What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures turned around heading lower in late session yesterday with selling pressure seen across biotechnology and ‘bubble stocks’ whereas commodity related and cyclical stocks outperformed. This divergence likely reflects the rising US 10-year yield that is now close to the cycle high since the bottom last year at around 1.15%. Good earnings releases were not enough to bolster equity sentiment and thus it seems we have no established a trading range in Nasdaq 100 futures in the 12,800 – 13,600 range.
EURUSD – the exchange rate is hovering close to the clearly pivotal 1.2000 level, not only a psychological level, but a key resistance point on the way up before broken in December. A bigger reversal would be a move below the 1.1900/1.1890 area, the latter being the 61.8% retracement of the rally wave from early November. One of the drivers for USD outperformance could be the strength in the US economy relative to Europe, which is still bogged down in Covid lockdown mode and how US stimulus plans are seeing a significant rise in US long treasury yields.
EURGBP – given the pivotal situation for the US dollar here in other pairs (most notably EURUSD and the 1.2000 level discussed above), the purer read on sterling will be in EURGBP today over the Bank of England decision on whether a negative rate policy option should be kept in the toolbox (more below on what we are watching next). A clear rejection of the idea of negative rates could see a significant drop in EURGBP that sets in motion a test toward at least 0.8600 and possibly even 0.8500 or lower eventually, while a mixed message could see, and a rate cut could see EURGBP backing badly up into the old range well above 0.9000. We believe the downside offers the path of least resistance, but it really is up to the BoE to make it happen.
Ethereum (ETHEREUM_XBTE:xome) rallied by more than 8 % within the past 24 hours to new all-time highs, although the transaction fees for Ethereum and associated networks are growing as well, making the Ethereum protocol less attractive for applications. Ethereum is, however, in an ongoing upgrade to Ethereum 2.0, which seeks to increase the transaction bandwidth and thus lower the fees.
Gold (XAUUSD) trades below support at $1830 while silver (XAGUSD) is at risk of extending its post-Reddit collapse beyond the 13% seen already. The risk of further silver long liquidation from recently established longs, a stronger dollar as US bond yields resume their ascent the main reasons behind the current loss of confidence. However, bond yields are primarily rising due to the market pricing in higher inflation expectations, thereby leaving real yields – a key driver for precious metals – anchored around a precious metal supportive –1%. Focus on Friday’s payroll data and the prospect for Biden’s stimulus plan. Silver support at $26 with gold looking at $1805 and $1775.
BTPs rally as Draghi accepts the mandate to form a new government (10YBTPMAR21). Ten-years BTP yields closed 6.5bps lower on the day of yesterday as Draghi accepted the mandate to form a new government from President Mattarella. Sovereigns from the periphery also moved higher, allowing Portugal to place €3 billion of 30-year government bonds at a yield of 1.022%. Bids exceeded €40bn breaking historical records. We expect the BTPs to continue to be supported by the pro-European message that Draghi sends, and once he forms a new government, we expect the 10-year yields to break below the historic low level of 0.5%. To learn more click here.
The reflation trade is back and alive with the 5s30s part of the yield curve the widest since 2016 (30YUSTBONDMAR21). The 30-year yields rose above 1.9%, the highest since February 2020, as Senate democrats put stimulus bill on a fast track. The Treasury decided not to issue a bigger volume of longer-dated security during next week’s quarterly debt auction, avoiding more weakness on the longer part of the curve.
PayPal (PYPL:xnas) - shares were up 5% in extended trading after strong Q4 earnings and an outlook that is slightly above market expectations. Q4 EPS was $1.08 vs est. $1.00, and net revenue came in at $6.12bn vs est. $6.09bn. The payment company’s outlook for FY21 is 17% growth y/y on both revenue and earnings. Although the cryptocurrency offering introduced late last year has not contributed meaningfully to results the uptake is huge and 2021 could become important year for the company if the interest in cryptocurrencies remain high throughout the year.
What is going on?
Euro Zone Jan. CPI Inflation estimate far higher than expected - the headline was +0.9% YoY, far north of the +0.6% expected and the core inflation hit a “heady” 1.4% YoY versus +0.9% expected, and thus the highest reading since last 2015. It is difficult to know how much to read into this data point, coming as it does amidst the region’s comprehensive virus lockdowns. Some of the factors, like a reversion in the German VAT at the beginning of the year to its pre-Covid level and a change in the official inflation basket weights, are clear one-offs that boosted inflation for the month, while others, in particular the enormous spike in container shipping prices, may persist - although at multiple of historic norms, it is hard to conceive that shipping prices can continue to rise at anything approaching their recent pace.
Strong US Data released yesterday - US Jan. ISM Services Index rises to 58.7 vs. 56.7 expected and 57.2 in December as the lack of comprehensive shutdowns in the US contrasts strongly with the situation in Europe, where the Services PMI’s for the month were below 50 for a second month. The US ISM Services employment sub-index hit 55.2, suggesting strong employment gains and the highest reading since pre-pandemic outbreak in the US. Likewise, the US Jan. ADP private payroll survey showed a strong increase of +174k vs. +70k and the December number was revised +45k higher.
What are we watching next?
Will the BoE make a firm statement of its attitude on a negative rate policy? Some speculate that the Bank of England is willing to cut rates once more by another 10 basis points to take the rate all the way to zero, but the more important signal the market is looking for today is the Bank’s attitude on negative rates, as today will see an announcement made on the results of an extensive survey on this policy option. Sterling could rally very sharply if the Bank of England clearly drops the idea, while sterling could weaken heavily on a rate cut and clear interest in considering the policy for future use. Something in between could be no rate cut combined with no clear intent to pursue negative rates at this time.
US President Biden trying to fast-track the US stimulus – and much of the original magnitude of the originally planned $1.9 trillion may stack intact as at least one key Democratic vote in the Senate, that of West Virginia’s Joe Manchin, now seems more secure, although he has weighed in against the hike to a $15 federal minimum wage. With the US economy already doing well, a further stimulus could provide an interesting test for markets as the budget deficits required to fund such a stimulus could mean sharply higher long US treasury yields unless the Fed intervenes, not to mention the possible inflationary impacts.
Earnings releases to watch this week
Strong earnings for Q4 continue ending 2020 on a good note despite an ongoing pandemic. Unilever has reported earnings this morning in Europe showing better than expected revenue for Q4 but missing a bit on 2020 figures.
- Today: Unilever, Royal Dutch Shell, Chugai Pharmaceutical, Philip Morris, T-Mobile US, Roche, Merck & Co, Bristol-Myers Squibb
- Friday: NTT, Linde, Sanofi, Estee Lauder, Deutsche Telekom
Economic Calendar Highlights for today (times GMT)
- 1000 – Euro Zone Dec. Retail Sales
- 1200 – UK Bank of England Meeting
- 1330 – US Weekly Initial Jobless Claims and Continuing Claims
- 1500 – US Dec. Factory Orders
- 1530 – US Weekly Natural Gas Storage Change
- 1800 – US Fed’s Kaplan (non-voter) to speak
- 1900 – US Fed’s Daly (Voter) to speak
- 2230 – Australia RBA’s Governor Lowe to Speak before Parliament committee
- 0030 – Australia RBA Monetary Policy Statement
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