• Shaky markets while stablecoin adoption increases
    by Mads Eberhardt on January 12, 2021 at 3:20 pm

    The sharp drop in the crypto space in the beginning of the week triggered all-time high trading volumes in Bitcoin. Furthermore, big news were out from the US Treasury regarding the use of stablecoins. For the first time, Bitcoin experienced a drop of $10,000 in under 48 hours From being traded at approximately $41,000 on Sunday, Bitcoin fell to a low of $30,500 yesterday evening according to TradingView. Rumours started to circulate shortly thereafter on what contributed to the drop, and it seemed to be a hefty sell-off by miners as well as others who were taking in profits from the recent surge. This sell-off contributed to panic to some extent across the whole cryptocurrency market. Bitcoin volume at its all-time-high upon increased volatility The sell-off resulted in all-time highs in the traded Bitcoin volume as it hit $11 billion based on the eight biggest cryptocurrency exchanges, beating the 2017 bull run. There has been a lot of talks about institutional interest in this circle. However, it also looks like more retail investors are finding their way to the space as the PayPal volume for cryptocurrencies also hit a new high yesterday of $242M. Bakkt will not support XRP, making XRP’s legal issues worse Yesterday, Intercontinental Exchange’s subsidiary called Bakkt said that it will go public through a SPAC deal. Bakkt is planning to launch an app for cryptocurrency trading in March. That app will however not let clients trade XRP, the fourth biggest cryptocurrency measured on market capitalization. Without Bakkt having disclosed the reason behind this decision, it is most likely due to XRP’s legal issues. At the end of December 2020, XRP was sued by the Securities and Exchange Commission in the US for assumingly having issued more than $1 billion in tokens without registering it as a security. As many cryptocurrency exchanges and fund managers are not legally allowed to handle securities, an avalanche of delisting’s followed as Bitstamp, Coinbase, Binance.US and more exchanges delisted the cryptocurrency, contributing to a sharp price decline. Once again, it shows the power that the regulators have on the development of respective cryptocurrencies. A power, which should never be underestimated. US Treasury allows US banks to use public blockchains and USD stablecoins The power of regulators can also contribute positively which was demonstrated last week in the stablecoin space. The Office of the Comptroller of the Currency under the US Treasury stated last week that US-based banks are allowed to use stablecoins and blockchain for settlements and payments. The CEO and co-founder of Circle, Jeremy Allaire, who issues the second-biggest stablecoin called USDC together with Coinbase, stated that this is a “huge win” for crypto and stablecoins as it paves the way for the use of stablecoins as a mainstream payment medium. Stablecoins experienced significant growth last year where the Tether supply grew from $4.1B to $21B while the USDC supply grew from around $520M to $4B at the end of the year. Mads Eberhardt Cryptocurrency Analyst Saxo Bank Topics: Cryptocurrencies Bitcoin Ethereum

  • FXO Market Update - Jan 12
    by Mathias Alrixon on January 12, 2021 at 9:30 am

    EURHUF has been trading within 354/369 range for over 3 months and currently trades in the middle of the range. Vols have traded higher as EM currencies have traded weaker over the last week with US yields and US spot trading higher. Sell 1 month strangle if you think spot will continue to trade in the range. Saxo Bank publishes two weekly FX Options Market Update reports covering changes and updates on the FX Options and FX Volatility market. They describe changes in FX volatility levels, risk premium and ideas how to trade based on these. EM currencies have traded weaker over the last week as US yields and USD spot have traded higher. EURHUF has traded back to the middle of the 354/369 range, which spot has traded within since start of September. Vols have traded higher over the last week with 1 month EURHUF up to 8.0, the highest level since start of November and the risk premium has increased to 1.25 vol after the move higher in implied vol. Risk reversals have not moved much so far and trades steady around 1 vol for EURHUF calls. We like to sell in to the higher vol and selling a strangle is a good strategy if you think spot will continue to trade in the range. Sell 1 month 355.00 EURHUF put Sell 1 month 370.00 EURHUF call Receive 175 pips Spot ref.    360.60 The Top/Bottom charts shows the top 5 and bottom 5 values/changes for at-the-money vol, risk reversal (RR) and risk premium of the 45 currency pairs we are tracking. Risk premium: Implied (Imp) minus realized volatility. A positive risk premium means implied volatility trades above realized volatility, i.e. the implied volatility can be seen as “rich”. Change: The difference between current price/volatility and where it closed 1w ago. FX Options Trading: You should be aware that in purchasing Foreign Exchange Options, your potential loss will be the amount of the premium paid for the option, plus any fees or transaction charges that are applicable, should the option not achieve its strike price on the expiry date If you write an option, the risk involved is considerably higher than buying an option. You may be liable for margin to maintain your position and a loss may be sustained well in excess of the premium received. By writing an option, you accept a legal obligation to purchase or sell the underlying asset if the option is exercised against you; however far the market price has moved away from the strike. If you already own the underlying asset that you have contracted to sell, your risk will be limited. If you do not own the underlying asset the risk can be unlimited. Only experienced persons should contemplate writing uncovered options, then only after securing full detail of the applicable conditions and potential risk exposure. Learn more about FX Options: Forex Options – An introduction Forex Options – Exotic options Forex Options - Webinars Mathias Alrixon OTC Derivatives Trading Saxo Bank Topics: Forex Options GBPJPY AUDJPY CADJPY EURGBP EURSEK EURUSD Silver Forex GBPUSD EURCHF USDJPY AUDUSD USDMXN XAUUSD EURPLN NZDUSD Usdrub

