Summary: Another strong day for risk-takers as US equities surged strongly yesterday and a strong Asian session brought the US equity futures to within a percent of all-time highs. The most-shorted stock squeeze may have suffered a fatal blow, as did the attack on silver, for now at least. In FX, the US dollar remains firm as EURUSD suffered its lowest close since early December and threatens the important 1.2000 level.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures continue to climb back to the levels from before the sell-off last week, that was induced by the odd balls from short squeezes orchestrated by ‘WallStreetBets traders’, which caused hedge funds to drastically reduce gross leverage in their portfolios. As trade restrictions were implemented in several of the US short squeeze stocks the market stabilised and Nasdaq 100 futures are now back above 13,500 with hedge funds increasing leverage again. Yesterday, our ‘Bubble Stocks’ basket also did very well, indicating that investors are back trading momentum.
EURUSD – the USD rise yesterday saw EURUSD taking out an important local pivot yesterday - the prior 1.2050 area low. This brings into view what many believe is the key trend support in the 1.2000 area, which was also near the prior high of the cycle, and given the EURUSD’s history of sticky trading around big round levels, is also a major psychological support, although the more technical breakdown level is perhaps the 1.1890 area, which is the last major Fibonacci retracement of the rally wave from the early November lows. A breakdown would require a major rethink for the market narrative on the US dollar, as the strong consensus is in favour of a weaker USD this year.
AUDUSD – dropped yesterday as low as 0.7564 on the rather dovish RBA meeting and the stronger US dollar, but managed to bounce back above 0.7600 overnight, likely in part on the ongoing surge in risk appetite, although one important concern for the Aussie, a significant drop in iron ore prices, remains. The 0.7600-25 area is pivotal for the pair as we watch whether this remarkable USD resurgence (not so much for the magnitude of the rise, but rather that it has unfolded despite a powerful surge of strong risk sentiment) continues. Looking lower, if selling resumes, the longer-term uptrend won’t be challenged unless the pair challenges the 0.7400 area.
Silver’s go it alone rally has finished and after failing to break above $30/oz and following a 12% correction it has now found support ahead of $26/oz. Without support from gold (XAUUSD), the rally was doomed to fail given the lack of fundamental reasons for the gold-silver ratio (XAUXAG) moving to a seven-low at this point in the cycle. Having fully retraced the rWallStreetBets inspired rally, the focus now turns to gold and its ability to recover from this week’s strong dollar-led weakness. With 10-year real yields falling back below 1%, a potential line of support has emerged at $1830. Silver traders will also keep an eye on HG copper (COPPERMAR21) which despite Chinas cash crunch and weak PMI has found support ahead of $3.47.
Brent crude oil (OILUKAPR21) and WTI crude oil (OILUSMAR21) trade at the highest in a year, supported by the broader rally in financial markets and reports showing declining stocks in both US and China, the world’s biggest consumers. OPEC+ look set to having drained the global oil surplus by the middle of the year. This after Saudi’s unilateral production cut decision has helped support stable prices through a troubled period of resurgent coronavirus and lockdowns. The OPEC+ Joint Ministerial Monitoring Committee (JMMC) meets today but no decisions on production level is expected before the early March OPEC+ meeting. Focus today EIA’s weekly stock report with API data pointing to another strong draw in crude oil stocks.
Expect BTPs to rise on news that Draghi begins talks with President Mattarella to form a technical government (10YBTPMAR21). Talks between parties to form a new majority led by Conte failed, and today Draghi will meet President Mattarella to talk about the prospects to form a technical government. We expect the BTPs to act positively on the news as Mario Draghi as Italian PM would send a strong pro-European message. The 10-year BTP yields could dive between 12 and 19bps, while long maturities will benefit the most. To learn more click here.
Amazon (AMZN:xnas) and Alphabet (GOOGL:xnas) - both companies delivered very strong results yesterday as expected and formulated in our earnings preview from this Monday. Amazon delivered a 5% revenue surprise highlighting the strong demand for e-commerce and cloud services. Alphabet’s revenue also surprised by 5% and driven by strong online advertising spending.
What is going on?
China Jan. Caixin Services PMI disappoints with weakest reading in nine months - the independent survey was out with a reading of 52.0 vs. 55.5 expected and 56.3 in December, marking a sharp deceleration and the weakest reading since April of last year. This confirms the drop in the official “non-manufacturing” survey which likewise dropped sharply for January to a reading of 52.4. Some of the slowdown may be attributable to restrictions on travel linked to the response to virus trouble spots in China in January.
Alibaba is looking to issues $5bn worth of bonds this week after the company posted a revenues gain (BABA). The company has been looking to issue bonds since the beginning of the year but talks stalled when Jack Ma went out of sight. After the revenue gain of last quarter, the company resumes its plan to issue $5bn bond sales in various tranches with the longest maturity being 40 years and some will be sustainability bonds for eligible projects.
What are we watching next?
Will a rising US dollar and/or US yields act to slow recent risk sentiment surge? It has been unusual to witness a surge in global risk sentiment at a time when the US dollar has also rallied notably, although the rise has not been particularly sharp, about 2% depending on the measure of the US dollar. But if this extends further, the rising cost of the world reserve currency could begin to slow market confidence as it represents a tightening of liquidity. So too could any further rise in long US yields, which have inched back toward cycle highs and could represent an even greater risk of a setback for risk assets if yields rise sharply as they did in the first week of the year.
Big week ahead in the earnings season with Amazon, Alphabet, and Alibaba
Strong earnings from Amazon, UPS, and Alphabet (Google) yesterday bolstered equity sentiment and helped push Q4 EPS in the MSCI World Index into positive growth y/y. In other words, aggregate corporate profitability is now back above levels from before the pandemic. Today the most important earnings release to watch is from PayPal. Read this week’s earnings preview here.
Economic Calendar Highlights for today (times GMT)
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
