Summary: US equities scratched their way to new record highs yesterday in a very low energy session, with equities mixed overnight in Asia, but led by a strong session for mainland Chinese shares, which are challenging cycle highs. The US dollar weakened sharply across the board as US yields pulled back from highs. This helped both USDJPY sharply lower and gold prices sharply back higher.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equity futures closed at new all-time highs yesterday driven by strong risk sentiment also evident across commodities and cryptocurrencies. However, equity futures are reversing a bit from those highs in early European trading as Nasdaq 100 future failed to touch 13,700. Rising interest rates are yet to impact equity valuations, so the question remains open of where the equilibrium point is for when the speculative parts of the equity market is impacted by higher discount rates. Our best guess at this point is that the 1.5% level on the US 10-year yield is where the first level of pain could come into equities.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin rallied steeply yesterday after Tesla CEO and largest shareholder Elon Musk said the company had invested $1.5 billion in the crypto currency and plans to accept the cryptocurrency as payment for its cars in the future. Bitcoin traded as high as $48,000 this morning. Ethereum was also impacted by the news, trading near record highs this morning north of 1,750, but taking a back seat to the action in the market’s largest cryptocurrency.
USDJPY – a strong about face in most USD pairs since last week’s close, led yesterday and overnight by USDJPY, where the 200-day moving average just above 105.50 came under fire, but has so far survived. Helping the USDJPY sharply lower and below 105.00 overnight, long US yields backed off rather sharply after the 30-year yield in the US challenged the 2.00% level in recent sessions, and we’ll likely need to see US yields capped for USDJPY to push notably back lower. So far, this move is merely a consolidation of the recent rally, but starting with a move back below the 104.40 pivot high established back in January, USDJPY bears would find encouragement and focus on cycle lows near 102.60 and possibly eventually the 100.00 level on a general resumption of the bear trend.
AUDUSD – EM currencies and commodity dollars have led the charge against the US dollar since the latter peaked out pm Friday, with AUDUSD suddenly back above 0.7700 here after recently challenging the pivotal 0.7600 area for much of last week. This looks like a resumption of the uptrend until proven otherwise (for example, if this rally falters tactically with a close back below 0.7650), aided by the weaker US dollar and a new surge in key commodities, iron ore in particular. A next step for AUDUSD bulls would be a close back near 0.7800, which helps to open up the next strategic target of 0.8100. It’s tactically important for AUDUSD to continue the upside momentum.
Crude oil (OILUSMAR21 & OILUKAPR21) surge higher yesterday to record the longest run of gains in a year. After initially pausing to check for potential sellers around $60/b in Brent, oil rallied further overnight on a combination of tightening supply led by Saudi Arabia’s unilateral decision to cut production for two months and rollout of Covid-19 vaccines together with continued inflows from macro-orientated funds seeking a hedge against inflation. The bullish backwardation continues to firm with the one-year roll yield (carry) now trading close to 8%. Momentum in oil and several other commodities are currently so strong that overbought conditions are being ignored.
Gold (XAUUSD) and silver (XAGUSD) trade higher with focus on the softer dollar, the prospect for more US stimulus and not least renewed support from investors seeking a hedged against rising inflation. The reflation trade received fresh attention yesterday after US 10-year breakeven yields broke above 2.2% to reach a seven-year. Key gold resistance now at $1875/oz. Platinum (XPTUSD) reached a 4 ½-year high at $1185/oz and since early November it has clawed back more than 400 dollars of its discount to gold. Rising inflation risks together with expectations for a stimulus and a post-pandemic surge in demand amid a weak supply outlook, have spurred copper (COPPERUSMAR21) higher, and after finding support below $3.50/lb it is once again challenging the January high at $3.70/lb.
Thirty-year yields failed to sustain breach of pivotal 2% level (IEF, TLT). Thirty and 10-year US Treasury yields stalled their rise as the market is waiting for the £1.9 trillion fiscal stimulus package to pass. Interestingly, the difference between 10-year yields and the breakeven rate is the widest in ten years indicating that nominal yields are lagging inflation expectations by 100bps. Tomorrow’s Powell speech and 10-year Treasury auction might re-establish the rising trend of yields.
