Market Quick Take - November 24, 2020

Macro 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  Markets had a jumpy session in the US, after strong US initial November PMI data surprised the market and sent gold tumbling lower. Equities were not sure what to do with the news, celebrate the strength or fret the lack of stimulus? Later, however, equities rushed higher in very late hours after Trump instructed a key agency to prepare for a presidential transition.


What is our trading focus?

  • Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities continue to rally on renewed economic optimism with the strong November PMI figures in the US yesterday extending on the positive export news from South Korea. This suggests that the economy is resilient despite the rising Covid-19 cases and we guess that is why investors are renewing their pro-cyclical and value bets this week. This is evident from the fact that the S&P 500 futures are again leading Nasdaq 100 futures. The 3,607 level in the S&P 500 futures are the next critical resistance level which if taken out will open up for a new retest of new all-time highs.

  • Bitcoin Tracker ETN (BITCOIN_XBTE:xome) and Ethereum Tracker ETN (ETHEREUM_XBTE:xome) - interesting that crypto assets remained quite stable and even positive yesterday even as gold suffered an ugly correction. The second largest crypto-currency Ethereum has recently been stealing headlines with its performance, which has rallied some 25% since last Thursday - see more on the Ethereum 2.0 upgrade here. Bitcoin and other crypto-assets are benefitting from renewed talks about inflation and debasement of currencies with several well-known institutional investors arguing for having some Bitcoin in the portfolio.

  • AUDUSD – a roller coaster ride yesterday for this currency pair – even if all of the action was still within the recent trading range as first the strong US PMI data tipping gold lower and bonds higher saw AUDUSD correcting lower, before the celebration of the news that Trump has taken a significant step to conceding the US election result boosted all things positively correlated with risk sentiment. The AUDUSD has traded in a very narrow range for over two weeks now as bulls wait for the signal that a 0.7400+ break is unfolding that can shift the focus perhaps all the way to 0.8000+ if the USD is set for a major weakening move. The first order of business would be a close above the thrice-tested 0.7340 area.

  • GBPUSD and EURGBP – GBPUSD is trading below 1.3350 this morning, after trading yesterday near 1.3400 and at its highest level since a brief spike to nearly 1.3500 at the beginning of September, and EURGBP has dropped to the lowest portion of the range since the spring, below 0.8900. After passing a number of supposed deadlines in the Brexit negotiations, UK Prime Minister Boris Johnson is set this week to speak to EU Commission President Ursula von der Leyen to pave the way for a deal both sides believe is within reach. Sky News reported that EU officials think a Brexit deal is 95% done. A breakthrough in negotiations could come any day and spark a considerable GBP surge, although implied volatility for 3-months and beyond in the options market has been dropping steadily for weeks.

  • Gold (XAUUSD) has weakened to a four-month low overnight following yesterday's slump below key support at $1850/oz. While the break was triggered by strong U.S. PMI data sending the dollar higher, gold and silver was already trading on the defensive with continued vaccine news taking its toll on sentiment. Total holdings in ETF’s dropped 344k oz yesterday and has since the November 9 announcement from Pfizer seen total outflows of 2 million ounces. Next key level and a potential target for this sell-off is the 200-day moving located just below $1800/oz.

  • Yellen appointment as Treasury secretary might boost Treasury yields (10YUSTNOTEDEC20). The former Fed Chair will be the first woman to hold the position. We expect her to be in favor for more easing, which should help the Fed’s agenda. As emergency spending rises, we can expect Treasury yields to move higher as well as reflation trade picks up.

  • Lagarde and Rehn speeches today might set sentiment for the periphery (10YBTPDEC20, FBONZ0). Rehn spoke about how “irresponsible” is the behavior of certain countries against the recovery fund. The central bankers’ speeches today might shed some more light about the ECB’s December stimulus, which might ultimately give a boost to the periphery.

What is going on?

  • The energy sector has emerged as one of the biggest winners since Pfizer/BioNTech started a chain of vaccine announcements on November 9. Having been the hardest hit due to the pandemic-led slump in fuel demand, it is also a sector that stands to benefit the most from a vaccine driven reopening. While crude oil, up 15% since November 9 still requires support from producers curbing production, company stocks and related ETF’s have surged higher. Examples are XLE:arcx (32%), XOP:arcx (40%), CVX:xnys (28%), RDSa:xlon (29%), COP:xnys (46%) and OXY:xnys (57%).

  • New Zealand government proposes adding house prices to RBNZ’s remit - with property prices overheating in New Zealand in the wake of the RBNZ chopping the interest rate to 0.25% and launching a QE program, the NZ finance minister Robertson said today that he had written a letter to RBNZ governor Adrian Orr that asked him to consider adding house price considerations to the RBNZ’s remit. Orr responded that house price stability is already a consideration in its monetary policy deliberations. Sources quoted in a Bloomberg article argue that no central bank has housing prices as a formal consideration in its remit. The NZD bounced some 0.5% against the AUD before the price action settled on the news as this suggests the RBNZ is in a bit of a hot seat after moving so aggressively in its pandemic response.

  • Former Fed chair Janet Yellen to be chosen as next Secretary of Treasury – She has been the odds-on favourite for this cabinet post and sources indicate Biden will announce her nomination today, as well as naming other Obama-era hands to a number of other key posts, including John Kerry (2004 presidential candidate and Obama’s Secretary of State in his second term) to a new position as Special Envoy on Climate. Janet Yellen specialized as labor economist and is thought to be highly concerned with inequality and climate change, while not a particularly controversial pick for Wall Street banks. As well, if the era of central bank independence is drawing to a close, having an experienced Fed official in the presidential administration makes coordination between government and the Fed that much easier.

  • US President Trump takes major step toward conceding election defeat by instructing a key agency to start a formal transition process and cooperate with president-elect Biden’s team, even while he continued to claim that he would fight on in challenging the election result. The move came after nine Republican senators called for allowing a transition to proceed and hours after the state of Michigan certified its election result.

  • DAX has decided to increase the index from 30 to 40 members. This is the biggest change since 1988 and the change also comes with stricter rules on membership as a result of the Wirecard scandal. A new rule is to mandate a new index member to have two years of profitability. This rule would have prohibited Delivery Hero to have overtaken Wirecard’s index membership as the company has never been profitable.

What we are watching next?

  • FOMC minutes to contain any hints for December FOMC meeting? With many at the Fed concerned on the risk that the beginning of 2021 could see a fiscal cliff due to the expiry of some portions of the emergency response to the Covid-19 outbreak, many believe that the Fed will signal that it is willing to act. Regardless, the market could prove reactive to the minutes tomorrow – especially with long Thanksgiving weekend looming.

Earnings releases this week are slowing down as the Q3 earnings season is coming to an end. This list below shows the most important companies reporting this week.

  • Today: Agilent Technologies, Xiaomi, Compass Group, Medtronic, Analog Devices, VMWare, Autodesk, Dell Technologies, Alimentation Counche-Tard, HP, Best Buy, Hormel Foods, Dollar Tree
  • Wednesday: Deere & Co, Alibaba Health Information
  • Friday: China Gas

Economic Calendar Highlights for today (times GMT)

  • 0900 – Germany Nov. IFO Survey
  • 1400 – ECB President Lagarde to Speak
  • 1400 – US S&P CoreLogic House Price Index
  • 1500 – US Nov. Consumer Confidence
  • 1600 – US Fed’s Bullard (Non-voter) to Speak
  • 1700 – US Fed’s Williams (Voter) to Speak
  • 1745 – ECB Chief Economist Lane to Speak
  • 2000 – New Zealand RBNZ to publish Financial Stability Report

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