Market Quick Take - January 25, 2021

Macro 4 minutes to read
Saxo Strategy Team

Summary:  Equities finished last week with a somewhat wobbly session, but this week is off to a strong start, with most Asian indices up smartly to start and US futures near or at new record highs. In the US, the path to the Biden stimulus plan looks complicated by a unified Republican opposition and at least one Democratic senator who expresses caution on the size of the deal. In commodities, grain prices suffered their worst weekly retracement since 2016.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)strong start to the week with S&P 500 futures pushing above 3,850 showing that momentum continues in US equities despite the weak session on Friday. With US 10-year yield stuck at 110 basis points investors have reduced their alertness to rising interest rates and the reflation trade has suffered. The flipside of this sentiment is US technology stocks which are doing great again with the Nasdaq 100 futures hitting fresh new all-time highs.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome)diverging fortunes for the two largest crypto currencies at the weekend, as Ethereum managed to post a new all-time price-high overnight north of 1,450 before pulling back a bit, while the Bitcoin price churned over the weekend and only managed to poke at the highs onFriday just below 34,000.

EURUSDthe most traded of USD pairs is nearing a pivotal level as it tries to scratch its way back higher – thefirst hurdle is the 1.2200 area that contains the 50% retracement of the recent sell-off and the 21-day moving average, although a solid rally bar that also easily takes back the 61.8% retracement near 1.2236 would be a more comforting sign for USD bears that the greenback is easing back into a downtrend. The FOMC meeting this Wednesday as well as news flow on the Biden stimulus package, rounded off by the PCE inflation data point on Friday, are the key developments to watch this week after it was rather disappointing recently that a very supportivebackd-drop for USD selling only saw a slightly weaker USD last week.

EURGBP and GBPUSDsterling is back on the bid again to start the week and has avoided a full reversal of recent gains, though it was disappointing last week that EURGBP was unable to stick lower after posting new multi-month lows that broke a well-defined range low near 0.8860. Alas, the upside hope for sterling remainsas long as the pair avoids a back-up above the 0.8950 and especially 0.9000 levels, while further encouragement can be found in GBPUSD trading back above 1.3700 again this morning. On a call between UK Prime Minister Boris Johnson and US President Joe Biden, the first call to a foreign leader by the latter, Biden failed to mention that anything related to trade was discussed, while the UK account of the call claimed the issue of a free trade deal between the two countries was raised.

Crude oil (OILUSMAR21 & OILUKMAR21) both survived a downside challenge on Friday with Brent finding support at $54.50/b, the recent low. A surprise rise in US crude oil stockpiles of 4.3 million barrels, the first since early December, was being offset by data pointing to a pickup in fuel demand. Also supporting the price has been a pledge from Iraq to cut output in January and February as well as some reduction in shipments from Libya due to a pay dispute. Continued focus this week on the virus and the risk of more lockdowns in China versus the prospect of vaccine-led recovery in global demand.

US Treasuries will continue to trade mixed ahead of the FOMC meeting on Wednesday (10YUSTNOTEMAR21).Following a strong TIPS auction las Thursday, the 10-year Breakeven rate hit the highest level in two years. As the reflation story continues to gain strength, the market will want to have more reassurance from the Federal Reserve that it will not taper in the foreseeable future. The risk that the market is running is that at the mention of tapering long Treasury maturities will selloff. Still, only if the 10-year yields break above 1.2%, a broader selloff will ensue.

Prices of junk bonds rise as investors are pushed towards higher-yielding debt to seek protection against rising US yields (JNK, IHYU).Last week, the average yield of US dollar CCC rated corporate debt fell to a historic low of 6.41% beating the low it touched in 2014. It is clear that corporate high yield spreads are tightening as investors accept lower-quality credit to seek coupon protection amid rising interest rates. This month, junk bond issuance is on the way to beat 2020’ record high volumes.

