Market Quick Take - February 18, 2021
Saxo Strategy Team
Summary: The US equity market saw a choppy session yesterday that ended with a modest decline, with the mood remaining cautious overnight as China came back online from its long holiday. The Chinese CSI-300 Index gapping higher at the open but sold off steeply from the highs on the day. US yields declined on the day despite a blowout US Retail Sales number for January, clearly driven by the latest round of stimulus checks.
What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities sold off somewhat badly in early trading before trying to right themselves by the end of the day, with mixed success, as the S&P 500 nearly managed to scrape back to unchanged on the day while the Nasdaq 100 ended the day with a small decline. The action was a bit downbeat overnight. The major US indices have posted a strong February thus far, and the focus could remain on the upside as long as the 21-day moving averages remain intact – for the S&P 500 Index this comes in near 3,853 and for the Nasdaq 100 the not-so-distant 13,480.
- Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin and Ethereum are riding higher, with the latter pulled up by Bitcoins strong price action as the 1,800 area finally gave way more forcefully and the coin traded north of 1,900 overnight before settling back slightly. BItcoin managed a surge all the way above 52,000, and BlackRock’s Rick Rieder was out hinting an increased interest for Bitcoin. The crypto currency exchange Coinbase is said to be readying an IPO, with coindesk.com reporting that the company share prices trading on the Nasdaq Private Market indicate the company is currently valued at $77 billion.
- EURUSD - sold off steeply yesterday and within sight of the important 1.2000 level even as the rise in US yields was tempered later in the day. That 1.2000 level looks important as a structural support for the bearish USD case, at least in the EURUSD context, and a break could point to a return to the 1.1600-1.2000 range, possibly on the US leading Europe in post-Covid recovery, or more cynically, if risk sentiment suffers a setback in the near term.
- AUDUSD - bounced back from a weak couple of sessions late yesterday and overnight as Australia reported solid jobs data and iron ore futures in China ripped strongly higher as the country returned from its long holiday. The pair is trading back toward the top of the 0.7800+ zone established in the first week of this year, but the directional risk looks distinctly two-way, with more strong risk sentiment needed to send the currency over the top. As well, AUD is strongly bid in the crosses like AUDNZD, AUDCAD and AUDJPY, suggesting it could prove one of the highest beta currencies to swings in sentiment here. There is a lot of range to work with before a downside break becomes a concern starting in the 0.7600 area.
- Gold (XAUUSD) - found support as yields retreated on dovish FOMC minutes and stock market weakness. It remains precariously close to critical support at $1765/oz highlighted in our latest update. In it we focused on why gold, the most interest rate sensitive metal and hard asset, has been struggling with the combination of rising yields and a stronger dollar. Yesterday’s very strong US retail sales further strengthened growing market fears that the Federal Reserve may move on rates sooner than previously expected. Below $1765/oz the market will focus on $1725/oz, the 38.2% retracement of the rally that began back in August 2018. A death cross where the 50-DMA trades below the 200-DMA has emerged for the first time since June 2018.
- Crude oil futures continue higher as the US energy crisis becomes deeper and longer lasting. The brutal cold blast that hit key production facilities and refineries in and around Texas is now estimated to have cut oil production by 40% or more than 4 million barrels per day. The supply shock, one of the biggest that has ever hit the US, is helping to tighten to market further with the Brent crude oil prompt spread now trading at 85 cents as buyers bid up cargoes from the North Sea. Ahead of today’s delayed stock report from the EIA, the API added further support after saying that US crude oil stocks slumped by 6 million barrels last week. Increased focus now on OPEC+ with the market looking for a decision to increase production when they meet in early March.
- Copper (COPPERUSMAR21) - has raced through $3.90/lb ($8500/tons on LME) as Chinese traders returned from holiday. Growing demand as the green transformation gathers momentum, tight supply and the recovery of economies from the coronavirus crisis are the reasons why banks increasingly have raised their 6-12 month's forecast to $10,000/tons, which would see HG copper reach the 2011 record high at $4.65/lb.
- Shopify (SHOP:xnas) - suffered a very volatile session, ending the day down over 3% but suffering intraday losses of more than 8% at one point. This came after an earnings call before the opening, in which the company beat Q4 EPS estimates, but warned that the pace of growth would slow in 2021.
- Strong retail sales revert Treasury gains (TLT, IEF). Following stronger Retail Sales and PPI data, Treasury reverted the daily gains and hit a new high at 1.33%. Yields slowed their rise following the FOMC minutes, in which it was stated clear that FED officials are not considering reducing economic support for some time to slow down the selloff in US Treasuries. Today, the US Treasury will issue 30-year TIPS and it is key to understand whether the market will seek inflation hedge despite real yields have been rising with nominal yields in the past few days. For more information about key levels on nominal yields, click here.
- Gilts tighten as Bank of England official say that there is room for further easing (GILS). BOE speaker Ramsen said that there is headroom to increase QE, this sent Gilts higher reverting some of the losses of the past few days. Ten-year Gilt yields closed 5bps lower at 0.57%. Yet, the auction of 2035 gilts was weaker than the previous one with a lower bid/cover ratio despite yields were 25bps point higher.
