Market Quick Take - February 15, 2021
Summary: Equities closed last week on strong note, with the US VIX measure of volatility closing below 20 on Friday for the first time in nearly a year. US long treasury yields ended the week at new cycle highs and rising yields may at some point prove incompatible with ever rising equity prices, though equity markets are so far brushing off the development. The USD is weak and yen even weaker with commodity - and EM currencies enjoying the most strength.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities closed Friday on a strong note and at new record highs, with the futures market continuing higher still overnight, although the US market will be close today during regular US trading hours to mark the US President’s Day holiday. Reflecting a new level of complacency, the US VIX index closed Friday below 20 for the first time since the pandemic turmoil began rocking the market in February of last year.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - the crypto space had an active weekend, with Bitcoin trading to new highs in a bit to take out $50,000 but failing to do so and trading near $47,000 this morning. Trading in Ethereum has stumbled out of the gates this week as the cryptocurrency dropped below 1,700 at one point overnight before rebounding back toward 1,750. Bloomberg ran a story suggesting Morgan Stanley is considering a Bitcoin investment, and Deutsche Bank is said to be planning to offer crypto custody and prime brokerage.
USDJPY – interesting to note that with a backdrop of a broadly falling US dollar, USDJPY is actually trading higher and thus that the JPY is even weaker in the crosses, suggesting that the yen remains very sensitive here to the sudden further rise in long US treasury yields, which closed the week at a new high for the cycle from 7-years and out the curve and where yields rose further overnight in Asia. A close above the recent 200-day moving average test (above 105.50) would begin to suggest that a new uptrend has been set in motion – again, a dramatic development when the backdrop is one of USD weakness.
AUDUSD and EURUSD – quite a contrast here as AUDUSD shook off momentary weakness and is aiming at new highs for the cycle after a strong close Friday, with strong commodities prices offering a supportive backdrop. EURUSD is also higher, but still below the recent pivot high (1.2190) and far below the high for the cycle above 1.2300, suggesting that the euro is being held back by the higher long US yields (and strong risk appetite, which looks less EUR supportive recently), if not to the degree that yields are keeping the yen down as noted above. AUDUSD traders will look toward 0.8000 and even 0.8100 next if the current backdrop continues, but we have argued that at some point, rising US yields become a destabilizing force for risk sentiment.
Crude oil (OILUSMAR21 & OILUKAPR21) - has following a brief pause on Friday resumed its tightening supply-led rally, now with the added boost from an arctic blast in the US reaching all the way down to Texas to potentially disrupt flows from the Permian, America’s largest shale patch. The blast which according to @NWS has triggered record low readings at more than 100 sites in the central US has also sent demand for heating skyrocketing with spot natural gas prices in Oklahoma surging by more than 4000% since Wednesday. The Henry Hub natural gas (NATGASMAR21) contract meanwhile trades up 4.4% at $3.04/therm. In Brent, the front month spread has surged to a one-year high at $0.58/b, on a combination of tightening conditions and speculative demand.
HG copper (COPPERUSMAR21) and platinum (XPTUSD) - continue higher with speculators increasingly being attracted to markets where the outlook points to tight supplies and strong demand. A tailwind that gold (XAUUSD) currently does not have and which together with the prospect for rising yields is sending a signal of unease. Adding to the current tailwinds for industrial metals are reports that the usual China LNY holiday will be felt less on demand with many factories staying open due to travel bans. Copper reached $3.834/lb, a fresh 8-½-year high overnight with the next major target being $4/lb, the 2012 high.
Reflation trade to test market on Thursday with 30-year TIPS issuance (TLT, IEF). Last week 10- and 30- US Treasuries closed slightly above their pivotal 1.2% and 2% levels. This week it will be important to see if they manage to sustain trading above these levels ahead of the 30-year TIPS auction on Thursday, when demand for inflation hedges will be tested.
European sovereigns from the periphery are entering in a honeymoon after Draghi was sworn in as Italy’s Prime Minister (BT10, IS0P). Spread compression in the periphery will intensify this week as Mario Draghi secures his position as Italy’s Prime Minister after two confidence votes in the parliament. This trend can be intensified by the ECB policy meeting minutes if it emerges that more stimulus is being considered by the central bank.
What is going on?
Former US President Donald Trump acquitted in second impeachment trial - seven Republican Senators voted to convict trump in an overall 57-43 vote in favour of conviction, falling well short of the 67 votes needed for a two-thirds majority. Some argue that the process has damaged Trump’s political power from here, and Republican Senate minority leader McConnell made scathing comments on Trump’s culpability in the Capitol Hill riots in early January even while voting not to convict, suggesting that the Republican party will now struggle to figure out if it can move beyond Trump from here.
Biden administration cites concerns about WHO report on Covid - After the WHO visit to China on Covid origins that did not provide definitive conclusions, the US Biden administration maintains it still has “deep concerns” about the WHO effort, questioning whether it had access to sufficient data, especially on early findings. Biden will speak on Covid at the upcoming G-7 meeting on Friday.
COT on commodities in week to February 9 saw speculators increase bullish bets on 24 major commodity futures by 5% to a fresh record of 2.7 million lots, representing a nominal value of $143.7 billion. Position extremes at or near one-year highs were seen across multiple raw materials from crude oil and products to HG copper, corn, wheat and cattle. A post-pandemic growth sprint combined with tightening supply and continued demand for reflation hedges, helped drive the Bloomberg Commodity index up by 3.1% to a 27-month high.
What are we watching next?
The inflection point at which rising safe haven yields become a problem for risk appetite rather than a reflection for a hopeful outlook – we note above the new highs for the cycle for long US treasury yields on Friday’s close, a development that need not necessarily prove a concern as long as it is a reflection of rising hopes for the growth and the post Covid-vaccination economy. But risky assets have been bid up strongly in this cycle on the strong accommodation measures from central banks, and rising long yields change the multipliers upon which now historically elevated asset valuations are based and represent a de fact tightening of financial conditions. As well, the Covid policy response has dramatically raised the debt levels across developed economies, making our economies that much more sensitive to rising yields – so every trader should tread with caution if yields continue aggressively higher.
Earnings releases to watch this week – earnings season continues apace this week, with a number of interesting names to report this week around the world.
- Today: BHP Group
- Tuesday: CVS Health Corp, Palantir
- Wednesday: Analog Devices, Baidu, Twilio, Shopify, Rio Tinto
- Thursday: Daimler, Walmart, Applied Materials, Roku, Nestle, Airbus
- Friday: Allianz, Deer & Co, Deutsche Telekom
Economic Calendar Highlights for today (times GMT)
- US Holiday Today (President’s Day)
- 1000 – Euro Zone Dec. Industrial Production
- 1000 – Euro Zone Dec. Trade Balance
- 1315 – Canada Jan. Housing Starts
- 1330 – Canada Dec. Manufacturing Sales
- 0030 – Australia RBA Meeting Minutes
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