  • Podcast: Social media companies a drag on US equities. Tesla versus NIO.
    by Saxo Market Call on January 12, 2021 at 9:00 am

    Today, we look at divergent markets as Japanese equities managed to scrape to a new cycle high, while US stocks corrected sharply back lower after the prior day's surge, dragged in particular by social media companies on the de-platforming of Trump and other related issues linked to him politically. Also a look today at Tesla versus NIO, the commodities complex, the status of the US dollar consolidation and more. Today's call with Peter Garnry on equities, Ole Hansen on commodities and John J. Hardy hosting and on FX. Listen to today’s podcast and have a look at today’s slide deck. Follow Saxo Market Call on your favorite podcast app:       If you are not able to find the podcast on your favourite podcast app when searching for Saxo Market Call, please drop us an email at marketcall@saxobank.com and we'll look into it.   Questions and comments, please! We invite you to send any questions and comments you might have for the podcast team. Whether feedback on the show's content, questions about specific topics, or requests for more focus on a given market area in an upcoming podcast, please get in touch at marketcall@saxobank.com. Saxo Market Call Saxo Bank Topics: Podcast Forex Equities Commodities Macro Nasdaq EURUSD Gold Crude Oil US Election

  • Market Quick Take - January 12, 2021
    by Saxo Strategy Team on January 12, 2021 at 7:25 am

