What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures pulled to strong new record highs on Friday, with the Nasdaq 100 closing above 13,000 for the first time and the S&P 500 closing well north of 3,800. Given the bout of consolidation before this latest surge, this moves the first tactical support for this move higher to perhaps that 13,000 level for the Nasdaq 100 and perhaps 3,750 for the S&P 500.
- Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - crypto assets suffered a ferocious bout of volatility as Bitcoin corrected as much as 20% overnight from last Friday’s highs, and likewise Ethereum corrected by a similar amount. A major European broker of leveraged contracts on crypto assets demanded that clients post 100% margin by late yesterday, which coincided with some of the volatility.
- AUDUSD and EURUSD – the US dollar snapped back to the strong side in the latter half of last week and the culprit seems clearly the rise and breakout in long US yields, which has proven more aggressive than yield rises elsewhere, particularly European yields. There is plenty of room for further USD consolidation within the context of the overall downtrend, so as long as EURUSD stays north of the 1.2000 level (there is also an important Fibonacci retracement level around 1.2060) the bullish technical case remains intact there, while AUDUSD traders will want the 0.7500 area to hold (still quite far away, first area of support is 0.7600-25), but especially the 0.7400-25 level that was the resistance on the way up.
- USDJPY – the USDJPY pair is often the most sensitive to moves in US yields and traded well above 104.00 overnight, still within the descending channel, but crossing above the key 104.00 level, which distracted traders in previous months on the way down. If US yields extend higher, the USDJPY could threaten a breakout of the channel if it trades above 104.50, which could set in motion a squeeze on JPY positions.
- FTSE 100 (UK100.I) - the index best positioned for the reflation due to its high index weights in energy and materials sectors is struggling a bit this morning with the rest of emerging market equities and a small decline in US interest rates. On the positive side, China PPI y/y in Dec beat expectations and is now at the highest level since the pandemic started indicating further price pressures in the economy which is good for the FTSE 100 and the reflation trade.
- Gold (XAUUSD) and silver (XAGUSD) both trying to stabilize following the biggest drop in two months on Friday after hopes for large stimulus helped send bond yields and the dollar sharply higher while the US stocks hit another record high. Markets got caught off-guard following a strong start to the year and once the key $1900/oz got broken algo driven momentum strategies took over to send the price sharply lower. With inflationary pressures still building the run up in yields are likely to only have a short-term negative impact on precious metals. Having broken the uptrend from the December low, gold needs to find support (not close below) $1840/oz, the 61.8% retracement and 200-day moving average. Resistance (using Fibo’s) at $1871/oz and $1888/oz.
- Busy week for the bond market might push US 10-year Treasury yields as high as 1.20% (10YUSTNOTEMAR21). The focus this week will be on inflation and retail sales data as well as Treasury bond auctions for 10-year notes on Tuesday and 30-year bonds on Wednesday. However, Federal Reserve’s speakers might be the reason yields will continue to rise as tapering is further mentioned, starting with Bostic today. Bostic said last week that if the economy gets stronger the Fed might taper earlier than expected. Last week 10-year Treasury yields closed on the upper resistance line at 1.11% and if they break this level, they will find next resistance at 1.20%.
- There might be more upside for Gilts as negative interest rates are being discussed (GILTLONGMAR21, GILS). A Brexit deal was not enough to ignite risk-on sentiment. More aggressive lockdown measures might lead to a double recession as we might learn on Friday with the reading of the UK’s Gross Domestic Product. To foster sentiment in Gilts could also be today’s BOE’s Tenreyro speech. Tenreyro has been the most vocal member of the Bank of England to discuss negative interest rates.
What is going on?
- Commodity rally: Too much too soon? The broad commodity rally that saw the Bloomberg Commodity Index rise by 10% during the last quarter extended into the new year with the index gaining 4.2% during the holiday shortened week to January 5 as inflows to value, cyclical and reflation investing strategies continued. Speculators responded to this by increasing an already record long commodity to 2.6 million lots, representing a nominal exposure of $134 billion. We are bullish commodities in 2021 but following the rapid buildup, the market could now in the short-term pause should the bullish technical and/or fundamental outlook change.
- US Fed Vice Chair Clarida optimistic on US economic outlook, not bothered by US yield rise. In an interview late Friday, the influential Fed figure sounded optimistic on the outlook for the US economy despite the latest virus developments, was happy to see the new stimulus package passing, and declared that the Fed would continue to support the US economy with asset purchases at current levels through this calendar year. At the same time, Clarida said he was not concerned with rates at current levels.
What are we watching next?
- The ongoing development in US long yields – after the first week of the year saw US 10-year and 30-year treasury yields break above the key range highs of 1.00% and 1.75%, respectively, the ongoing development in US yields is important for the outlook across asset classes, as higher yields represent a tightening of financial conditions, which is benign if this is due to an improvement in the outlook and a strong economy, but comes at an interesting time as many speculative assets have had a remarkable run and could prove very sensitive to a persistent run higher in yields. Important FOMC Vice Chair Clarida failed to push back against the current yield levels on Friday.
- Smooth transition domestically and geopolitically to incoming Biden administration? – the unprecedented US political situation in the last days of US President Trump’s presidency is seeing hot tempers and threats to impeach Trump if he does not resign or Vice President Trump doesn’t remove Trump from power via the 25th Amendment. Some also fear the risk of unrest on Biden’s inauguration day after the mob of Trump supporters stormed Capitol Hill. Geopolitical tensions are another area of interest in the early days of the Biden administration as the lame duck Trump administration has ratcheted tensions with China higher with a number of moves to lay land mines for Biden as any move to unwind these measures would allow criticism of being “soft on China”. The other angle is China’s response to the moves themselves as well in coming weeks.
- Q4 2021 earnings season starts this week. Q3 2020 earnings season was the big comeback for corporate earnings and the market expect the momentum to continue in the Q4 earnings season. It starts today with Carnival (cruise line operator) reporting earnings, but the real start is not until Friday when JPMorgan Chase, Citigroup, and Wells Fargo report Q4 earnings and more importantly provide the market with an update on loan losses and the US economy.
Economic Calendar Highlights for today (times GMT)
- 0900 – Switzerland SNB Weekly Sight Deposits
- 1440 – ECB President Lagarde moderates panel discussion
- 1530 – Canada Bank of CaanadaQ4 Business Outlook
- 1700 – US Fed’s Bostic (FOMC Voter) economic outlook
- 2300 – US Fed’s Kaplan (Non Voter) to Speak
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