an informal primary that drew hundreds of thousands of voters back in the summer. The arrests were said by at least one observer to constitute a “total sweep of all opposition leaders”.
- US Dec. ISM Manufacturing much stronger than expected at 60.7 vs. 56.8 expected and 57.5 in November, surprising consensus, which was looking for a drop. In the sub-indices, interesting developments included the employment gauge rising above 50 again to 51.5, but most of all the Prices Paid number rising to a multi-year high of 77.6, suggesting a sharp rise in price pressures for those surveyed.
- Commodities maintain their strong momentum with the Bloomberg Commodity Index (CMOD:xlon) trading up 9% during the past month. The rally has been led by grain sector which has surged higher by 16% during this time. Corn (CORNMAR21) overnight powering to $5/bu while soybeans (SOYBEANSMAR21) at $13.65/bu have both reached fresh six-year highs. Reasons apart from temporary strike action among oilseeds workers in Argentina being strong Chinese demand at a time where La Nina-related dryness in Argentina and portions of Brazil have cut the production outlook from two of the world's biggest exporters.
What we are watching next?
- Will long US treasury yields break higher and what will be the implications? – US treasuries have traded in an impossibly compressed range in recent weeks – as investors perhaps waited for the new calendar year or the results of the Georgia Senate run-off races before making a move. While, nominally, a break above 1.00% in the US 10-year and 1.75% in the US 30-year, the two clear break out levels for those benchmarks, does not immediately have to have implications, any persistent move higher in long yields represents a de facto tightening of financial conditions and could begin to take the steam out of the housing markets and eventually equity markets for stocks trading at aggressive multiples that only makes sense in an extremely low yield environment.
Economic Calendar Highlights for today (times GMT)
- 0815-0900 – Euro Zone Dec. Services PMI
- 0930 – UK Dec. Services PMI
- 1300 – Germany Dec. CPI
- 1315 – US Dec. ADP Employment Change
- 1400 – UK BoE Governor Bailey to Speak
- 1445 – US Final Dec. Services PMI (Markit)
- 1500 – US Nov. Factory Orders
- 1530 – US Weekly DoE Crude Oil/Product Inventories
- 1900 – US FOMC Meeting Minutes
- 2350 – Japan Nov. Labor Cash Earnings
- 0030 – Australia Nov. Building Approvals
- 0030 – Australia Nov. Trade Balance
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