Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: After posting a new record high close yesterday, US equity futures dipped overnight as most other developed market indices remain rangebound in recent sessions. Crypto currencies have suffered a new bout of severe volatility yesterday and overnight, while the US dollar advanced against commodity currencies and precious metals dipped again after their recent run higher.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – US equities are edging lower after hitting record levels as new restrictions in the US to handle the pandemic may be weighing on sentiment and questions remain of how much of the Biden $2trn stimulus package can be enacted. Overnight in Asia, preliminary Japan PMI figures for January showed a worsening situation from December which is at odds with the recent rising growth expectations. S&P 500 futures have already broken below yesterday’s lows and the 3,800 level on the downside could come into play today.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome)–crypto currencies suffered a new bout of extreme volatility, with Bitcoin trading all the way below 29,000 overnight before rallying more than 10%into early European hours. Similarly, Ethereum traded below 1,050 briefly overnight, which amounted to a more than 25% correction from its high three days ago, though at 1,170 as of this writing, is still some up 100% from a December 24 low. This scale of volatility could spook participants in the market for a time and shake out weaker hands until a new sense of stability is found.
EURUSD–while most currencies backed off slightly against the US dollar, the Euro held rather steady yesterday, likely in part due to ECB President Lagarde saying yesterday that the central bank may not need to use all ofthe its EUR 1.85 trillion asset purchase target if financial conditions remain favourable, though she also argued that plan could be expanded if necessary. Yield spreads between Germany and the periphery, especially Italy, widened on this rhetoric. Still, EURUSD needs to pull back well above 1.2200 to begin to argue that it is mounting a full comeback from recent lows.
EURGBP and GBPUSD –sterling has pulled back from new recent highs for the cycle, perhaps as UK Prime Minister Boris Johnson warned yesterday that virus lockdowns could persist until summer even with the intention to vaccinate the most vulnerable 15 million citizens there by the middle of next month. EURGBP pulled back above the 0.8860 area that it had justbroken, while GBPUSD backed down below the 1.3700+ break level overnight, a level it took out yesterday. Too early to tell if we have seen another failure of new highs in GBPUSD to hold, but the three prior new cycle highs all resulted in some degree of failure and back-filling before the trend continued.
Gold (XAUUSD) andsilver (XAGUSD) traded higher yesterday before retracing lower in response to stronger-than-expected US economic data. Following the recent rise in nominal bond yields, both have struggled to find a bid strong enough to propel them higher towards relative safety, in the case of gold above $1882/oz. Platinum (XPTUSD) jumped to a 4 ½-year high $1155/oz before giving up most of those gains. Investment appetite for semi-industrious metals such as silver and platinum however stays strong with total ETF holdings in both at record highs.
Crude oil (OILUSMAR21 & OILUKMAR21) is still stuck in a narrow range near the highest level in a year with pandemic-led demand concerns, now also in China where lockdowns are spreading ahead of the Lunar New Year holiday. Limiting the downside are the weaker dollar, US stimulus hopes, Saudi Arabia’s unilateral production cuts and a continued strong investor demand for commodities, including oil. Focus today, the two-day delayed weekly US EIA stock report after the API reported a surprise build on Wednesday. In Brent, resistance can be found at $56.60 while the downside focus today will be trendline – from the November low – at $55/b followed by the recent low at $54.50/b.
Pressure coming from US Treasury TIPS issuance and 10-year Breakeven push US yield curve higher (10YUSTNOTEMAR21). The US yield curve steepened, but not enough in our opinion. Yesterday, the 10-year TIPS auction was awarded the lowest bid ever of –0.987%, following which 10-year Breakeven spiked to 2.18% for the first time since 2018. Inflation expectations are not the only elements that contribute to the steepening of the yield curve.Yesterday the Treasury announced the issuance for 2-, 5- and 7-year notes next week to finance the stimulus bill. We believe that we will see the spread between 2s10s widening above 100bps in the next few days.
European sovereigns' bondholders are becoming wary of the ECB policies(10YBTPMAR21,10YOATMAR21, BUNDMAR21). Christine Lagarde yesterday said that the central bank might not use the entire stimulus package provoking fear that prices of European sovereigns would not be supported. Italian BTPs suffered the most widening 7bps to a level previously seen last November. Heading to the ECB press conference the Spanish government bond auction was very weak with the bid to cover for 7-year Bonos lower by more than 70% since prior auction. This is a clear signal that investors are wary from negative yielding debt in the periphery if the support of the ECB is not clear.
Intel (INTC:xnas) - delivered strong Q4 earnings with revenue at $20bn vs est. $17.5bn and EPS of $1.52 vs $1.11 driven by a positive surprise in the data center business which bodes well for the cloud industry in general. Intel says work-from-home demand is expected at current levels for 1H and says all of 2021 outlook depends on 2H corporate demand. The new CEO Gelsinger also said on the conference call that he expects that most of products in 2023 will be manufactured internally despite investors growing demand for Intel to shred that business as Intel has fallen behind TSMC. This new strategic decision caused shares to decline 5%
What is going on?
EU peripheral spreads widen in the wake of the ECB - after ECB President Lagarde equivocated on the need to use the entire EUR 1.85 trillion in asset purchase targets if financial conditions remain favourable, suggesting that the ECB has perhaps reached the far side of a “peak” in its accommodative message.
Covid news continues to cast a dark shadow – In China, will have to limit travel around the New Year celebrations in February, and Hong Kong was forced to lockdown tens of thousands of its residents. In the UK, Prime Minister Boris Johnson said the current lockdown could last until summer. In Europe, the progress of vaccinations is slow, while in the US, President Joe Biden announced that vaccine production will be difficult to increase until April- and warned that 100,000 Americans could die over the next month, while announcing new rules on mask wearing for travel.
The grains sector has run into profit taking with the Bloomberg Grains Index trading lower for the first week in seven. A +50% rally in corn and soybeans since August helped attract a very elevated speculative long position, currently some 50% the two previous peaks in 2016 and 2018. A long that is now being challenged by beneficial rains in South American key growing area that may improve crop yield prospects and reduce worries about global supply. It remains to be seen whether the correction may turn out to be the canary in coal mine signaling a broader round of profit across other commodities that have seen strong speculative buying in recent months.
What are we watching next?
UK Chancellor Sunak to announce plan on Mar 3 to restoring UK finances– this is one of the first signs that one of the most aggressive implementors of fiscal spending in the pandemic response recognizes that some return to fiscal rectitude may be necessary, a process that in the last cycle was seen as proceeding too quickly, especially in the UK’s case. Without inflation pressures on the country, the pace may not need be as quick this time, while the urgency may pick up if rising inflation generates unease.
Q4 2021 earnings season kicked into gear this week
Earnings are off to a good start as we wrote about yesterday in our earnings review with strong upside surprises at around 90%. Intel reported strong Q4 earnings after the close while the US railroad company CSX Corp said volumes are improving from 2020 lows. Today’s earnings focus is on Schlumberger which will give insights into the outlook for the US oil industry in the first half of the year.
Today: Schlumberger, New Oriental Education & Technology
Economic Calendar Highlights for today (times GMT)
0815-0900 – Euro Zone Jan. Flash Manufacturing and Services PMI
0930 – UK Jan. Flash Manufacturing and Services PMI
1330 – Canada Nov. Retail Sales
1445 – US Jan. Flash Markit Manufacturing and ServicesPMI
1500 – US Dec. Existing Home Sales
1530 – US Weekly Natural Gas Storage Change
1600 – US Weekly DoE Crude Oil and Product Inventories
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