Summary: Equities were mixed yesterday in the US and overnight in Asia, the US market continues to see extreme interest in bidding up some of the most shorted stocks, while the broader market was rather flat on the session. Today is FOMC day, with the recent discussion on the timing of tapering among Fed members seemingly settled as too early to forecast when it would be appropriate.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – Nasdaq 100 futures closed at an all-time high yesterday and have firmly pushed beyond to the 13,555 level despite troubling market behavior across many of the most shorted US single stocks including GameStop. Yesterday’s high at 13,600 in the Nasdaq 100 is today’s resistance level to watch if momentum continues. Adding further to momentum in US technology stocks is the failure of long US yields to bounce back from Friday’s drop reviving the TINA (‘there is no alternative’) at the expense of the reflation theme and commodities.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – crypto currencies are losing a bit of steam, as Ethereum trades this morning below 1300, just two days after posting a brief new all-time high at 1475, while Bitcoin has been more bogged down recently, with less volatility as it has been caught between 31,000 and 35,000 over the last five sessions. One wonders if some of the higher frequency, day-trading group of trades has become distracted with high volatility penny stocks and stocks involved in short squeeze attacks like GameStop, etc.
EURGBP and GBPUSD – It was a bit disappointing last week that the EURGBP break lower of the prior range (around 0.8866) failed to produce any significant follow through lower. But neither did the pair really reverse back into the range and yesterday’s lowest close for the cycle near 0.8850 sets up the hope for sterling bulls that the pair can follow through lower this time – perhaps aiming at the 0.8600 area in coming weeks. The GBPUSD chart is less compelling after a string of new highs and constant backfilling, but the re-break above 1.3700 provides some hope that something is afoot there to the upside as well. The ability for sterling to hold higher without any notable positive catalysts suggest underlying supportive flows into the currency.
USDCAD – there isn’t much differentiation across the USD/commodity dollar complex in recent sessions, but USDCAD has perhaps shown the most resistance to further USD weakening, as three lows in succession have been quickly gathered up as downward momentum for the trend has slowed notably. A break above the 1.2800 area, for example after this evening’s FOMC meeting, could set in motion a larger consolidation back toward 1.3000, a major chart point on the way down.
Gold (XAUUSD) has disappointed somewhat on the inability to garner more of a bid as US treasuries corrected lower and still trades in the shadow of the collapse back below 1,900 while it coils back and forth around the 200-day moving average near 1,850. Little is expected from today’s FOMC meeting, but a surprise in either direction could get the gold market’s attention. A break below the 1,804 low of last week could trigger a fresh round of stop-losses for consolidation lower, while 1,900 is the minimum starting point for trying to shift the focus back higher.
The reflation trade is losing steam, and 10-year yields retrace towards pivotal 1%. The FOMC meeting today might break the rally (10YUSTNOTEMAR21). Since last week’s TIPS issuance and rise in 10-year Breakeven to a 2-year high, inflation expectations and yields started to fall. The 10-year yield is now so close to the pivotal 1% level that many are starting to wonder if the reflation trade is still alive. Today, Powell will make sure that his “rates low for longer” is well received, however any reference to “tapering” might spark selloff sentiment in US Treasuries. We remain negative on US Treasury bonds because since August last year, the yield curve has started to bear steepen and yields are not trading in an uptrend.
Conte will start consultations to form a new coalition for a third government headed by him (10YBTPMAR21). The market is convinced that Prime Minister Conte will be able to form a new coalition and initiate a third government headed by him. The BTP rallied for the second day in a row with the yield on 10-year BTPs falling by 10 bps since the beginning of the week to 0.64%. Today Conte will start consultations regarding a new government, however it seems that the small party which caused the government to fall in the first instance will not support a third government. Yesterday, Italy issued inflation linkers and zero coupons offering negative yield and they were well received by the market. We believe that BTP will continue to be volatile until a new government is not formed.
Microsoft (MSFT:xnas) - shares were up 4% in extended trading on strong FY21 Q2 earnings (ending 31 December 2020) with EPS at $ 2.03 vs est. $1.64 and revenue at $43.1bn vs est. $40.2bn driven by strong results in personal computing driven by the continuing mobility restrictions. The cloud business also saw strong results beating estimates. Revenue for the quarter was 17% y/y accelerating from the previous quarter.
LVMH (MC:xpar) - strong results with FY profit from recurring operations at €8.3bn vs est. €7.2bn and the luxury maker is raising its dividend per share to €6 per share vs est. €4.5, and lifting its organic revenue growth target for fashion and leather to 18% compared to estimates of 13%.
Beyond Meat (BYND:xnas) announced a collaboration with PepsiCo to develop and distribute drinks and snacks made with plant-based protein. Initially the stock price was up by more than 30 % compared to the previous day, but ended the session in +18 %.
What is going on?
Short squeeze in US stocks like never seen. The short squeeze in the most shorted US stocks covered yesterday continued again with GameStop shares up another 92% closing at $147.98 and continued again in extended trading to $209 driven by a frenzy of volume in option. GameStop was the most traded single stock in the world yesterday beating Apple and Tesla. One question to think about is why this behavior is only happening in the US and not in Europe or elsewhere.
Janet Yellen cites Biden’s four crises in first day in office as new US Treasury Secretary – the Covid crisis, inequality, racism and climate change, and praised the close coordination of the Fed and Treasury during the great financial crisis and cited the need to “do it again” in fighting the K-shaped recovery, while noting that the K-shape was in place before the pandemic.
Australia Q4 CPI comes in hotter than expected – as was the case for Q4 New Zealand CPI reported recently, Q4 Australian CPI rose more than expected at 0.9% QoQ and +0.9% YoY vs. 0.7%/0.7% expected, while the “trimmed mean” measure was only +0.4% QoQ (as expected) and +1.2% YoY vs. +1.1% expected. These numbers are still far from levels that will warrant central bank reactions, but all economists and market observers are looking forward to the readings from April onwards, when the basing effects of the crash in oil prices last year kick in.
What are we watching next?
FOMC meeting today – The FOMC meets today, 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. One thing that is different this time around relative to December is that yields at the long end of the US yield curve have broken significantly higher, although much of that surge has been erased over the last couple of weeks. One interesting question that could come up in the Q&A is how the Fed views the appropriateness of its purchase amounts, given that net issuance will far exceed their purchases this year, by as much as 100%
Q4 2021 earnings season kicks into gear this week
Strong earnings yesterday after the market close from Microsoft and LVMH are bolstering equity sentiment. NextEra Energy was a slight disappointment and if this continues across other green stocks then the theme could see its momentum disappear over the coming month. Today’s earnings in focus are Apple, Tesla, Facebook, and Boeing.
Economic Calendar Highlights for today (times GMT)
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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.
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