Market Quick Take - December 8, 2020
Head of FX Strategy
Summary: Markets are trading sideways to slightly lower as multiple issues are dragging on what has mostly been an optimistic backdrop: the Brexit situation remains uncertain, with the UK and EU leaders set for in person emergency talks in Brussels, Poland and Hungary continue to hold out against approving the EU budget, and the US stimulus package meant to be passed yesterday is being held up.
What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - An old divergence reappeared yesterday, as the Nasdaq 100 managed to power to a new all-time high close, perhaps as US long treasury yields reversed back lower, while the S&P500 index closed very slightly down on the day. The wind at the markets back from stimulus hopes was largely absent, but the situation has yet to unsettled traders, even as the VIX remains stubbornly above the 20.00 level, which pre-covid would have been a rather elevated level.
- AUDUSD and EURUSD – watching the status of the US dollar here closely. The EURUSD recently cleared the critical 1.2000 level and was scooped up confidently yesterday on a dip below 1.2100 by USD bears, needing to stay clear of 1.2000 if the USD down-trend is to be maintained for follow through higher to 1.2500+. AUDUSD has been bid to new highs recently above 0.7400, but the price action has been rather choppy and full of backfilling – especially yesterday - and not much new progress has been made higher. Pairs like AUDUSD need to make a notable advance soon to underline the new trend, or a reversal risk sets in.
- EURGBP and GBPUSD – It is nearly impossible to match the price action with the headlines, as the lack of progress in Brexit talks and sudden concern that progress towards a deal might not be made in time has failed to sustain a GBP sell-off. More below on emergency talks set to begin today. Yesterday, GBPUSD traded all the way below 1.3250 before rebounding all the way back to 1.3400, with 1.3500 to the upside the critical level to watch on a possible breakthrough in talks and 1.3250 now the new failure era if fears grow of a weak or punitive semi-non-deal that leaves the UK out in the cold.
- Gold (XAUUSD) popped through key resistance yesterday on a combination of stimulus hopes as US coronavirus infections continue to surge and a weaker dollar. Outflows from ETF’s slowed to just 46k ounces, a sign that the recent bout of profit taking may be fading. Copper (COPPERUSMAR21) traded lower for a second day, but still above recent support at $3.46/lb, on signs that Chinese demand is slowing following the recent surge.
- Gilts bull flattened as a Brexit deal looks distant (FLGH1, GILTLONGMAR21). Yesterday 10-year Gilts yields dived 8bps to 27bps, which is the most they fell since April the 9th. EU chief negotiator Barnier was pessimistic about a deal and as we are approaching the end of the year without a Brexit deal, we can expect Gilts to continue to rise. Rate cuts bets are increasing.
- US Treasury yields fall as stimulus bill talks stall (10YUSTNOTEMAR21). 10-year Treasuries were well bid yesterday as stimulus talks didn’t lead to a deal. At this point in time, investors are not ready yet to bet on a bear steepener if a stimulus bill is on agreed upon. The level of 1% remains important, however we believe that equities will start to be sensitive when the 10-year yields hit 1.5%.
What is going on?
- Japan Prime Minister Suga announces massive stimulus - Worth some JPY 73.6 trillion, or more than $700 billion, the proposed fiscal stimulus package is worth nearly 14% of Japanese GDP – more details set to emerge soon, as Suga is struggling with public confidence and the virus has seen a resurgence in Japan in recent weeks.
- Japan Economy Watchers Survey Expectations plunged in November. Consensus was looking for a small drop to 47.9 from 49.1 in October, but the index fell to 36.5 the lowest level since July as Covid-19 infections are rising again.
- Uber is selling its self-driving unit to start-up Aurora. The high-flying technology of self-driving technology has proven to be much more difficult to develop and implement than initially thought. Uber is now selling its Advanced Technologies Group to the start-up Aurora while investing $400mn in the company taking a 26% ownership. The move makes sense from the perspective of getting to profitability faster which is what Wall Street wants, but long-term the self-driving technology was a key component in the bull case.
What we are watching next?
- Brexit situation entering the final, final countdown - With the latest round of talks not yielding any progress, UK Prime Minister Boris Johnson is set to travel to Brussels to meet in person with the EU’s Ursula Von Der Leyen in coming days for emergency talks. The state aid, or “level playing field” issue is said to be the stickiest issue remaining, and not helping at the margin, the UK House of Commons voted to reinsert controversial portions of the Internal Market Bill that would revive the risk of a customs border between Ireland and Northern Ireland, although Boris Johnson is said to be ready to abandon the clauses.
- Deadline today for Poland and Hungary to submit to EU budget framework or risk losing funding - Poland's government coalitions is divided on the wisdom of maintaining a veto of the budget (over “rule of law” clauses that the two countries feel is unfair to their sovereignty), with German and Poland leadership said to be in talks this morning. If the two countries fail to reach agreement on the budget, the EU is said to have a “Plan B” that would fund the budget and see Poland and Hungary losing billions in aid. An EU summit is set for this Thursday.
- US stimulus talks – progress or no progress? The $900B+ stimulus deal that seemed to be gaining momentum remains in doubt as its progress hit a snag yesterday, forcing US lawmakers to look at an emergency bill tomorrow to keep the government funded for a week beyond December 11 while dealing with the larger stimulus package. The two sticking points are said to be local and state government aid, which Republicans object to because those districts most in need are Democratic, and liability protection for businesses, with Democrats are against. Making matters more complicated, the stimulus bill is attached to a larger funding bill of some $1.4 trillion that funds the US government into the next calendar year.
- Airbnb and DoorDash IPOs. Airbnb lifted its IPO range overnight (see above) indicating strong demand. The shares are expected to trade on Thursday with the Saxo ticker code ABNB:xnas. DoorDash lifted its price range to $90-95 per share from $75-85 per share on Friday driven by strong investor risk appetite following the strong Q3 earnings from its Chinese competitor Meituan. DoorDash will start trading tomorrow under the Saxo ticker code DASH:xnys.
Earnings releases expected this week. It is a thin week on earnings as we are outside the earnings season but earnings from Lululemon Athletica and Adobe are worth watching as both companies are priced for perfection and thus carry an intrinsic skew for a negative surprise.
- Today: Ferguson, Brown-Forman, Chewy, AutoZone, Ashtead Group
- Thursday: Costco Wholesale, Oracle, Broadcom, Lululemon Athletica, Adobe
Economic Calendar Highlights for today (times GMT)
- 0800 – Hungary Nov. CPI
- 0900 – Norway Nov. Region Survey
- 0930 – South Africa Q3 GDP
- 1000 – Germany Dec. ZEW Survey
- 1100 – US Nov. NFIB Small Business Optimism
- 1700 – EIA's Short Term Energy Outlook
- 2330 – Australia Dec. Westpac Consumer Confidence
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