Summary: A volatile session yesterday for US stocks as retail brokers limited trading in stocks at the center of the short squeeze phenomenon, resulting in wild swings in those names and at first supporting risk sentiment as many of these stocks fell, although later the mood soured somewhat into the close and worsened overnight on a very weak Asian equity market session.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures are lingering this morning with Nasdaq 100 futures just above the important 13,000 level failing to find a positive catalyst and instead fixated on the spectacular sideshow in the most shorted US stocks. The general sentiment seems to be leaning negative and if Nasdaq 100 cannot hold the 13,000 level then equities could see substantial downside risk in today’s session as many indicators suggest that hedge funds and other systematic quant funds are deleveraging aggressively with the VIX sitting above 30.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – crypto currency focus has switched to some of the smaller coins that have seen tremendous moves recently, while Bitcoin pulled back higher and had a go at the 35,000 area overnight before easing back below 33,000 as of this writing, while Ethereum has found a new resistance line around 1,375 in recent days and traded near 1,300 this morning.
USDJPY – continues to trade near the important 104.50 area and even slightly above the recent pivot high, the first time the pair has broken a pivot high in many months – how the move holds into the close today could define whether a larger squeeze develops and as we noted yesterday, it is somewhat notable that the JPY has weakened despite a firm safe-haven bond market earlier this week, although yesterday did see a weak session for long US treasuries. The 106.00 area looks like the next pivotal one for USDJPY if the rally extends here.
AUDUSD – took a stab at a strong bounce yesterday after the pair was not able to sustain the break of the important 0.7600 area. The bounce was inspired by hopes that general market energy would calm and risk appetite improve on signs that the short squeeze on Wall Street was reversing, but the suddenly souring mood again in late trading and especially overnight, has the Aussie on the defensive and the currency will continue to trade in correlation with global sentiment on risky assets, and bellwether commodities like copper and iron ore. A close near 0.7600 to close this week raises the risk of a test of the next important trend support near 0.7400.
Silver (XAGUSD) temporarily surged the most since August yesterday after the Wallstreetbets group of traders targeted the white metal after someone called it “The biggest short squeeze in the world”. However, lack of understanding about how commodity markets works, and the sheer size of the silver market left the attempt doomed from the beginning and as a result the short-term risk has now turned to one of losses as long bets are exited. The 6.8% rally only drove the XAUXAG ratio down to but not through the double bottom from August at 69.3. Bullion banks tend to be short futures as a hedge against commitments in the spot market. Something that over the years has attracted a crowd of conspiracists believing the metal was kept artificially low in order to hide the existence of inflation. Our bullish silver view is based on increased industrial demand as the green transformation gathers pace, reflation and a weaker dollar.
Treasury bonds lower as the stock market recovers (10YUSTNOTEMAR21). Ten-year Treasury yields remain close to the pivotal 1% level; however, they rose slightly as the stock market recovered from Wednesday’s volatility in the stock market. We still believe that we will see US Treasury yields higher in the long-term as they are still trading in the uptrend they have been trading in since August. In the short-term, they will continue to function as safe havens during market volatility.
BTPs 5- and 10-year auction went well, but demand was lower despite the higher yield offered compared to previous auctions (10YBTPMAR21). We might start to see some fatigue among BTPs investors following this week’s rally. The auction of 5 and 10-year BTPs went well but demand was lower signaling that if a new government isn’t formed in no time there is room for a selloff in the short-term. We still believe that in the long-term the BTP will benefit from spread compression thanks to the ECB’s policies, and any sign of weakness might be an opportunity to add on this position.
What is going on?
Short squeeze in US stocks disrupted in part by broker limitations on trading key names. Nearly every stock that was a target of the short squeeze phenomenon dropped heavily yesterday, regardless of whether it was one of the stocks at the center of the recent attention on most shorted stocks (GME, AMC, NOK) or one of the many other most-shorted names that have been less in the limelight. This was in part due to US brokers limiting buying in key stocks yesterday, they claimed in part due to regulatory capital requirements, as US broker Robinhood, for example, had apparently drawn down a credit facility and announced after hours that it was raising new funding to enable full access to trade these shares again, which buoyed many of the names in later trading. After trading below 200 yesterday, GameStop stock, for example, leapt to above 300 dollars in late trading after the close on this news.
US and France reported preliminary Q4 GDP figures. The first estimate of US Q4 growth, out yesterday, was a positive 4.0% annualized, slightly below the 4.2% annualized growth expected. In contrast, the first estimate for France for Q4 GDP this morning was –1.3% QoQ growth and –5.0% growth YoY, vs. -4%/-7.6% expected, respectively, a solid performance given the scale of Covid shutdowns there. Germany reports its GDP figures later this morning.
German inflation for January comes in hot at +0.8% MoM and 1.0% YoY vs. +0.4%/+0.8% expected, and the “EU Harmonized” number was a hefty 1.4% MoM and 1.6% YoY vs. +0.3%/+0.5% expected, respectively.
Grain markets - Following the recent bout of profit taking the sector led by corn (CORNMAR21) and soybeans (SOYBEANSMAR21) have rallied strongly to occupy the top of the performance table this week. US corn prices hit its highest level in 7½ years boosted by strong sales to China while soybeans and wheat (WHEATMAR21) both stays supported by the outlook for tightening global supplies due to Russian export taxes on wheat while rainfall in Brazil may hamper the upcoming harvest.
What are we watching next?
Will the Short Squeeze “attack on Wall Street” resume or have we seen the peak? The shutdown in trading of key stocks yesterday triggered an outrage among the groups of traders aimed at pumping these names to new heights and it was remarkable to see populists voices on both the left (US Congresswoman AOC) and the right (Donald Trump, Jr.) tweeting their ire at the decision. The situation has garnered so much attention that Democrats in both the House and the Senate announced the intent to hold hearings soon on online trading platform practices. Our conviction is that the most likely angle for a regulatory change is the elimination of the ability to sell order flow information to other operators, which is the key feature that allowed the controversial Robinhood broker to offer “free” commissions to its customers. This practice is not legal anywhere else.
Q4 2021 earnings season kicks into gear this week
Today’s earnings from Caterpillar and Chevron will give good insights to demand in the physical part of the world economy with Caterpillar sitting in the middle of the global construction industry and Chevron being the first major oil & gas company reporting Q4 earnings. Especially insights into demand expectations from major oil companies for 2021 is important for digesting the macro situation.
Economic Calendar Highlights for today (times GMT)
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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.
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