Market Quick Take - December 14, 2020
Head of FX Strategy
Summary: The week is getting off to a cautious start after a choppy session in the US on Friday and a more distinctly downbeat session in Europe. Looking ahead to the event risks this week, the Wednesday US FOMC meeting stands out as the key event risk, together with prospects for the US stimulus package, and whether the Brexit negotiations are leading anywhere after the two sides decided at the weekend to continue talking.
What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the major US indices traded in choppy fashion on Friday, but managed to pull off the low for the day to close at almost unchanged levels. We continue to look at the 12,000 level and then the 11,500-600 area in the Nasdaq 100 as important technical areas if developments this week for some reason derail market sentiment, which has looked very stretched to the bullish side of late. For the broader S&P 500 index, note that Tesla shares will be added to this index next Monday. The downside levels of interest for this index start at 3,600 and stretch to 3,530-3,500 if a deeper sell-off sets in. Friday’s low was right on the 21-day moving average, currently near 3,628.
- Disney (DIS:xnys) - Disney shares rocketed over 13% higher on Friday to close at an all-time high after the company reported a smaller than expected loss. Helping drive the share price higher, the company noted a huge growth in the subscriber base for its Disney+ subscriber offering, that it would be raising the price of that offering and the roadmap for a slate of new shows based on its Marvel and Star Wars products; the CEO said that 80% of future projects will go to Disney+ over theaters. Disney expects 230-260mn subscribers on Disney+ by 2024 most likely becoming the biggest paid video streaming service in the world.
- AstraZeneca (AZN:xlon) and Alexion (ALXN:xnas) - AstraZeneca reported on Saturday that it is acquiring Alexion for $39bn in a deal in which Alexion shareholders get $60 per share in cash and 2.12 AstraZeneca shares per share which combined is a $175 per share offer or 45% above Friday’s close. The expectation is that the deal will close in Q3 next year highlighting the big regulatory hurdle of large acquisition in the already high concentrated (few companies dominate) health care sector. The deal is obviously a move from AstraZeneca to add growth and a rare disease drug portfolio to its existing business. The combined business will have FY21 revenue of $36.6b and EBITDA of $13.3bn.
- Bitcoin rallied hard this weekend - rising above 19,000 as the focus remains on the 20,000 level that was almost reached at the beginning of this month. A number of stories announcing institutional-type investors showing increasing interest in Bitcoin could be the driver behind the rebound. For example, Massachusetts Mutual Life Insurance company has invested in Bitcoin to the tune of $100 million.
- AUDUSD and EURUSD – the US dollar looks offered and was sharply lower versus the Aussie this week and AUDUSD impressively managed to stay elevated well above 0.7500 overnight despite a steep correction in the price of iron ore, Australia’s number one export. With the break above 0.7400 there, the focus has shifted to 0.8000+, barring some event that dampens sentiment hoping for a global recovery. EURUSD has yet to etch new highs after consolidating in a narrow range capped by the 1.2178 cycle high. Technically, as long as the recent break of the 1.2000 area holds, traders will continue to focus toward 1.2555 - the early 2018 high.
- EURGBP and GBPUSD – sterling will continue to trade nervously until we understand whether the UK and EU are headed toward a deal. Sterling saw a solid relief rally overnight that was partially unwound, but there is significant two-way potential and traders should respect the risks. It seems unlikely that a comprehensive deal can be struck before the end of the year, with the “best” outcome for sterling perhaps some indication that the terms of trade will continue as during the transition period, with negotiations to continue on some key areas next year.
- Gold (XAUUSD) starts the week being stuck in a $1825/oz to $1850/oz range with short-term charts pointing to a 2-3% move on a break in either direction. Continued focus this week on vaccine rollouts, the final FOMC meeting of 2021 on Wednesday and another attempt to get a U.S. relief bill agreed before Christmas. Total ETF holdings slipped again on Friday with sentiment hurt by the general and elevated level of risk appetite seen elsewhere.
- Brent crude oil (OILUKFEB21) and WTI crude oil (OILUSJAN21) start the week bid in response to U.S. vaccine rollouts shortening the route to a recovery in fuel demand. In the Middle East a ship near Saudi Arabia was hit by an explosion highlighting the risk of disruptions. Oil is increasingly being viewed as the cheapest of all reflation assets and with this in mind, the prospect for increased investor appetite, together with a recovery in demand, could propel prices higher in 2021. With this outlook in mind the market views the pandemic as old news and ‘just’ a bump in the road. Monthly oil market reports from Opec today, IEA on Tuesday and OPEC+ JMMC on Wednesday.