Another Italian government crisis might be ahead as Prime Minister Conte said to consider early election if he doesn’t get Senate on his side on Wednesday’s vote (10YBTPMAR21).Some of the premier’s allies are starting to believe that early elections might be the only way to resolve the current impasse. Conte said that if the Senate doesn’t pass a justice policy this Wednesday, he will consider early elections, which would bring total chaos in Italian BTPs once again. This week, the Italian government is also looking to issue inflation linkers and zero-coupon bonds on Tuesday and 5- and 10-year bonds on Thursday. 

 

What is going on?

The Biden stimulus plan may be in for a reduction – Republican opposition to the plan looks united on its overall size,and noRepublicans are unlikely to agree to the entire bill, which includes stimulus aimed at state- and local aid- and a new minimum wage hike. The stimulus checks are also seen as excessive by some and not sufficiently targeted to those in need. Some conservative Democrats and the one Independents in the Senate are also key votes. A bipartisan call of Senators with Biden will take place later today that could give a sense of whether the entire stimulus package is in danger and whether parts of it are likely to be split off for separate consideration.

The grains sector trades lower, but off their overnight lows,following its worst week in terms of losses since 2016. The combination of a very elevated speculative long andimproved crop conditionsin South America saw soybeans (SOYBEANMAR21) loose 7.5%,wheat (WHEATMAR21) 6% and corn (CORNMAR21) 5.8% lastweekDuring the past five months when soybeans and corn rallied by more than 50%speculators accumulated a recordnet long across 6 grain and soy contracts of more than 800,000 lots. With some of the South American uncertainty now reduced, the focus will return to Chinese demand, the dollar, and the upcoming US planting season. Support in corn at $4.9/bu and $12.90/bu in soybeans.

What are we watching next?

FOMC Meeting this Wednesday The FOMC meets this Wednesday, and the meeting statement wand Fed Chair press conference will be scrutinized for any changes that suggest any alteration of the Fed’s policy guidance. The market operates under the assumption that the Fed will act less if there is more fiscal stimulus and more if there is left, but a key question is what Powell thinks about the fact that the market must absorb so much treasury issuance (I.e.,its QE is not nearly enough to cover the US budget deficit). Given the recent back and forth on the issue of the Fed eventually tapering purchases, the latest message from Powell and other key Fed officials is that it is far too soon to discuss. 

Q4 2021 earnings season kicks into gear this week
Around13% of the companies in the S&P 500 have now reported Q4 earnings with a strong upside surprise to both revenue and earnings. The outlook has generally been quite positive for 2021 with most companies expecting a strong second half. This week the earnings season shifts gear with many of the top 50 companies on market capitalization in the S&P 500 reporting earnings and especially important earnings from US technology stocks. The most anticipated earnings release will be from Tesla which is defying Wall Street analysts. The earnings releases highlighted in bold redare those with the most expected impact on overall equity sentiment or insights on macroeconomic activity.

 
  • Tuesday: Verizon Communications, MicrosoftLVMH, Texas Instruments, Starbucks, AMD, J&J, Novartis, NextEra Energy, Raytheon Technologies

  • Wednesday:AT&TAppleTeslaFacebook, ServiceNow, Abbott Laboratories, Boeing

  • Thursday:Visa, Mastercard, Comcast, Danaher, McDonald’s

  • Friday: Keyence, Caterpillar, Charter Communications, Eli Lilly, ChevronSAP, Honeywell

 

 

Economic Calendar Highlights for today (times GMT)

0900 – Germany Jan. IFO Business Climate Survey
0900 – Switzerland SNB Weekly Sight Deposits
1345 – ECB Chief Economist Lane to Speak
1330 – US Dec. Chicago Fed National Activity Index
1530 – US Jan. Dallas Fed Manufacturing Activity
1615 – ECB President Lagarde speaks on Panel
1700 – UK BoE Governor Bailey to Speak
2300 – South Korea Q4 GDP

 

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved, we have put together a general Risk Warning and a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed here or within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.