Market Quick Take - November 23, 2020

Macro 6 minutes to read

John Hardy

Head of FX Strategy

Summary:  Markets are starting off the week on a reasonably positive footing after a late sell-off on Friday in the US failed to follow through into the Monday session in Asia. The US dollar is on the defensive and oil prices are pressing on range highs, in general suggesting that the market is hoping to continue looking through the Covid-19 reality on the ground to the promise of an aggressive vaccine roll-out.


What is our trading focus?

  • Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the value and cyclical trade rotation seems to be starting the week with another try with S&P 500 futures leading the gains over technology stocks. The good export numbers out from South Korea over the weekend is bolstering growth trades across the board. S&P 500 futures are clearly bid with the key resistance level being at last Thursday’s close at 3,580.

  • Bitcoin Tracker ETN (BITCOIN_XBTE:xome) and Ethereum Tracker ETN (ETHEREUM_XBTE:xome)- the BItcoin price was volatile at the weekend, topping out just below 19,000 and trading briefly south of 18,000 before stabilizing into early Monday trading. But various other cryptocurrencies were stealing the headlines at the weekend, particularly second largest crypto-currency Ethereum, which has rallied more than 20% since last Thursday - see more on the Ethereum 2.0 upgrade below. Bitcoin and other crypto-assets are benefitting from renewed talks about inflation and debasement of currencies with several well-known institutional investors arguing for having some Bitcoin in the portfolio.

  • AUDUSD – still watching and waiting here as this is a currency pair that perhaps best tracks the “reflation trade” narrative, or the expectation that the global economy can begin to eventually look beyond Covid-19 (and effectively already can now for much of Asia) and that fiscal stimulus will drive inflation and commodity prices higher. The AUDUSD has traded in a very narrow range for over two weeks now as bulls wait for the signal that a 0.7400+ break is unfolding that can shift the focus perhaps all the way to 0.8000+ if the USD is set for a major weakening move. On the flip-side – declining US long yields are a confusing factor here and if this represents a concern on the growth outlook, the reflation trade may yet falter. Still, a breakdown in AUDUSD only looks a threat if the price action retreats below 0.7200.

  • GBPUSD and EURGBP – GBPUSD is poking above 1.3300 this morning, its highest level since a brief spike to nearly 1.3500 at the beginning of September, and EURGBP remains well below the pivotal 0.9000 area. After passing a number of supposed deadlines in the Brexit negotiations, UK Prime Minister Boris Johnson is set this week to speak to EU Commission President Ursula von der Leyen to pave the way for a deal both sides believe is within reach. Sky News reported that EU officials think a Brexit deal is 95% done.

  • Brent crude oil (OILUKJAN21) and WTI crude oil (OILUSJAN21) trade near a 12-week high with Brent moving closer to the August peak at $46.50/b. Supported by the progress toward a vaccine, a weaker dollar and a strong start to the week in Asia. Key focus being next week's OPEC and OPEC+ meetings where the group must navigate rising production from Libya, UAE privately questioning the benefits of participating and most importantly what to do with the planned January production hike. Stock levels at Cushing, the WTI delivery hub has risen to within 3.8 million barrels from the May peak.

  • US Treasuries will continue to rise as lack of stimulus poises more risks for the economy (10YUSTNOTEDEC20). Thanksgiving is approaching; however, the market is still trying to make sense of what happened last week with Mnuchin asking unused Fed’s funds to the US Treasury. Even though the reaction in the corporate bond space was muted, the US yield curve flattened at the end of last week. Yields may continue to fall as it is uncertainty continue to rise.

What is going on?

  • UK set to establish National Infrastructure Bank - UK Chancellor of the Exchequer Rishi Sunak is expected to announce the founding of a National Infrastructure Bank that will put billions of pounds to work toward the government’s “levelling-up agenda”, investing in projects and infrastructure aimed at less prosperous regions and as part of the effort towards fulfilling the UK’s goal of net zero carbon emissions by 2050.

  • US President Trump’s options are running out for challenging the US election result after a Pennsylvania judge rejected the Trump team’s lawsuit on the election result there. And the state of Michigan could certify its result as early as today, although the Michigan Republican Party and National Republican Party are seeking a 14-day delay of the certification.  A larger number of Republicans are said to be impatient with Trump’s lack of concession and the final vote tallies show that Trump lost the national popular vote by over six million votes and thus a 3.8% margin.

What we are watching next?

  • Covid-19 vaccine roll-out to begin soon - the Pfizer vaccine candidate may get approval in the UK in less than a week, while the EU is said to be close to an agreement with Moderna on its vaccine. Other vaccine candidates, including one from AstraZeneca (AZN:xlon) are potentially set for imminent approval as well. The US is said to be readying a vaccination roll-out in less than three weeks.

  • US President Elect Biden to name many cabinet picks tomorrow. This looks to be one of the earliest announcements for an incoming president’s cabinet in recent history and will send strong signals on the degree to which Biden will pursue a centrist line that attempts to get some of the opposition on board and to what degree his team recognizes the large progressive element of the Democratic voting base. Particularly pivotal is the Secretary of Treasury pick, which is less impactful if a former Fed official (especially Janet Yellen) is chosen, but could elicit a strong market reaction if someone like Wall Street hostile Elizabeth Warren is chosen. Sources are already reporting on Biden’s Secretary of State choice, veteran foreign policy adviser Antony Blinken.

  • The initial stage of the Ethereum 2.0 upgrade is launching soon - expected to happen at around Dec 1 this year. It’s the first step toward changing the way that transactions are processed, by moving away from the computationally heavy verification process to a proof-of-stake concept. Validators will stake a part of their ETH holdings which in turn gives a reward when validating, but the stake is lost if any fraud is detected in the validation process. When fully rolled out, this is expected to increase both the transaction speed and the security of the Ethereum network.

Earnings releases this week are slowing down as the Q3 earnings season is coming to an end. This list below shows the most important companies reporting this week.

  • Monday: Prosus, Naspers
  • Tuesday: Agilent Technologies, Xiaomi, Compass Group, Medtronic, Analog Devices, VMWare, Autodesk, Dell Technologies, Alimentation Counche-Tard, HP, Best Buy, Hormel Foods, Dollar Tree
  • Wednesday: Deere & Co, Alibaba Health Information
  • Friday: China Gas

Economic Calendar Highlights for today (times GMT)

  • 0815 – France Flash Nov. Manufacturing and Services PMI
  • 0830 – Germany Flash Nov. Manufacturing and Services PMI
  • 0900 – Euro Zone Flash Nov. Manufacturing and Services PMI
  • 0930 – UK Nov. Flash Manufacturing and Services PMI
  • 1445 – US Nov. Flash Manufacturing and Services PMI
  • 1530 – UK Bank of England governor Bailey, others to speak
  • 2000 – US Fed’s Evans (Voter in 2021)

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