Summary: The US equity market closed slightly lower after a jittery session that saw both relatively strong new highs rejected as well as a solid bounce off session lows. Overnight action was a bit quieter than usual with China off-line for a week to celebrate the Chinese New Year holiday. US President Biden announced a Pentagon task force for dealing with China and he and Chinese President Xi Jinping.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)–volatile session yesterday in Nasdaq 100 with a high to low range of 1.8% with the index trading just above yesterday’s close in early European trading hours. S&P 500 futures are more bid this morning trading around yesterday’s open price. The breakdown of risk in Tesla, Bitcoin, and Ark Invest funds are an interesting risk signal to watch for clues to a potential correction coming in equities. But overall, the market action is making us more nervous, and our view is that investors should consider reducing equity exposure a bit here.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - the two largest cryptocurrencies are struggling to maintain altitude, with Ethereum some 6% below yesterday’s new all-time high this morning, while Bitcoin traded below45,000 this morning. The technical situation for Bitcoin is clearer, with support around the prior major high just below 42.000 from early January, followed by the psychological support of 40,000 (just as 30,000 was clearly the pivotal level for much of January beforenew highs were posted on Tesla’s announcement of its interest in Bitcoin.
USDJPY – one of the key supports for the US dollar – rising long Treasury yields – was removed yesterday after a weak US CPI number and reasonable demand at a US treasury auction saw a solid dip in US 10-year yields to their lowest level in a week. USDJPY is trading near the key 104.00-50 zone, which was where the exchange rate broke out of the descending channel almost two weeks ago. The recent rally found resistance near the 200-day moving average, currently 105.54 and the resistance level for any renewed rally attempt.
AUDUSD and EURUSD – as noted above in USDJPY, US yields turning lower yesterday removes one of the supports for the US dollar, and AUDUSD rebounded quite smartly overnight after failing to hold yesterday’s highs. A close above 0.7800 there helps set sights higher toward the0.8100+ levels on the chart, but one wonders if there is some risk that the pair remains rangebound for the next week or so with China off-line celebrating its New Year holiday. EURUSD, meanwhile, has stalled out ahead of the important 1.2190-1.2200 resistance, with the euro held back by pandemic lockdowns and a slow vaccine roll-out, though it did post a bullish reversal from the attempt below 1.2000 - these are the two trigger areas for the next step for the super-major exchange rate.
Crude oil (OILUSMAR21 & OILUKAPR21) -after surging by 12% over the past eight trading days, both contracts are now well into overbought territory with 14-day RSI readings above 77. However, given the current positive outlook, traders are not inclined to reduce exposure which at best point to a period of consolidation, unless the general level of risk appetite receives a knock. The EIA reported a bigger-than-expected decline in US stocks last week while backwardations remain firm and rising with the one-year roll yield on WTI edging higher towards 9%. Focus today monthly oil market reports from OPEC and the IEA with the market looking for any changes in their forecasts for supply and demand.
Dovish Powell and solid 10-year bond auction push US Treasury higher (TLT, IEF). At the Economic Club of New York Webinar, Powell said that the United states is far away from having a strong labour market, and that he doesn’t expect sustained inflation to outbreak. The central bank will therefore need to keep monetary policy lose for longer.Despite US Treasury yields fell, they are still trading close to the uptrend line of their trading channel signaling that there is a setback in reflation trade, but that yields may resume rising soon.
Tesla (TSLA:xnas) and Uber Technologies (UBER:xnys) - with Tesla shares down 5% yesterday the market has been negative on the induced net income volatility that Elon Musk has added to Tesla and its shareholders. With Tesla shares being a big part of the most successful active funds, a breakdown could cause redemptions at funds holding Tesla and kickstart a wave of selling, so we urge investors to monitor Tesla shares closely here. Uber reported Q4 earnings yesterday that disappointed the market sending the shares down 5% in extended trading. Revenue was $3.17bn vs est. $3.22bn and the net income loss was another $968mn making it increasingly difficult to see how the company can reach break-even before the yearend.
What is going on?
US President Biden and Chinese President Xi have first call- after Biden earlier announced a special Pentagon task force to deal with China, the US President and Xi spoke, with Biden raising concerns about China’s actions related to Hong Kong, Xinjiang and Taiwan and its “unfair economic practices” while Xi stated that “China-US confrontation will hurt both sides – cooperation is the only choice”, according to official Chinese media. The two also discussed pandemic, climate change and weapons proliferation issues.
US CPI came in lower than expected - with the January headline and core measures both surprising to the downside with readings of 1.4% year-on-year, with the core CPI flat month-on-month and dropping from a 1.6% reading in December. An investigation of the internals of the inflation report shows that energy prices are the key drag on inflation, while food prices and used cars and trucks are the most inflationary components.Inflation measures should pick up sharply starting in March and especially April due to the basing effects of the very low energy prices during the worst market effects from the pandemic last spring.
Gold’s strong inverse correlation with US 10-year real yields – has faded this year and at –1.07% it is currently near the weakest level seen since January 21, a development that normally would translate into demand for gold, which is currently not happening. During the past month, the reflation focus has strengthened with rising bond yields primarily being driven by rising inflation expectations. Normally a situation that would support precious metals. The reason probably must be found in the “everything” rally currently unfolding elsewhere while investors looking for inflation hedges in commodities are focusing on those with tightening supply such as copper, platinum and crude oil.
What are we watching next?
US 30-year treasury auction – yesterday's 10-year Treasury auction saw demand in the middle of the range and yields dropped sharply to a new one-week low in the wake of the weak CPI release noted above. Today, the longest US debt – 30-year T-bonds, will be auctioned after yields there dropped back yesterday after touching the 2.00% level earlier this week.
Breakdown of the Tesla-Ark-Bitcoin risk cluster – yesterday, Bitcoin was down 5%, Tesla was down 5%, Ark Disruptive Innovation fund was down 1.2% but down 2.6% from the intraday highs, with spillovers into green transformation and biotechnology segments. This correlated risk-off moves across these parts of the equity is worth watching over the coming week as it could be a signal of a general correction in equities coming.
Earnings releases to watch this week - we had MercadoLibre as the highlight of the week as Bloomberg’s data indicated that the e-commerce giant in South America would report yesterday, but apparently there has been a lot of confusion about their reporting date and the company did not report yesterday. The company’s investor relations site provides zero information, but this morning Bloomberg has updated the next reporting date to 25 February. Today, the focus is on Disney and its international rollout of Disney+ video streaming offering.
Today: Zurich Insurance, PepsiCo, Duke Energy, Brookfield Asset Management, Disney, L’Oreal, Illumina, AstraZeneca, Schneider Electric
Friday: Enbridge, Dominion Energy
Economic Calendar Highlights for today (times GMT)
0800 – ECB Vice President Guindos to speak
1100 – ECB’s Knot to speak
1330 – US Weekly Initial Jobless Claims and Continuing Claims
1530 – US Weekly Natural Gas Storage Change
1900- Mexico Central Bank Overnight Rate Announcement
During the day – Monthly Oil Market Reports from OPEC and the IEA
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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.
