Market Quick Take - January 26, 2021

Macro 4 minutes to read

Summary:  Equity markets are slightly traumatized after a zany session yesterday on Wall Street, with retail traders launching coordinated attacks on the widely shorted company Gamestop. As well, Italian Prime Minister Conte resigned yesterday, though this will not necessarily lead to new election. In the US, President Biden declared himself open to negotiating the income cut-off level for stimulus checks.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – yesterday’s price action across the most shorted single stocks such as GameStop caused massive price swings in certain stocks causing cascading effects and volatility in the broader indices with 3.4 points range in the VIX Index and 2.7% price range in Nasdaq 100 futures. US equities have recovered as yesterday’s price action was technically driven but nevertheless a worry for market fragility. The 13,380 level in the Nasdaq 100 is the key support level to watch today.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – crypto currencies were generally under pressure – as Ethereum backed off badly shortly after posting a new record high yesterday, and Bitcoin was under pressure near 31,000 as of this writing versus a high yesterday just below 35,000.

EURUSD – with EU peripheral spreads widening somewhat on the recent ECB comments on possibly not needing to purchase up to the declared ceiling of sovereign bond and on Italy’s shaky government situation, the EURUSD is trading back on the defensive, never having rallied above the important 1.2200-1.2235 area. A test of the 1.2050 lows may be the side of least resistance if risk appetite continues to soften here in the near term on concerns that the US stimulus will be less forceful than originally hoped. Beyond that to the downside is the psychologically important 1.2000 level, while the pair needs to trade below 1.1900 to suggest that the entire up-trend is in danger.

AUDUSD – the AUDUSD appeared ready to mount a charge at the cycle highs again recently, but instead has continued to coil around in a shrinking range below 0.7800, with the downside trigger level of the multi-week low near 0.7660 now very close. Overnight, the Chinese warning of an asset bubble and weakness in key commodities contributed to downside pressure. The scale of the recent consolidation relative to the magnitude of the rally off the early November lows was very small, and the pair can till consolidate back to 09.7500 or even all the way to the 0.7400 area without threatening the up-trend as the latest price action suggests that the bulls may need to exercise some patience here.

Gold (XAUUSD) continues to gyrate around its 200-day moving average, currently at $1848/oz, while waiting for a catalyst to take it away from the current range. Yesterday’s rollercoaster ride in US stocks on a potential delay to the US stimulus package saw the dollar advance while bond yields dropped. Silver (XAGUSD) weakened with copper (COPPERMAR21) thereby lifting the gold-silver ratio to a one-week high. This after the Chinese central bank withdrew cash in a sign that authorities want to cool emerging overheating risks. The focus is now moving to tomorrows FOMC meeting where the market will be looking for comments that can guide bond yields. Resistance at $1875/oz and support at $1828/oz. 

Crude oil (OILUSMAR21 & OILUKMAR21) remains stuck with a slow roll-out of vaccines and resurgent Covid-19 outbreaks in some regions off-setting signs of tightening supply. A flare-up in virus cases in China is threatening fuel demand during the upcoming Lunar New Year period while the market also fret a potential delay of the US stimulus package. The physical market meanwhile continues to tighten supported by lower February shipments from Iraq and Russia on top of the planned cuts from Saudi Arabia. As a result, the front month Brent spread is signaling the tightest market conditions in a year. Brent double bottom at $54.5/b the key area of support.

Bond future market drives the rally in Treasuries pushing the 10-year yields to 1.02% (10YUSTNOTEMAR21). The 10-year Treasury yield fell by 16bps since its high at the beginning of the month, but it isn’t down with the uptrend that started since August and the yield curve will resume its steepening sooner than expected. Tomorrow’s Federal Reserve meeting could be a catalyst for higher yields if tapering is being discussed.

Prime Minister Conte will resign today, but he’s seeking another mandate driving BTPs higher (10YBTPMAR21). Despite the Italian government will fall anyway, the yield on 10-year BTPs fell by 8bps yesterday as Conte is said to seek another mandate in an attempt to create a solid government. Italy will issue 2026 inflation linkers and 2022 zero-coupon today.

What is going on?

US President Biden said he was open to a reduction in stimulus checks – this was widely credited with a more negative mood overnight, as the $75,000 income level cut-off for receiving checks may be up for negotiation after Biden’s comments in the wake of a meeting with a bipartisan Senate group. Other measures in the $1.9 trillion original stimulus proposal, like the more than doubling of the federally mandated minimum wage, (some states have much higher minimum wages than the current minimum of $7.25 per hour) may also have a hard time passing.

Short squeeze in US stocks like never seen. Across the group of the most shorted US single stocks there was wild trading activity yesterday with many of these names shooting higher in a classic short squeeze. There is no single cause for these moves, but instead a complex function of Robinhood traders buying weekly call options, coordinated efforts to go long these names on the famous r/wallstreetbets forum on Reddit, gamma squeeze, increased gambling in the population due to the lockdowns, low interest rate environment etc. No single cause but many feedback loops causing these moves. Yesterday’s moves also caused Melvin Capital, a rather successful hedge fund, to ask to a private industry rescue by Citadel and SAC, as the company was caught in these short squeezes and had lost more than 30% in the first three weeks of trading before yesterday’s moves.

South Korea’s economy grew 1.1% QoQ in Q4, slightly more than the 0.9% expected, and this put the year-on-year level for Q4 at some –1.4%, one of the best performances of any economy in the annus horibbilis of 2020.

Chinese president Xi Jinping delivered a warning against a cold war – in an address at the World Economic Forum’s virtual Davos meeting. Many believe Xi’s comments were directed at the incoming Biden administration in the US, as the Chinese president weighed in against an “outdated cold war mentality” and said “confrontation will lead us to a dead end”. Hos US President Biden’s administration’s approach to China shapes up in coming weeks and months will likely prove critical for global growth and inflation prospects, not to mention for the fortunes of various sectors of the economy and individual companies.

China tightens liquidity, warns of asset bubble – Chinese markets suffered an ugly session overnight as the People’s Bank of China drained liquidity from the market, an odd move given the approaching New Year holiday there. An official from the PBOC told media that asset bubbles are a risk, for example, in the property market, if China doesn’t move to focusing on job growth and inflation.

What are we watching next?

FOMC Meeting this Wednesday – The FOMC meets this Wednesday, and the meeting statement and 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 less, 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
Around 13% 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 red are those with the most expected impact on overall equity sentiment or insights on macroeconomic activity.

  • Today: Verizon Communications, Microsoft, LVMH, Texas Instruments, Starbucks, AMD, J&J, Novartis, NextEra Energy, Raytheon Technologies
  • Wednesday: AT&T, Apple, Tesla, Facebook, ServiceNow, Abbott Laboratories, Boeing
  • Thursday: Visa, Mastercard, Comcast, Danaher, McDonald’s
  • Friday: Keyence, Caterpillar, Charter Communications, Eli Lilly, Chevron, SAP, Honeywell

Economic Calendar Highlights for today (times GMT)

  • 1300 – Hungary Central Bank Rate Decision
  • 1400 – US Nov. S&P CoreLogic Home Price Index
  • 1500 – US Jan. Consumer Confidence
  • 1500 – US Jan. Richmond Fed Manufacturing
  • 0030 – Australia Q4 CPI
  • 0030 – Australia Dec. NAB Business Conditions/Confidence
 

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
Zürich
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 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.