- Federal Reserve meeting, stimulus talks and Markit PMI figures to dictate sentiment in Treasuries this week (10YUSTNOTEMAR21). The bond market is looking at the Fed meeting this week and any insight that it may give about the bond purchases program. Right now, the Fed is purchasing bonds at a pace of $80 billion a month, and there are speculations that the central bank will look to increase purchases in the longer part of the yield curve in order to curb the rise in yields. Ten-year yields are already falling, and on Friday they broke the support line of the ascending wedge they were trading since august and they might be poised to fall further if a stimulus doesn’t get agreed upon and PMI figures are weaker amid a second wave of Covid-19 case.
- Spanish 10-year yields closed Friday below zero (BONH1). European sovereigns rallied on Friday as the market was digesting the ECB meeting the day before. Spanish ten-year yields fell below zero and closed the day below that level. In the periphery now only Italy and Greece are offering positive yields.
- Gilt yields continue to fall as uncertainty surround Brexit (FLGH1). Brexit talks are set to continue and there is no specific timeline this time around. Ten-year gilts are opening the week with a yield of 0.16%, and as uncertainty rise, they may continue to fall until they test the 0.1% benchmark bank rate.
What is going on?
- The Commitment of Traders report (COT) covering futures positions and changes made by speculators in the week to December show continued strong vaccine and stimulus optimism led demand for risk. The dollar short against ten IMM currency futures and the Dollar Index reached $31 billion, a ten-week high. In commodities, continued profit taking across agriculture commodities and a big setback for natural gas offset gains in oil, fuel products and metals, both precious and industrials. Overall, the total speculative position of 2.3 million lots across 24 major futures markets is not far from the February 2017 record. More on www.analysis.saxo.
- US election results to be made official today. The US electors will vote today to finalize the result of the US election, which will be closing off all official legal routes for US President Trump to continue challenging the result after the Supreme Court has rejected to hear recent cases advanced by Republicans. Some in the Republican leadership are beginning to call for unity and for the party to recognize the result of the election with their eye on maintaining discipline ahead of the two Georgian Senate run-off races scheduled for January 5.
- Japan Q4 Tankan survey released overnight shows sentiment generally improved far more than expected. The Large Manufacturing Index reading rose to –10 from –27 and vs. -15 expected, while for large Non-manufacturing the reading was –5 vs. -12 previously and –7 expected. Similar improvements in sentiment were seen in smaller firms in both manufacturing and non-manufacturing.
What we are watching next?
- Brexit situation – at the weekend, the two sides decided to continue signaling that negotiations are ongoing even if they remain far apart on key issues, though at this late stage, just over two weeks from the end of the official transition period, one wonders what can be accomplished. Sterling was a bit higher on the open today in early trading hours, but lost much of those gains. UK Prime Minister Boris Johnson said the UK “certainly won’t be walking away from the talks” but continued to signal that his country should prepare to trade on WTO terms.
- FOMC meeting on Wednesday - this is one of the last major event risks of the year that could disrupt the market narrative. After recent disappointing US employment figures, some believe that the Fed will announce an extension of the maturity of its purchases with an eye to guiding long rates lower. So the “hawkish” outcome would be a Fed that keeps its guidance unchanged and instead harps on the need for a more powerful fiscal stimulus to bridge the gap to the post-Covid vaccine recovery.
- US stimulus package status – we are reaching decision time soon on the US stimulus package after a recent emergency funding measure was passed to keep the US government funded this week. A bipartisan group is set to present two versions of a stimulus bill – one of $908 billion that includes $160 billion in state and local government aid spending, and one without those measures.
Economic Calendar Highlights for today (times GMT)
- 0900 – Switzerland SNB weekly sight deposits
- 1000 – Euro Zone Oct. Industrial Production
- Noon – OPEC's Monthly Oil Market Report
- 2000 – New Zealand Q4 Westpac Consumer Confidence
- 0030 – Australia RBA Meeting Minutes
- 0200 – China Nov. Industrial Production
- 0200 – China Nov. Retail Sales
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