Market Quick Take - November 25, 2020

Macro 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  Global equity markets are on course for their strongest single month performance ever, although we do have a few trading sessions left, if not for the US, which is set to go on Thanksgiving holiday tomorrow. Today sees a raft of US economic data releases and the FOMC minutes of the October meeting could possibly send important signals on the December FOMC meeting.


What is our trading focus?

  • Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities are pausing their momentum for now measured by S&P 500 futures, but Nasdaq 100 futures are up 0.3% trading above yesterday’s range heading into an area (12,133) that has previously been a resistance level four times. If Nasdaq 100 can push through this level, there is likely short-term upside driven by momentum traders shooting for a re-test of the previous all-time high.

  • Bitcoin Tracker ETN (BITCOIN_XBTE:xome) and Ethereum Tracker ETN (ETHEREUM_XBTE:xome) - Bitcoin shot past 19,000 yesterday before more two-way price action developed overnight, and Ethereum also consolidated after a move well above 600 yesterday. Retail interest, also among first-time buyers into the crypto space has intensified, with some concerned that we are seeing shades of the late 2017 frenzy in the space. Cryptocurrency exchange Coinbase crashed at one point yesterday as it was overwhelmed with trading activity in the third largest cryptocurrency Ripple, which more than doubled from its Friday close already by yesterday morning.

  • EURUSD – we focused over the last couple of days on AUDUSD for a sign of the US dollar tipping over the edge lower, but the Aussie has been held back a bit, perhaps due to the meltdown in gold. So today we switch focus to the supermajor EURUSD, which closed yesterday at the top of the range of the last more than two months, with 1.1900 clearly a major hurdle to overcome on a daily close for an assault on 1.2000 and beyond.  EURUSD rallied from its post-Covid-19 panic gyrations in the spring and first touched that 1.1900 level already on the last day of July – meaning we have been rangebound for nearly four months. Forward optimism on the global growth outlook would likely rewards the euro more than the US dollar.

  • European banks (BNK:xpar) - European banks are up 42% in just two months driven by a combination of higher rates, lower Brexit uncertainty, good Covid-19 vaccine news and finally the news in Financial Times this morning that ECB is likely to lift the ban on dividends next year paving the way for European banks to attract yield chasing investors.

  • Nikkei 225 (JP225.I) - Japanese equities up 0.6% again today extending the impressive gains in November. However, the magnitude of the push today was scaled back by lack of risk-on moves across other markets with the Chinese CSI 300 Index down more than 1%. The momentum in Japanese equities is a unique story to track and we wrote yesterday a note on the renewed interest for Japanese equities and whether this is a new dawn.

  • EURNOK and USDNOK – NOK has run sharply higher and EURNOK just managed to close at a more than two-month low yesterday below 10.60, possibly opening up a move to the post-Covid panic low of 10.373 and more to the downside, as oil prices have found their stride in recent sessions in rising to their highest levels since the March wipeout. USDNOK likewise broker lower to its lowest level since early September, with that low of 8.66 now approximately coinciding with the 200-week moving average.

  • The energy sector remains on fire and following the first vaccine announcement on November 9, Brent crude oil (OILUKJAN21) and WTI crude oil (OILUSJAN21) have both surged higher by 20%. The stocks of individual oil companies meanwhile have performed even better. Majors like Chevron (CVX:xnys) and Royal Dutch Shell (RDSa:xams) have both added more than one-third. It is however, among independent U.S. oil and gas producers the biggest gains have occurred. The 12 biggest have during the mentioned time increased their market cap by $61 billion or 52%. Optimism that vaccines will drive a sharp recovery in 2021 demand offsetting current weakness. Focus today EIA’s weekly stock report after the API last night reported a 3.8m barrel increase.  

  • Gold (XAUUSD) has paused after reaching our target at $1800/oz, the 200-day moving average. Surging stocks on vaccine optimism and U.S. transition have reduced but, in our opinion, not removed its appeal. Following another big ETF reduction yesterday, total holdings have now dropped by 2.6 million ounces since November 9. Platinum (XPTUSD), given its use in the recovering automobile industry, has moved in the other direction resulting in its discount to gold falling to $840/oz from a $1055/oz high on November 6. Silver (XAGUSD) meanwhile has held its own during the recent weakness with support currently established at $22.90/oz, the 38.2% retracement of the March to August surge.

What is going on?

  • US Treasury Secretary Mnuchin shifting funds taken back from Fed to make difficult for Yellen to access - A key theme that could emerge early in the Biden presidency will likely be how difficult it is for any agreement on fiscal outlays across party lines. Already, the fight is on, as Mnuchin is said to be shifting the nearly half a trillion dollars it has taken back from unused Fed emergency response programs and placing it in the General Fund that would require Congressional approval for its use, meaning incoming Secretary Yellen would be unable to easily tap the funds. At least one official claims that the move is illegal and could be reversed under the Biden administration.

  • US Fed’s Williams and Bullard declared that Fed’s QE program is working well – with New York Fed and Vice Chair Williams indicating that tweaks might be necessary, while St. Louis Fed president Bullard said that he saw no reason to change the program at this point. Tonight’s FOMC minutes will be closely studied for clues on how worried the Fed is about a fiscal cliff at year-end and whether it believes is should do anything to mitigate risks.

  • Tesla market value exceed $500bn for the first time. The inclusion into S&P 500 has unleashed demand for Tesla ahead of the official index inclusion pushing Tesla to become the 7th most valuable company in world. We wrote on Friday that investors should be careful of the speculation that is going on in the electric vehicle industry. This includes Tesla shares.

  • JD Health announces $4bn IPO scheduled for next month. The company is a subsidiary of JD.com and looks to be valued around $29bn. This will be the first test of the Chinese IPO market since the postponement of the Ant Group IPO.

What we are watching next?

  • FOMC minutes out tonight 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 tonight – especially with long Thanksgiving weekend looming.

  • Higher long bond yields are the missing piece in the narrative and could hold the key - if we are looking at a reflationary recovery to develop in the wake of vaccine roll-outs starting already in the coming weeks, the missing piece of the puzzle in the current narrative is a rise in long bond yields, which have otherwise stayed stubbornly rangebound after a brief spike inspired by the Pfizer vaccine efficacy news of more than two weeks ago. Key trigger levels that will change the playing field for all assets start with a move in the US 10-year Treasury benchmark yield rising above 100 basis points (currently 87 bps.).

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
  • Thursday: Deere & Co, Alibaba Health Information
  • Friday: China Gas

Economic Calendar Highlights for today (times GMT)

  • 0930 – ECB to publish Financial Stability Review
  • 1330 – US Weekly Initial Jobless Claims and Continuing Claims
  • 1330 – US Oct. Advance Goods Trade Balance
  • 1330 – US Q3 GDP revision
  • 1330 – US Oct. Durable Goods Orders
  • 1500 – US PCE Inflation
  • 1500 – US Nov. Final University of MIchigan Sentiment
  • 1500 – US Oct. New Home Sales
  • 1530 – US Weekly DoE Crude Oil and Product Inventories
  • 1700 – US Natural Gas Weekly Storage
  • 1900 – US FOMC Minutes

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