Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Summary: Equity markets are slightly traumatized after a zany session yesterday on Wall Street, with retail traders launching coordinated attacks on the widely shorted company Gamestop. As well, Italian Prime Minister Conte resigned yesterday, though this will not necessarily lead to new election. In the US, President Biden declared himself open to negotiating the income cut-off level for stimulus checks.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – yesterday’s price action across the most shorted single stocks such as GameStop caused massive price swings in certain stocks causing cascading effects and volatility in the broader indices with 3.4 points range in the VIX Index and 2.7% price range in Nasdaq 100 futures. US equities have recovered as yesterday’s price action was technically driven but nevertheless a worry for market fragility. The 13,380 level in the Nasdaq 100 is the key support level to watch today.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) – crypto currencies were generally under pressure – as Ethereum backed off badly shortly after posting a new record high yesterday, and Bitcoin was under pressure near 31,000 as of this writing versus a high yesterday just below 35,000.
EURUSD – with EU peripheral spreads widening somewhat on the recent ECB comments on possibly not needing to purchase up to the declared ceiling of sovereign bond and on Italy’s shaky government situation, the EURUSD is trading back on the defensive, never having rallied above the important 1.2200-1.2235 area. A test of the 1.2050 lows may be the side of least resistance if risk appetite continues to soften here in the near term on concerns that the US stimulus will be less forceful than originally hoped. Beyond that to the downside is the psychologically important 1.2000 level, while the pair needs to trade below 1.1900 to suggest that the entire up-trend is in danger.
AUDUSD – the AUDUSD appeared ready to mount a charge at the cycle highs again recently, but instead has continued to coil around in a shrinking range below 0.7800, with the downside trigger level of the multi-week low near 0.7660 now very close. Overnight, the Chinese warning of an asset bubble and weakness in key commodities contributed to downside pressure. The scale of the recent consolidation relative to the magnitude of the rally off the early November lows was very small, and the pair can till consolidate back to 09.7500 or even all the way to the 0.7400 area without threatening the up-trend as the latest price action suggests that the bulls may need to exercise some patience here.
Gold (XAUUSD) continues to gyrate around its 200-day moving average, currently at $1848/oz, while waiting for a catalyst to take it away from the current range. Yesterday’s rollercoaster ride in US stocks on a potential delay to the US stimulus package saw the dollar advance while bond yields dropped. Silver (XAGUSD) weakened with copper (COPPERMAR21) thereby lifting the gold-silver ratio to a one-week high. This after the Chinese central bank withdrew cash in a sign that authorities want to cool emerging overheating risks. The focus is now moving to tomorrows FOMC meeting where the market will be looking for comments that can guide bond yields. Resistance at $1875/oz and support at $1828/oz.
Crude oil (OILUSMAR21 & OILUKMAR21) remains stuck with a slow roll-out of vaccines and resurgent Covid-19 outbreaks in some regions off-setting signs of tightening supply. A flare-up in virus cases in China is threatening fuel demand during the upcoming Lunar New Year period while the market also fret a potential delay of the US stimulus package. The physical market meanwhile continues to tighten supported by lower February shipments from Iraq and Russia on top of the planned cuts from Saudi Arabia. As a result, the front month Brent spread is signaling the tightest market conditions in a year. Brent double bottom at $54.5/b the key area of support.
Bond future market drives the rally in Treasuries pushing the 10-year yields to 1.02% (10YUSTNOTEMAR21). The 10-year Treasury yield fell by 16bps since its high at the beginning of the month, but it isn’t down with the uptrend that started since August and the yield curve will resume its steepening sooner than expected. Tomorrow’s Federal Reserve meeting could be a catalyst for higher yields if tapering is being discussed.
Prime Minister Conte will resign today, but he’s seeking another mandate driving BTPs higher (10YBTPMAR21). Despite the Italian government will fall anyway, the yield on 10-year BTPs fell by 8bps yesterday as Conte is said to seek another mandate in an attempt to create a solid government. Italy will issue 2026 inflation linkers and 2022 zero-coupon today.
What is going on?
US President Biden said he was open to a reduction in stimulus checks – this was widely credited with a more negative mood overnight, as the $75,000 income level cut-off for receiving checks may be up for negotiation after Biden’s comments in the wake of a meeting with a bipartisan Senate group. Other measures in the $1.9 trillion original stimulus proposal, like the more than doubling of the federally mandated minimum wage, (some states have much higher minimum wages than the current minimum of $7.25 per hour) may also have a hard time passing.
Short squeeze in US stocks like never seen. Across the group of the most shorted US single stocks there was wild trading activity yesterday with many of these names shooting higher in a classic short squeeze. There is no single cause for these moves, but instead a complex function of Robinhood traders buying weekly call options, coordinated efforts to go long these names on the famous r/wallstreetbets forum on Reddit, gamma squeeze, increased gambling in the population due to the lockdowns, low interest rate environment etc. No single cause but many feedback loops causing these moves. Yesterday’s moves also caused Melvin Capital, a rather successful hedge fund, to ask to a private industry rescue by Citadel and SAC, as the company was caught in these short squeezes and had lost more than 30% in the first three weeks of trading before yesterday’s moves.
South Korea’s economy grew 1.1% QoQ in Q4, slightly more than the 0.9% expected, and this put the year-on-year level for Q4 at some –1.4%, one of the best performances of any economy in the annus horibbilis of 2020.
Chinese president Xi Jinping delivered a warning against a cold war – in an address at the World Economic Forum’s virtual Davos meeting. Many believe Xi’s comments were directed at the incoming Biden administration in the US, as the Chinese president weighed in against an “outdated cold war mentality” and said “confrontation will lead us to a dead end”. Hos US President Biden’s administration’s approach to China shapes up in coming weeks and months will likely prove critical for global growth and inflation prospects, not to mention for the fortunes of various sectors of the economy and individual companies.
China tightens liquidity, warns of asset bubble – Chinese markets suffered an ugly session overnight as the People’s Bank of China drained liquidity from the market, an odd move given the approaching New Year holiday there. An official from the PBOC told media that asset bubbles are a risk, for example, in the property market, if China doesn’t move to focusing on job growth and inflation.
What are we watching next?
FOMC Meeting this Wednesday – The FOMC meets this Wednesday, and the meeting statement and Fed Chair press conference will be scrutinized for any changes that suggest any alteration of the Fed’s policy guidance. The market operates under the assumption that the Fed will act less if there is more fiscal stimulus and more if there is less, but a key question is what Powell thinks about the fact that the market must absorb so much treasury issuance (I.e.,its QE is not nearly enough to cover the US budget deficit). Given the recent back and forth on the issue of the Fed eventually tapering purchases, the latest message from Powell and other key Fed officials is that it is far too soon to discuss.
Q4 2021 earnings season kicks into gear this week
Around 13% of the companies in the S&P 500 have now reported Q4 earnings with a strong upside surprise to both revenue and earnings. The outlook has generally been quite positive for 2021 with most companies expecting a strong second half. This week the earnings season shifts gear with many of the top 50 companies on market capitalization in the S&P 500 reporting earnings and especially important earnings from US technology stocks. The most anticipated earnings release will be from Tesla which is defying Wall Street analysts. The earnings releases highlighted in bold red are those with the most expected impact on overall equity sentiment or insights on macroeconomic activity.
Economic Calendar Highlights for today (times GMT)
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
What happened to the future?
What happened to the future?
Mitigate risks by emphasizing high-quality sovereign bonds and exploring potential opportunities in corporate bonds.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.