    US equity markets corrected lower yesterday, although global markets steadied overnight in Asia, and the Nikkei 225 posted a new multi-decade high. The US dollar remains firm after US treasuries weakened again, but gold and silver snapped back from an extension of their sell-off yesterday. In the US, Trump and Pence make nice as House likely set to move forward with impeachment in last week of the Trump presidency. What is our trading focus? Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures pulled back sharply yesterday, erasing the entire extension above the old highs prior to the rally, and putting the major indices at delicate levels that need to hold to confirm the trend. The levels are around 12,900 in the Nasdaq 100 index and perhaps 3,750-75 for the S&P 500. Later in the week, equity traders will need to begin balancing incoming earnings results and guidance with expectations on how the economy and earnings will develop as vaccine roll-outs get under way in earnest in Q1. Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - crypto assets stabilized and bounced back after Bitcoin sold off nearly all the way down to $30,000, a correction from the top late last week of over 25%. Ethereum suffered a sell-off of similar magnitude, but has already retraced more than half of the lost territory as of this writing. Some are linking the recent more frequent mention of “tapering” of Fed QE purchases as aimed squarely at speculative phenomena like the meteoric rise in Bitcoin and other crypto assets as well as Tesla stock. AUDUSD and EURUSD – the US dollar remained broadly firm, with AUDUSD trading below 0.7700 at a new 5-day low close. The next trend support there is arguably 0.7600-25, although yesterday saw the pair finding support in the very narrow rising trend channel. Major trend support is the 0.7400 area that was critical on the way up. For EURUSD, the sell-off extended well below 1.2200, with first retracement support around 1.2065, and the major trend support coming in psychologically at 1.2000. USDJPY – the USDJPY pair is often the most sensitive to moves in US yields and traded near the top of its very well-defined trend channel yesterday, where key resistance arguably come in around 104.50. If this area is broken, it would represent the first G10 USD pair to suggest a trend reversal for this cycle and would likely coincide with a further rise in US treasury yields at the long end of the curve. Gold (XAUUSD) and silver (XAGUSD) continue to stabilize following the biggest drop in two months. The dollar rally has paused while US 10-year bond yields reached a new cycle high overnight. Rising nominal yields is a drag, but as long it is being driven by expectations for higher inflation, the (negative) impact on precious metals will eventually start to fade. During the latest rout gold has confirmed trendline support at $1815/oz while staying mostly above its 200-day moving average at $1840/oz with focus now on resistance at $1870/oz. Silver meanwhile has started to claw back some of the 5% it lost relative to gold with the first level of resistance at $25.7/oz. US Treasury yields continue to rise, market attention turns to 10y auction today (10YUSTNOTEMAR21). The belly of the US yield curve rose sharply with 7- and 5-year yields rising as much as 5bps on the day. The 3-year Treasury auction closed marginally cheaper; however, demand was solid with the bid-to-cover-ratio rising as investors were looking to reduce duration. Fed’s Bostic’s speech fostered bearish sentiment in Treasury as it said that it is open to tapering as soon as the end of 2021 if there is a strong recovery. The selloff will likely continue with the 10-year yield trying the 1.2% resistance level. Key levels ahead are: 10-year Treasury auction today and 30-year auction tomorrow, and Bostic speaking again on Thursday. Odds for an interest rate cut continue to rise in the United Kingdom as the economy faces double dip recession (GILTLONGMAR21, GILS). Bank of England’s Tenreyro was vocal yesterday about an interest rate cut, however it failed to convince the market that this tool will be enough to support the British economy and ignore a recovery as Gilts continued to selloff throughout the day. Tesla (TSLA:xnas) and NIO (NIO:xnys) - Tesla shares were down 8% yesterday in what at first seemed like a correlated move to the decline in Bitcoin highlighting the same speculative vein. But part of the explanation could also have been Tesla’s main competitors in China, NIO, reporting a new sedan called ET7 with deliveries starting in Q1 2022. But the real positive surprise was the upgraded battery pack showing better performance and longer range. NIO shares were up 6%. What is going on? A buoyant grain market awaits the monthly release of world supply and demand forecasts by the U.S. Department of Agriculture today at 1700 GMT. Soybean (SOYBEANSMAR21) is hovering near a six-year high while corn (CORNMAR21), following its best run in a decade, continues to challenge the key $5/bu level. The report is expected to show reduced US inventories for soybeans, corn and wheat while a drop in oilseed and corn output in Brazil and Argentina would trim global stockpiles of both crops, already projected at the lowest in at least five years. Speculators began 2021 holding a near record net-long in corn and soybeans futures as rising demand and hot, dry crop weather in South America have reinforced concerns about tightening world supplies. US President Trump and VP Pence meet, send no signs of Trump resignation or removal by VP Pence, which means that the Democratic House leadership will likely move forward with articles of impeachment tomorrow in an attempt to remove Trump from office and prevent him from ever serving again after having “incited insurrection”, as well as due to his role in asking for an official in Georgia to “find more votes”. The US Senate would then have to impeach Trump with a two-thirds majority for the impeachment to result in a trial and removal from office (largely symbolic as any trial would likely not take place until after the end of Trump’s term on January 20. Carnival reports preliminary Q4 results showing a net loss of $1.9bn. The cruise line operator’s average monthly burn rate was $500mn in Q4 compared to $9.5bn in cash on the balance sheet as of 30 November indicating that the company has enough liquidity to get through 2021. The CEO says that the company expects all ships to be operational by year-end and that demand for 2022 is strong with cumulative advance bookings for 1H 2022 ahead of 2019. This is a good indication of what to expect for the general leisure industry when vaccines normalize our daily lives. Shares were down 1.5% yesterday on the news. Cryptocurrency platform Bakkt to go public through a SPAC deal. The company is owned by the Intercontinental Exchange and has plans to launch an app in March that will let users buy and sell cryptocurrencies and manage loyalty points and gift cards according to Financial Times. The company will have an enterprise value of $2.1bn. The deal comes after Coinbase, the most established name in the industry, has just announced its plan to IPO in a more traditional way. What are we watching next? The ongoing development in US long yields – after the first week of the year saw US 10-year and 30-year treasury yields break above the key range highs of 1.00% and 1.75%, respectively, the ongoing development in US yields is important for the outlook across asset classes, as higher yields represent a tightening of financial conditions, which is benign if this is due to an improvement in the outlook and a strong economy, but comes at an interesting time as many speculative assets have had a remarkable run and could prove very sensitive to a persistent run higher in yields. Yesterday, the 10-year treasury benchmark yield posted another new high for the cycle at 1.15%. Q4 2021 earnings season starts this week. Q3 2020 earnings season was the big comeback for corporate earnings and the market expect the momentum to continue in the Q4 earnings season. Friday is the most important day when JPMorgan Chase, Citigroup, and Wells Fargo report Q4 earnings and more importantly provide the market with an update on loan losses and the US economy. Economic Calendar Highlights for today (times GMT) 1100 – US Dec. NFIB Small Business Optimism survey 1435 – US Fed’s Brainard (Voter) to speak at AI symposium 1500 – US Nov. JOLTS Job Openings 1600 – US Fed’s Rosengren, Kaplan and Kashkari to speak at event 1700 – EIA's Short-term Energy Outlook 1700 – USDA’s Jan. World Agriculture Supply and Demand Estimates 1800 – US Fed’s George (non-voter) to Speak on economic outlook 1900 – US Fed’s Rosengren (non-voter) to speak on economic outlook 2130 – API's weekly US petroleum stock report Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:     Saxo Strategy Team Saxo Bank Topics: Macro Equities Commodities Forex Quick Take Bonds Tesla Motors Bitcoin Ethereum AUDUSD EURUSD USDJPY Gold Cryptocurrencies Silver United Kingdom

