Market Quick Take - February 25, 2021

What is our trading focus?

• Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – very strong session in Asia with Hang Seng futures bounding back 2% following the fallout from the likely increase in stamp duty on trading is lifting US and European equity futures this morning. Nasdaq 100 futures are up 0.3% but yesterday’s session was still quite volatile intraday suggesting fragile markets. European equity futures are bouncing back more in line with inflation hedges as the European equity market has more index weight in cyclical companies including miners and energy companies.
  
  
• Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - the crypto market seems to have stabilized after a couple of days with heavy price movements, with Bitcoin trading around the $50.000 level and Ethereum just above $1.600.
  
  
• AUDUSD and NZDUSD – the commodity currencies are doing well with this backdrop, as commodity prices have rushed higher of late and boosted the AUD and NZD to new highs for the cycle. Next chart points to the upside for AUDUSD are near the 0.8135, the 2018 high, and for NZDUSD the not-so-distant 0.7550+ high from 2017. A note of warning: these currencies will have high beta with any swing in commodity prices and at some point, the central banks in both countries will become more restive, and the RBNZ even has a history of actual currency intervention.
  
  
• EURUSD – for the broader US dollar picture, we continue to watch EURUSD and USDCNY for a sense of whether a more profound USD sell-off is unfolding here (as opposed to the chief focus of the moment on commodity-exposed FX), as EURUSD trades toward the top of the local range that has served as resistance for the last several weeks just under 1.2200. A weaker US dollar would likely help to fuel strong risk sentiment and asset- and commodity prices globally.
  
  
• Gold (XAUUSD) slumped back below $1800 after Powell pushed back on inflation concerns thereby causing a rise in US 10-year real yields to –0.75%, the November top. Following two days of Congressional testimonies, the market has concluded the Federal Reserve is not concerned about the recent rise in yields and as a result the yield curve (5-30yr) is now the steepest since 2014. Silver (XAGUSD) meanwhile has recovered back above $28 with the gold-silver ratio (XAUXAG) falling to 64. Driven by a continued rally in copper and some renewed focus from the “SilverSqueeze” group of traders after GameStop doubled twice yesterday. Gold has key support at $1765 and resistance at $1820.
  
  
• US Treasuries continue to selloff, 7-year Treasury Notes auction and PCE data in the spotlight today (TLT, IEF). Powell said that he believes there is going to be a long way to a recovery. According to the president of the Federal Reserve, inflation will reach a sustained level of 2% in more than 3 years. Despite sentiment in Treasuries improved after his speech, the 5-year note auction was weak sending yields in the belly and long part of the yield curve back up. Today’s 7-year and Personal Consumer Expenditure data will be crucial for Treasuries’ sentiment.
  
  
• Bailey’s speech improves sentiments in Gilts, but not for long (IGLT). Yesterday, 10-year Gilt yields rose to try the new support line at 0.80%, however after Bailey’s speech yields dived and closed the day at 0.72%. The Bank of England’s Governor is expecting a considerably negative first quarter leading him to continue to support the economy and to review the pace of Gilt purchases next months.
  
  
• Nvidia (NVDA:xnas) - reported Q4 earnings yesterday with EPS hitting $3.10 vs est. $2.81 and revenue at $5bn vs est. $4.8bn with revenue guidance of $5.3bn in Q1 vs est. $4.5bn by analysts. While the chipmaker sees some supply constraints and difficulties keeping inventory in some graphic cards, the company expect to have enough supply to grow the business in 2021. Shares were quite muted in extended trading.
  
  
• Ark Innovation ETF (ARKK:arcx) - the main fund of Ark Invest was down again yesterday and evidence suggests that the fund’s position size has been highly correlated to those stocks’ performance over the past couple of days. While risk seems more balanced for now the increasing puts on Ark Innovation ETF suggests professional investors are still betting on a bigger correction in this segment of the equity market.

What is going on?

• UK Chancellor Rishi Sunak preparing big new spending bill – and may offset some of expense with corporate tax raise - this is an interesting first effort by the UK Chancellor to both provide additional stimulus – possibly of up to £100 billion – but also some sense of fiscal probity by offsetting some of the expense with a corporate tax raise. Currently, the corporate tax rate is 19%. The Treasury will hold a “tax day” some three weeks after next Wednesday’s Spring Budget announcement, at which Sunak may outline the new spending plans and an eventual intent to shift the tax regime.
  
  
• Agriculture commodities - Poor weather in Brazil continues to support the prices of soybeans (SOYBEANMAY21) and sugar (SUGARMAY21). Heavy rains during the past week have delayed the harvest of soybeans while exacerbating shipping logjams which are also impacting the export flows of sugar. Arabica coffee (COFFEEMAY21) meanwhile has risen to a 14-month high with adverse weather - drought during flowering followed by too much rain – driving the price higher at a time where the market is beginning to look for a post-pandemic pickup in demand. These developments supporting a jump in the Bloomberg Ag Index (ETF example: AIGA:xlon) to a fresh four-year high.
  
  
• Charlie Munger hits out at current equity sentiment. In a talk yesterday at a Daily Journal interview he said that the current market behaviour reminds him of the dot-com bubble and that it will end badly. He lashed out at Tesla and Bitcoin, but also called Robinhood a dirty business luring in gamblers.

What are we watching next?

• What is the pain point for rising treasury yields? - the “everything up but bonds” trade yesterday is driving enormous potential energy into this market, as yields have risen very sharply recently and can only head so high before triggering some level of unease across markets – we are getting close to one important pressure point in US yields – the 1.50% ten-year benchmark, as this area marked the cycle lows in yield for that benchmark yield prior to the pandemic outbreak.

Earnings releases to watch this week – strong Q4 earnings yesterday from Nvidia was not enough to please investors, sending the shares down again in extended trading due to growth concerns related to its datacenter business. The chipmaker is also constrained on the supply side with difficulties keeping an inventory especially in its gaming (includes crypto mining) segment. Booking, the world’s largest operator of online travel booking sites, showed less worse than expected bookings in Q4 and the company’s CEO said they are seeing early signs of summer bookings in especially Germany and the UK. Today’s earnings focus

• Today: MercadoLibre, AXA, Anheuser-Busch InBev, Bayer, NetEase, Toronto-Dominion Bank, Salesforce, Autodesk, Workday, VMWare, Dell Technologies, Moderna, Safran
• Friday: Deutsche Telekom, BASF
• Saturday: Berkshire Hathaway

Economic Calendar Highlights for today (times GMT)

• 0830 – Sweden Jan. Household Lending
• 1000 – Euro Zone Consumer Confidence and other Confidence surveys
• 1045 – ECB Chief Economist Lane to speak
• 1330 – US Jan. Durable Goods Orders
• 1330 – US Weekly Initial Jobless Claims and Continuing Claims
• 1330 – US Q4 GDP revision
• 1430 – US Fed’s George (non-voter) to speak
• 1500 – ECB Vice President Guindos to speak
• 1530 – US Weekly Natural Gas Storage Change
• 1530 – US Fed’s Bullard (non-voter) to speak
• 2000 – US Fed’s Williams (voter) speaking
• 2100 – New Zealand Feb. ANZ Consumer Confidence
• 2330 – New Zealand RBNZ Governor Orr speaking
• 2350 – Japan Jan. Industrial Production / Jan. Retail Sales

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