Gilts yields stall as a report finds that the UK will not recover to pre-Covid levels until end of 2023 (IGLT). A report coming from the National Institute of Economic and Social Research is conflicting with the Bank of England’s view that the nation’s gross domestic product will return to pre-crisis levels at the beginning of 2022 Amid the uncertainty, Gilt yields failed to sustain a breach of the 0.5% upper trendline. Bailey’s speech tomorrow might give a final push to 10-year Gilts above this level. Bailey’s speech to the Treasury Commitee didn't give any insight on the central bank’s monetary policies as Bailey focused on defending his position over the London & Capital Finance collapse.
The average yield offered by USD junk corporate bonds fell below 4% (HYG). The Bloomberg Barclays US Corporate High Yield Bond Index indicates that the average yield offered by US junk bonds is below now 4%, the lowest it has ever recorded. High yield corporate bonds are rising in value as they are the only assets to offer enough of a yield to create a buffer against rising inflation expectations.
Ocado (OCDO:xlon) and Tesla (TSLA:xnas) - Ocado in focus today as the company has published FY20 earnings in pre-market session with EBITDA at GBP 73.1mn vs est. 70.2mn expected. Revenue was GBP 2.2bn in line with estimates and the online grocery company expects to see more tailwind from the pandemic with growth constrained by how fast capacity can be expanded. Tesla will be in focus today as the company announced last night that it had bought a $1.5bn stake in Bitcoin, but investors sent shares slightly down in extended trading. In the same 10-K filing by Tesla, the company announced that for the first time most of the revenue came from outside the US with Chinese revenue growing 124% y/y.
What is going on?
Mario Draghi calls for common euro-area budget - Mario Draghi continues to attempt to form a government in Italy, and yesterday repeated the call he made as ECB president for EU nations to integrate fiscally. Mr. Draghi, likely to become the next Italian PM, will be a forceful advocate for more EU integration, an effort that will either set the EU down the path to pulling closer together or risk spinning apart. The market has signaled its recognition of Draghi’s arrival on the scene by further crushing Germany-Italy sovereign yields spreads, which for 10-year debt now stands at 95 basis points.
What are we watching next?
China PPI tonight, US CPI tomorrow for latest read on reflation. With Blanchard, Summers, and Yellen flagging inflation worries over stimulus, combined with last week’s rise in commodity prices across agriculture and energy, on top of bottlenecks in global manufacturing the China PPI figures on Wednesday will be important for inflation expectations (traditionally, this indicator is closely linked with the ups and downs of oil prices). The index climbed to –0.4% y/y in December up from –3.7% in May 2020 and is expected to move into positive in January highlighting that inflationary pressures are building from the world’s largest manufacturing hub.
US Treasury Auctions through Thursday – today sees the auction of 3-year US treasuries, tomorrow the auction of 10-year treasuries, and Thursday the auction of the longest US sovereign paper, 30-year T-bonds. Given the fresh rise in long US yields to new cycle highs since the outbreak of the Covid crisis, the scale of demand for US treasuries (especially at the 10-year and 30-year auctions) will be interesting to watch, especially given the likelihood of a large Biden stimulus package soon and a US treasury that will have to issue far more paper than the Fed is buying, leading to concerns of rising yields and inflation.
World supplies of key crops look set to tighten further due to strong Chinese demand and lower South American output and cold weather risks. Ahead of today’s monthly supply and demand report from the USDA, corn prices are trading above a 7-½-year high. Analysts polled by Reuters expect the USDA to make further cuts to its end-of-season supply outlooks for corn, soybeans and wheat, while also trimming its harvest views for Brazilian and Argentine corn and soybeans. Russia’s move to impose an export tax on wheat together the risk of frost damage to US winter crop has further underpinned prices.
Earnings releases to watch this week
The Q4 earnings season continues this week with around 120 companies of the 2,500 companies we track during the earnings season reporting this week. The names marked in bold red are the ones, that we believe are most important for overall sentiment or sentiment in a specific segment of the equity market.
Economic Calendar Highlights for today (times GMT)
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