Market Quick Take - December 18, 2020

Macro 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  Markets finished the day at record highs in the US yesterday, but the mood soured overnight in Asia on reports of further US blacklisting of Chinese firms, on the status of the US stimulus package is suddenly looking shaky, and on Brexit talks suddenly stalled again over the fisheries issue. Bitcoin and precious metals posted strong advances yesterday.

What is our trading focus?

  • Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the US equity market was in a fine mood yesterday and pulled to a new all-time high across the major indices, although the mood soured overnight on concerns linked to the status of stimulus negotiations (see more below) and the risk of a US partial government shutdown this weekend if a new stopgap bill is not agreed at minimum. The calendar roll is the perhaps the biggest risk for market volatility.

  • Bitcoin (Bitcoin euro-ETN ticker is BITCOIN_XBTE:xome) surged again yesterday topping $23,500 for the first time before pulling back. This comes after a recent spate of signs of significant institutional interest in investing in the crypto currency space.

  • DAX (GER30.I) - momentum has stopped for now reversing a bit this morning following four sessions of strong gains on better Brexit news and vaccine optimism fueling better than expected preliminary PMI figures across manufacturing and services. The December IFO figures out at 09:00 GMT will impact DAX futures, so this macro release is key for today’s trading range and where the futures in Europe close today.

  • AUDUSD and EURUSD – the AUDUSD corrected sharply since late yesterday after running up to a strong new high for the cycle, a move that was in synch with the changing fortunes for risk sentiment since late yesterday and starts to bump into the first support level around 0.7575, though trend support is more like 0.7450-0.7400 now. The correction in EURUSD was much more shallow, with first support there around 1.2200-1.2175, and where near-term direction is likely set to follow the swings of risk sentiment, as well perhaps as latest status of Brexit negotiations.

  • GBPUSD and EURGBP – GBPUSD managed to advance all the way north of 1.3600 before beating a retreat as it became clear later in the day that talks between the two sides are “blocked” again over the fisheries issue. The short-term price action is impossible on the headline risk, but the fulcrum for GBPUSD is the huge 1.3500 level and for EURGBP perhaps 0.9000 as we await the final shape of the situation beyond December 31, with considerable two-way risk. Expression of a view via long options strategies into early January is one way to maintain a position regardless of the jumpy price action in the interim.

  • Gold (XAUUSD) and silver (XAGUSD) as well as most other commodities enjoy the continued surge in risk sentiment driven by a weaker dollar, U.S. lawmakers making progress towards a stimulus deal and the FOMC strengthened its commitment to supporting the recovery. Silver, up 7% on the week, has led the latest recovery before finding resistance at $26/oz. Gold on track for its biggest annual gain in a decade has paused with $1900/oz the next major level with the focus squarely on the potential tailwind from a weaker dollar and falling real yields.

  • The Bank of England didn’t change monetary policy leaving the yields free to spike in case of a Brexit deal (GILTLONGMAR21). The BOE yesterday played by the book by leaving monetary policy unchanged. As the likelihood of a Brexit deal rise, ten-year yields will rise and might try their resistance line of 0.45%. If yields spike too fast the BOE might step in to slow them down.

  • Alphabet (GOOGL:xnas) suffers fresh anti-trust suit. Just a day after a different move by US states against Google, 38 US states have filed an anti-trust lawsuit against Google. The lawsuit accuses Google of anti-competitive behaviour and abuse of its monopoly on internet search and advertising. Alphabet shares closed down a little less than 1% yesterday and have not participated in the recent run-up in the broader market, although the current share price doesn’t seem to reflect major concern from what is now a third major move by US authorities since late October.

  • FedEx (FDX:xnys) - shares were down 4% in extended trading despite FY21 Q2 EPS of $4.83 vs est. $4.01 and revenue of $20.6bn vs est. $19.4bn as Ground margins were worse than expected due to higher costs related to the holiday season. These higher costs are more temporary and thus margins should improve going forward on the other side of the holiday season. FedEx also plans to raise prices, especially for e-commerce, which is again another sign of rising prices throughout the global supply chain. The company said that it expects its air-freight business to be fully recovered from Covid-19 effects in the next 18-24 months.

What is going on?

  • The Trump administration is set to blacklist around 80 further Chinese companies - and their affiliates, according to reporting from Reuters, who cited people familiar with the move.

  • US weekly jobless claims data weak, November housing activity data strong. Yesterday saw the weakest US initial jobless claims number, at 885k vs. 818k expected and 862k last week, in nearly four months as Covid-related activity restriction likely led to job losses. Elsewhere, the strong November housing starts and building permits data for November (strongest since 2007 for the latter) suggest that the K-shaped narrative is strong, as many struggles with employment while there is an intense boom unfolding in housing as low rates have jolted house prices and new home construction.

  • Cryptocurrency exchange Coinbase files for IPO. The filing is confidentially at this point but has been leaked to the press and could not come at a better time with Bitcoin prices pushing above 23,000 yesterday. The exchange was valued at more than $8bn in 2018 in a financing round led by Tiger Global Management. This is another sign that the entire industry is maturing with the latest signs being active participation in cryptocurrencies by large institutional investors.

What we are watching next?

  • Are we at the beginning of a commodity super cycle? The ongoing ‘everything’ rally on a weaker dollar as well as vaccine and stimulus optimism were particularly noticeable in metals this past week. Leading from the front were industrial metals where HG copper (COPPERUSMAR21) topped $3.6/lb (LME $8000/t) for the first time in seven years. That strength has been filtering through to semi-precious metals, with silver trading up by more than 7% on the week, and finally to gold. Rising demand, especially from China, look set to remain strong in 2021 when the rest of the world emerge from underneath the Covid-19 cloud, thereby raising concerns about available supply following years of under investments. The metals rally in 2020 has been the sharpest in a decade with Goldman Sachs seeing echoes of the spike in early 2000’s when Chinese demand started a near decade-long super cycle.

  • China Central Economic Work Conference – as early as today, we could see China announcing  its growth and policy priorities for the coming year, with its changed attitude toward allowing some state-sponsored firms to fail the most noted change in this cycle. See more in a Bloomberg article.

  • Brexit situation – yesterday's seeming promise that a breakthrough was imminent yielded later to statements from the UK side that Brexit talks are “blocked” as the clock runs out on the calendar year, and both sides are signaling concern that a deal can’t be reached. UK Prime Minister Johnson spoke with EU Commission president Ursula Von Der Leyen late yesterday and after the call said that negotiations are in a “serious situation” with the risk of no deal as long as the EU maintained its “not reasonable” position on fisheries. Is this last-minute theatre or a serious snag? We give up predicting anything, but hard to believe that a stand-off over fisheries will collapse the entire potential for a deal. Stay tuned.

  • US stimulus package status – what seemed a promising move toward agreement between the two sides in the US Senate has now stumbled as the Republicans are seeking to end emergency Fed lending programmes that run out at the end of this year, a move that follows up Secretary of Treasury Mnuchin’s request to end the programmes. The Fed might have been able to restart the facilities without congressional approval if necessary under the new administration, but the Republican side now is looking to require any new start-up of the programmes to require Congressional approval. Democrats are against this move, and other terms of the package are also under discussion, including the size of stimulus checks, unemployment benefits, and whether a moratorium on evictions will be extended.

Economic Calendar Highlights for today (times GMT)

  • 0900 – Germany Dec. IFO Business Climate survey
  • 1030 – Russia Russian Central Bank Key Rate announcement
  • 1330 – Canada Oct. Retail Sale
  • 1610 – US Fed’s Brainard (Voter) to discuss climate change and financial regulation

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