Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: The market mood has shifted back to the positive side after a strong session in Asia overnight, with the notable exception of China. US Secretary of Treasury nominee is set for a confirmation hearing today and will tout the need for the large $1.9 trillion Biden stimulus plan. In Europe, soaring shipping costs are grabbing headlines after a tripling of container prices in just two months.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities are rebounding this morning erasing all of yesterday’s decline with the S&P 500 extending back to the 3,800 level. If this level is broken to the upside, then the next congestion area of resistance could be around 3,815. The market seems to be renewing its reflation trades with US yields climbing as well. The $1.9trn stimulus in the US waiting to be negotiated in US Congress has the potential not only to end the deceleration in economic activity but likely also kickstarting demand-driven inflation.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - while the Bitcoin price continues to gyrate in the range well below $40,000, Ethereum has pulled to a new cycle- and all-time high well clear of $1,300.
EURUSD - the US dollar has eased back lower after EURUSD tested the 1.2050 area yesterday as bulls hope to see the global equity rally back on track and the reflation trade returning (both of which generally support a weaker USD) after a rather sharp consolidation of the large rally wave from early November to the 1.2349 top at the start of trading this year. Italy looks to avoid any further political turmoil after prime minister Conte survived a confidence vote in the lower house, with a Senate vote up today that will determine whether the government coalition can continue to rule.
USDJPY – the price action in USDJPY has been maintained near the 104.00 area after the pair poked at the resistance provided by the top of the descending trend channel has dominated the USDJPY chart for months (around 104.50). The return of stronger risk sentiment overnight has seen US treasuries selling off and taken USDJPY back above 104.00 again – the pair will bear watching for more JPY weakness (likely to be even more pronounced in other JPY crosses) if long US treasury yields pull back toward the recent highs – just below 1.20% in the case of the US 10-year benchmark.
Gold (XAUUSD) is still trying to stabilise following the latest sell-off with focus on Treasury Secretary nominee Janet Yellen’s comments on the dollar and stimulus when she testifies on Capitol Hill today. Gold bulls will be looking for comments that may pause the recent dollar and yield rise. The impact of recent gold weakness was visible in the COT report covering the week to January 12. It found speculators had cut bullish gold bets by 31% to near the lowest since June 2019. With real yields back below –1%, the short-term outlook hinges on the dollar with gold facing resistance at $1855/oz while Monday’s drop to almost $1800/oz helped trigger a strong buying response.
Crude oil (OILUSFEB21 & OILUKMAR21) is holding up well and have yet to break any downside levels that could signal a deeper short-term correction. This despite recent dollar strength, fading demand for reflation hedges – as seen through gold - and increased nervousness about fuel demand amid signs of resurgence of the coronavirus in Asia, the world's biggest importing region. The International Energy Agency will release its monthly Oil Market Report later today with the market focusing on its demand outlook. Support in Brent at $54.10/b the trendline from the November low.
Conte secured a confidence vote in the lower house, but he still needs the vote of the Senate (10YBTPMAR21). Conte has won the confidence vote in the lower house, and today he will be seeking another confidence vote at the Senate, which, if successful, will see the continuation of government led by Conte. If the vote at the senate is unsuccessful, there is the risk for early elections in June. In the meantime, yields rose slightly yesterday indicating that the market believes a vote in summer will not be necessary, which would otherwise cause a deeper selloff.
What is going on?
European wheat prices continued to surge higher yesterday with the Paris milling wheat contract (EBMH1) rising to €235.75/t, the highest close in more than seven years. The rally has been attributed to two Russia factors. One being a wintry blast with temperatures dropping below minus 25 Celsius raising concerns for additional winterkill. Most important however is the recent introduction of Russian export duties in order to curb sales from the world’s largest exporter at a time of already tightening supplies. Chicago traded wheat (WHEATMAR21) meanwhile trades at $6.84/bu, near highest since May 2014.
Soaring shipping costs for containers finally getting headlines, especially for the China-to-Europe route, where prices have more than tripled to a record in the space of two months. The piling up of empty containers in Europe and the US on the disruptions in trade last spring from the Covid-19 outbreak have meant a shortage of empty containers in China where many imports of manufactured goods are sourced. The rising cost issue is mostly for the China-Europe route, as China intervened to cap rates to US-bound shipments in October. Signs of rising input prices abound in Europe, but have yet to affect CPI, though that will bear watching in coming months.
UK leader Boris Johnson creating new alliance to rival G-7? Johnson has invited South Korea, India and Australia to the G-7 meeting in June, a move that Italy, Germany, France and Japan oppose, but likely one that is intended to expand the G-7 and reduce the proportion of EU powers in the alliance.
What are we watching next?
US Treasury Secretary nominee Janet Yellen set to testify today – the former Fed Chair is set to testify in a Senate nomination hearing today and officials close to hear say she will express a belief in a market-determined dollar level (and explicitly not in favour of a weaker US dollar for competitive advantage). The appearance will give a sense of her ability in a new, far more political role. According to Yellen’s prepared remarks, she believes that now is the time "act big” with a large stimulus while yields are low. She also bemoaned the K-shaped recovery and the need for “more prosperity for more people”. Any questions related to China will also prove important as the Secretary of Treasury has often been a prominent economic policy figure in contact with China.
US President Elect Joe Biden to bring a very different attitude toward oversight – President elect Biden will arrive with an entirely new style than his predecessor and an entirely different attitude toward governing, including especially more oversight and the usefulness of regulation, an aspect of the Biden administration’s stance that the market may be underestimating. The new choice to head the SEC, Gary Gensler, is likely a more activist presence than his predecessor and will scrutinize everything from retail trading platforms like Robinhood, to cryptocurrency trading players, with a focus on investor protection. Biden has chosen Rohit Chopra to head the Consumer Financial Protection Bureau. He is an acolyte of Elizabeth Warren, who was instrumental in creating the CPFB, an institution that was largely dormant under Trump.
Q4 2021 earnings season kicks into gear this week
Netflix reports Q4 earnings today after the market close following a disappointing Q3 earnings release where Netflix mitigated some of the disappointment by issuing very positive expectations for Q4. The stakes are therefore high tonight for one of the large entertainment and technology stocks in the US. The list below highlights all the most important earnings to track this week with the ones marked in red being the one with the most impact on macro and sentiment in equities.
Economic Calendar Highlights for today (times GMT)
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