Market Quick Take - January 4, 2021

What is our trading focus?

• Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Crypto assets exploded over the holidays and over the weekend as Bitcoin rose to nearly 35,000 and some of the smaller coins rose more aggressively in sympathy than they have in a long time. The second-largest crypto currency, Ethereum, has been rising over 40% since yesterday to above $1,000 for the first time since early 2018. The sentiment in the Ethereum space is also boosted by the upcoming launch of ETH futures on the CME. The super-exponential pace of gains is impressive, but brings with it the risk of very sharp corrections when they do finally arrive.
  
  
• Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - major US equity futures are starting the year with positive momentum with S&P 500 futures hitting new all-time highs. The 3,800 level is the next big level in the S&P 500 to watch for traders and today’s open price is the first support level to monitor. The Georgia special election runoffs for two senator seats tomorrow are a potential positive catalyst for equities if Democrats win both seats as it would tie the senate at 50-50 with Vice President-elect Kamala Harris breaking the tie. This would set US fiscal policy up for an aggressive stance which the equity market would immediately price higher on more stimulus.
  
  
• China A50 - Chinese equities are 1% higher on the first day of trading despite the negative Alibaba stories over the holiday period with Chinese regulators forcing Ant (the financial arm of Alibaba) to divest out of all its businesses except its ‘roots’ in payments. We maintain a positive view on emerging market equities as this part of the market should do well in a reflation year, but the Chinese technology regulation is something to monitor.
  
  
• Japan Nikkei 225 (JP225.I) - Japanese equities corrected sharply in their first session of the New Year after a steep run-up last week as traders there fear that the government is set to declare a new state of emergency for the Tokyo region on a rise in Covid-19 cases. The level to watch for traders of the Nikkei 225 is the clear line of support (and former resistance) near 26,900 which broke last week with a significant surge higher – somewhat unsettling for bulls that so much of that surge was surrendered in the Monday session.
  
  
• AUDUSD and EURUSD – the USD managed to put up a brief fight ahead of the new calendar year versus the euro, but is trading on the weak side in most other pairs to start the year, with AUDUSD back above 0.7700. If risk sentiment remains positive and the reflationary narrative for the coming year stays on track, AUDUSD could prove one of the favoured expressions of USD weakness, although iron ore prices have corrected sharply from their recent huge run-up and the Australian outlook has been clouded by recent Chinese moves to limit imports. For EURUSD traders, the focus is on the 1.2500+ resistance, with 1.2000 as the major trend support and for AUDUSD, the next major chart resistance is up towards 0.80-0.8100 and trend support is perhaps 0.74-0.7500 now.
  
  
• GBPUSD and EURGBP – traders decided to take sterling higher after all after the UK Parliament approved the Brexit deal before year-end. Still, the move is rather modest in EURGBP terms and the next big focus is the well-defined range low in that pair near 0.8850, which could open a more significant move lower toward 0.8500 if traders can continue to look through the mounting Covid-19 resurgence in the UK. The virus numbers there have spiked badly again to new records due to the more contagious strain on the loose there as the UK races to vaccinate its citizens, having now approved a third vaccine, this one from Astra-Zeneca-Oxford. GBPUSD has now established itself above the pivotal 1.3500 level and the next major chart area doesn’t loom until well north of 1.4000.
  
  
• Commodities are broadly higher as the end of 2020 themes continue to attract fresh buying. The combination of a weaker dollar, heaps of stimulus, rising inflation/lower real yields and hopes for a vaccine-led recovery in global growth all playing their parts. Crude oil (OILUSFEB21 & OILUKMAR21) trades at a fresh ten-month high with vaccine rollouts off setting virus-related lockdowns, that could worsen during the coming months. OPEC+ will soon need to decide whether the global market can absorb another 500k b/d increase from February. Gold (XAUUSD) trades higher on the mentioned tailwinds with silver (XAGUSD) popping back above $27/oz on support from both gold and rallying industrial metals with HG Copper (COPPERUSMAR21) trading higher by 2%. Having broken through key resistance levels overnight the next target for gold is now the November high at $1965/oz.
  
  
• Georgia senate runoff might foster reflation sentiment if democrats get control of the senate (10YUSTNOTEMAR21). Investors should get ready for ten-year yields to hit the 1% pivotal level as the reflation story gains steam. Also, to support the reflation theme are the ten-year breakeven is close to break 2%, the highest since December 2018 and the bear steepening of the yield curve.

What is going on?

• Tesla says 2020 deliveries hit 499,550. This number is basically in line with its target for 2020 which is obviously pleasing Wall Street investors and marks a turning point for Tesla that has risen to become the most valuable carmaker in the world with a market value of $669bn. Three days ago, Tesla also announced the price point of its Model Y produced in China at CNY 369,900 which is below competitors in the same category fueling optimism around continued growth in China. The new delivery figures have not moved consensus price target a lot on Wall Street with consensus price target at $424 across 35 sell-side analysts which is 40% below the last close. Tesla is priced for perfection, and with competition in EVs heating up in 2021 it will be a crucial year for the stock.
  
  
• Primary corporate bond market resumes at full speed. After issuing a record $3.4 trillion of corporate bonds in 2020, borrowers are starting the new year looking to secure cheap debt as soon as possible. Mexico today is offering today 50-year dollar bonds, while Asian borrowers have started the year by issuing green bonds. The primary market will be buzzing this quarter, as it will be crucial for borrowers to refinance existing debt in light of bond yields rising due to reflation.
  
  
• Soybean (SOYBEANSMAR21), corn (CORNMAR21) and wheat (WHEATMAR21) all trading higher supported by a weaker dollar, bright demand outlook led by China and dry weather threatening production in South America. Especially in Argentina, the world's biggest exporter of soy products with dry conditions also building in Brazil. Soybeans hit $13/bu for the first time in six years while corn has recorded its longest run of gains in six decades.

What we are watching next?

• In the US, the Georgia Senate run-off elections – there are still two US Senate seats up for grabs in the state of Georgia, and polls for both races are shifting in the Democrats favour (although after the 2020 presidential election results relative to the polls, a considerable margin of uncertainty is necessary), which means there is still considerable drama on whether the Democrats under the incoming Biden administration might just have control of the Senate if they are able to win both seats (which would split the Senate 50-50, enabling VP Harris to cast the tie-breaking vote.) Trump’s desperate moves to reverse the election result and some sympathetic US lawmakers’ intent to protest the election certification could weigh on some Georgia voters’ minds.
  
  
• Some Republican US lawmakers plan to challenge the certification of Joe Biden’s election win - A number of Senate Republicans and a majority of House Republicans plan to interfere with the certification of the 2020 election result this week – the move is unlikely to result in anything more than division and noise, due to lack of constitutional authority for the effort to succeed and as many Republicans, particularly in the Senate, are against the move.

Economic Calendar Highlights for today (times GMT)

• 0815-0900 – Euro Zone Dec. Final Manufacturing PMI
• 0930 – Poland Dec. CPI
• 0930 – UK Nov. Mortgage Approvals
• 0930 – UK Dec. Final Manufacturing PMI
• 1430 – Canada Dec. Manufacturing PMI
• 1445 – US Dec. Markit Final Manufacturing PMI
• 1500 – US Fed’s Evans (Voter) to Speak
• 1500 – US Fed’s Bostic (Voter) to Speak
• 1530 – Mexico Dec. Manufacturing PMI
• 1715 – US Fed’s Mester (Non-voter) to Speak
• 2300 – US Fed’s Mester (Non-voter) to Speak

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