Market Quick Take - January 8, 2021

What is our trading focus?

• Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures are pushing into fresh all-time highs this morning across both S&P 500 and Nasdaq 100 driven by strong sentiment tied to expected stimulus from the Democratic majority in US Congress. The 13,000 is the next big level insight for Nasdaq 100 and if this level breaks, it likely opens the possibility of a short-term squeeze higher. The reflation trade patterns continue again overnight with Japanese and South Korean equities rallying strongly to new highs.
  
  
• Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - crypto assets continued their wild ride yesterday, with Bitcoin breaching $40,000 briefly yesterday before pulling back and likewise Ethereum up above 1,250 before pulling back well below 1,200 in early European hours. The price action could be linked to the idea that stimulus checks will see smaller-scale speculators in the US buying crypto-coins and popular stocks with their stimulus money that is likely forthcoming after Joe Biden takes office. Still, many credit a large portion of the price increases in recent weeks to interest in the crypto space from institutional money.
  
  
• AUDUSD and EURUSD – USD traders clearly have US treasury yields on their collective minds as the spike in US long yields and widening of yield spreads relative to other sovereign bond markets has helped support the USD, while the anticipation of hefty stimulus should actually prove encouraging for USD bears as the stimulus money tends to drive worsening deficits, as evidenced by yesterday’s November US Trade Balance release, which showed a trade deficit of $68 billion, the worst trade deficit for a single month since 2006 and the second worst ever (and very worst ever ex petroleum). USD bears may have little fear as long as risk sentiment remains positive – but that sentiment could be sorely tested if US yields continue to spike aggressively.
  
  
• USDJPY – the USDJPY pair rebounded all the way to 104.00 overnight on the spike in US yields as the yen tends to trade inversely with the direction of US yields, especially when the latter are on the move. The 104.00 level was a key chart point on the way down and offered support over the summer and once in September, but the resistance for the descending channel that is the dominant feature of the USDJPY chart doesn’t come in until 104.50 or a bit higher.
  
  
• Non-farm payrolls in focus as yields continue to rise (10YUSTNOTEMAR21). The market is of the opinion that the path to recovery will be longer than anticipated and that less jobs have been added to the economy in December. Although non-farm payroll has been losing power to impact the financial market in the past few years, today it may be different. Treasury yields have been rising since the start of the year as the reflation story gains steam and better-than-expected job figures could fuel yields even higher. The real test for the bond market however, will come next week with the 3-, 10- and 30- year Treasury bond auctions that have recently been announced.
  
  
• Hyuandai Motor (HYUD:xlon) - shares of Hyundai Motor rose 19% in South Korea as carmaker said it was in early talks with Apple on tight cooperation on batteries and electric vehicles. The two companies already cooperating on Apple’s software for cars CarPlay.

What is going on?

• Commodities have, just like stocks, witnessed a very strong start to 2021 with multiple tailwinds supporting various parts of the sector. Despite a tumultuous week in Washington and a continued spreading of the virus variant, first seen in the UK, the markets have rolled over the buoyant mood from December. This on the prospect for more stimulus to support growth and continued demand for hedges to protect against inflation following a week where nominal and breakeven (inflation) yields broke higher. The Bloomberg Commodity Index trades higher by 3%, led by natural gas, copper and gasoline. Iron ore, a non-index member, tops the chart following a 7% advance while the only losses were seen in coffee and cocoa as extended lockdowns hurt demand.
  
  
• As impeachment demands swarm, US President Donald Trump issued a video-taped concession that Biden will take office. And in other evidence that Trump is giving up the fight to overturn the result of the 2020 election, White House political staff have been asked to turn in their resignations before Biden’s inauguration day on the 20^th. In the wake of the mob storming Capitol Hill on Wednesday and Trump’s role in inciting the violence, House and Senate Democrats are threatening to impeach Trump and remove him from office if Pence does not invoke the 25^th amendment, which would require that he and a majority of Trump’s cabinet declare him unfit for office. For impeachment and removal from office, the House would have to vote to impeach and then the Senate would have to hold a trial of the president if two-thirds of Senators also go forward with an impeachment vote. A Senate trial has never occurred in US history. With the clock running down and 12 days until Biden takes over, it is questionable whether there is time for any of this. Two of US President’s cabinet resigned yesterday (secretaries of Transportation and Education).
  
  
• Alibaba antitrust probe is becoming high political game with the government imposing censorship on reporting on the case including the whereabouts of Alibaba co-founder Jack Ma. The news flow is increasingly raising the likelihood of a “tail-risk” event in Alibaba and its shares so investors should apply strict risk management until there is more clarity over the company.

What we are watching next?

• The US yield spike and rhetoric from Fed Vice Chair Clarida – US yields have broken above their prior post-pandemic range this week, with further rises in yields yesterday to 1.09% in the 10-year and 1.87% in the US 30-year. Another Fed official – Philadelphia Fed president Harker – mentioned the idea of tapering of QE, the second to do so recently, and thought it might occur as soon as the very end of 2021 or early 2022. But a more influential voice on the Fed should be listened to today, Richard Clarida, who is on the Fed Board of Governors and is considered influential in establishing Fed policy.
  
  
• Whether US data continues to confuse and whether market cares – we saw a sour note from the US jobs market earlier this week as the Dec. ADP Payrolls Change showed a net loss of –123k jobs versus +75k expected. Today’s Dec. Nonfarm Payrolls change is expected to show a weak number of +50k, but it appears the market is ready to brush aside negative data aside for now, assuming that any near-term weakness is from the latest round of Covid-19 lockdowns and that stimulus and a successful vaccine roll-out will lead to a surge in growth beginning as soon as Q2. As well, the ISM Services Index for December came in at a robust 57.2 vs. 54.5 expected and 55.9 in November, although the employment index fell to a four-month low of 48.2.

Economic Calendar Highlights for today (times GMT)

• 1000 – Euro Zone Nov. Unemployment Rate
• 1330 – Canada Dec. Net Change in Employment / Unemployment Rate
• 1330 – US Dec. Change in Nonfarm Payrolls
• 1330 – US Dec. Unemployment Rate
• 1330 – US Dec. Average Hourly Earnings
• 1600 – US Fed Vice Chair Clarida to speak w/Q&A

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