- Draghi won the confidence vote at the senate (BTP10). Draghi outlined an ambitious policy plan which was approved. It is a pro-European message of integration, in which he highlighted the need for a common EU budget. The former president of the European Central Bank has also highlighted the need of a reform for the tax system. BTPs will resume their spread compression vs the bund as he’s secured the confidence vote in the lower house.
What is going on?
- US Retail Sales post very strong (seasonally adjusted) gains in January - with the month-on-month figure showing a stunning gain of 5.3% month-on-month from December, and even more in ”ex Autos and Gas” terms. Headlines would suggest that this was driven by the latest round of stimulus checks, but Wolf Richter over at wolfstreet.com points out the enormous seasonal adjustments in play in this data series and that the large apparent negative surprise in December and apparent upside surprise in January largely balance out when seasonal adjustments are removed.
- Yields saw some relief yesterday as FED Minutes was as dovish as they get: Fed officials see economy “far from where it need to be” - indicating easy policy will not change anytime soon. Specific mentioning of: “Broad and inclusive” labor market recovery and inflation up to at least 2%, closing with: it “will take some time for substantial further progress to be achieved” - A cementing of their full employment mandate and zero concern about running the inflation hot, which to us continue to indicate that FED, again, will be late to the reality of the economy. We still see 150 bps in 10 Y US government as our first target.
- The Biden administrations attempt to “go big” on corona bill is hitting some trouble as Senator Manchin, the unique conservative Democratic Senator from West Virginia (Trump territory) and the rainmaker in the Senate continues to support the Byrd rule, which means President Biden and the Democrats can’t use simple majority to add significant policy measures like the big minimum wage hike to the planned stimulus bill. The fast-track “Reconciliation” tactic could see the passage of straight stimulus measures by a simple majority vote, but a minimum wage hike and other significant legislation would need the 60 vote super-majority. The market still sees a $1.5 trillion USD bill as the most likely, but there is now increase chance of diluted deal.
- There is further sign of reflation from the shipping market where the Baltic Dry Index is up 36% since early February, trading at $1756 (link). This further shows how supply chain and the overall theme of: Physical world too small for digital/online success. We continue to monitor these B2B inflationary pressures as they could accelerate the consumer inflation come summer and force FED hand by Q4-2021.
- Pfizer says South Africa Covid variant could significantly reduce vaccine protection. This is the “new scare” for health authorities globally. Studies from Pfizer Inc/BioNTech shows it may reduce antibody protection by two-thirds.
What are we watching next?
- US yields and risk appetite – there were no new hints to go on from the Fed’s latest batch of meeting minutes late yesterday to point to their next policy steps, the Fed is on an almost dogmatic path which will lead to a policy mistake. The market is increasingly realising that the Fed always is late and that market always leads and forces the Fed to react, hence interest rates (and inflation) will overshoot first, then FED will come with YCC, Yield Curve Control and other measures. We don’t see FED reacting before Q4. Overall, a weak spot gold (XAUSD) and higher bond yields keep us defensive on risk here.
- The Robinhood, Reddit hearing on the Committee on Financial Services of the United States of Representatives – it will start at noon Eastern Time. The impact of course a look at further potential regulation and the further insight into “network effect” on trading.
- Turkey Central Bank Interest Rate Announcement – consensus is that the Turkish Central Bank will leave rates alone at the very elevated 17.00% level as the country has seen success in stabilizing the Turkish lira (TRY) to as low as sub-7.00 levels in USDTRY terms recently. That 7.00 level was a major level that Turkey tried to defend on the way up and USDTRY trades right on it today coming into today’s meeting - and the central bank may want to see further progress in TRY to the upside before signaling an easing of policy.
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: Daimler, Walmart, Applied Materials, Roku, Nestle, Airbus
- Friday: Allianz, Deer & Co, Deutsche Telekom
Economic Calendar Highlights for today (times GMT)
- 0830 – Sweden Jan. CPI
- 1100 – Turkey Central Bank Announces Policy Rate
- 1230 – Euro Zone ECB Meeting Minutes
- 1300 – US Fed’s Brainard (Voter) to speak at climate summit
- 1330 – Canada Jan. Teranet/National Bank Home Price Index
- 1330 – US Jan. Housing Starts and Building Permits
- 1330 – US Weekly Initial Jobless Claims / Continuing Claims
- 1330 – US Feb. Philadelphia Fed Survey
- 1500 – US Fed’s Bostic (Voter) to Speak
- 1530 – EIA Natural gas storage change
- 1600 – EIA Weekly Petroleum Status Report
- 1800 – US Treasury Auctions 30-year Inflation-protected Bonds
- 2330 – Japan Jan. National CPI
- 0001 – UK Feb. GfK Consumer Confidence
- 0030 – Japan Feb. Flash Feb. PMIs
- 0030 – Australia Jan. Retail Sales
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Quarterly Outlook Q2 2022
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