Market Quick Take - January 25, 2021
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 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 trade has suffered. The of this sentiment is US technology stocks which are doing great again with the Nasdaq 100 futures hitting fresh new all-time highs.
Bitcoin () and Ethereum ()–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.
EURUSD–the 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 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 inflation data point on Friday, are the key developments to watch this week after it was recently that -drop for USD selling only saw a slightly weaker USD last week.
EURGBP and GBPUSD–sterling 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 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 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 auction las Thursday, the 10-year Breakeven rate hit the highest level in two years. As the story continues to gain strength, the market will want to have more reassurance from the Federal Reserve that it will not in the . The risk that the market is running is that at the mention of long Treasury maturities will selloff. Still, only if the 10-year yields break above 1.2%, a broader selloff will .
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 rated corporate debt fell to a historic low of 6.41% beating the low it touched in 2014. 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 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 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% lastweek. During 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/ and $12.90/ 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 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 to cover the US budget deficit). Given the recent back and forth on the issue of the Fed eventually 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 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 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, Microsoft, LVMH, Texas Instruments, Starbucks, AMD, J&J, Novartis, NextEra Energy, Raytheon Technologies
Wednesday:, 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)
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 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:
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)