  • FX Update: USD finds new gear on risk aversion
    by John Hardy on January 11, 2021 at 12:50 pm

    The consolidation in the US dollar bear trend continues as global markets start the week on wobbly footing on some of the usual suspects returning and grabbing the spotlight, from Covid-19 concerns looking more global again, to longer term concerns on the US-China relationship and maybe even on the implications of Trump finding himself locked out of his social media platforms. FX Trading focus: USD: benign consolidation – unless… The US dollar continues to back up, adding to its strength since mid-week last week. The initial pull higher was on the back of the break higher in long US yields that we gave prominent coverage last week, with this latest addition to the greenback’s resurgence on a bit of risk aversion to start the week. There are multiple angles on what may be driving a sudden risk off move, with the most straightforward simply a heavy dose of negative Covid-19 news, as the super-contagious variant could win the initial part of the sprint to vaccinate, and where previous major winners in fighting the virus are dealing with record levels (Japan) and with a sufficiently serious new outbreak to require the total shutdown of a major city (Shijiazhuang in China). Regarding that super-spreading variant plaguing the UK, it is rapidly spreading elsewhere and in Denmark, to take an example, it is expected to become the dominant strain of the virus by mid-February, frustrating any hopes that activity can normalize any time soon. The negative tone today is quite a contrast with Friday, where equities surged to a new record despite US December jobs data coming in weak (-140k on December non-farm payrolls and only weaker participation driving the reported drop in the unemployment rate). Sure, it is no surprise to see major losses in the hospitality and other service jobs, but the market’s apparent trust that all will be well remains jarring relative to the news flow. I suspect another potential source of unease could be the shutdown of Donald Trump by social media companies and the uncertainty on the risk of further unrest that could ultimately become more disruptive. The mob occupying Capitol Hill last week somehow failed to have any initial effect, but any aggravation or spreading of this phenomenon, whether in Washington DC or across the country could change the market’s stance on the issue. As counterintuitive as it sounds, US unrest could support the US dollar via weak risk sentiment. Specifically, pro-Trump groups are encouraging demonstrations on January 17 – this Sunday – and there is dark talk that some would like to show up armed for the occasion. Finally, the US-China relationship is a credible source of potential long-term unease and uncertainty, just as headlines linked to Trump huffing and puffing on trade issues serially pumped and dumped the market for the year prior to the Covid-19 pandemic and the trade deal that was finally signed almost a year ago today. It seems that the outgoing Trump administration is laying down all manner of anti-China landmines that the incoming Biden administration will have to deal with from day one and seemed designed such that any step back from them can be used by the Republican opposition as proof of a “soft on China” stance. Looking across the G-10 currencies, besides the stronger US dollar, the most interesting developments are the pull higher in USDJPY,  where 104.50-105.00 is the area where this consolidation would become something more. For sterling, GBPUSD is arguably already in trouble on any close back below the huge 1.3500 level. Other USD pairs are less close to levels that suggest a meaningful challenge to the bear trend, although that could change suddenly on an unanticipated deleveraging event of considerable scale. We use EURUSD, as noted below, as the key pair for assessing the status of the USD trend. Most other currencies are trading according to their position in the risk correlation hierarchy, although SEK is an interesting holdout in relative terms, especially versus NOK (NOKSEK longs were likely a recently popular trade on the oil resurgence). Chart: EURUSD The status for EURUSD is the anchor for the status of the USD sell-off, and still has plenty of room to consolidate lower without upsetting the USD bears’ apple cart. The next level of note lower is perhaps the 38.2% retracement area around 1.2065, followed by the important 1.2000 level, which looks the existential level for USD bears, although arguably the 1.1888 level, the 61.8% retracement of the last large rally wave, is the real “uncle point” that reverses the trend – it’s also below the 100-day moving average now. The straightforward approach for USD bears will be to buy half a position on dips below 1.2100 with initial stops well below 1.2050 and wait for a pattern reversal suggesting that support is coming in before establishing a full position. Upcoming Economic Calendar Highlights (all times GMT) 1440 – ECB President Lagarde moderates panel discussion 1530 – Canada Bank of CaanadaQ4 Business Outlook  1700 – US Fed’s Bostic (FOMC Voter) economic outlook  2300 – US Fed’s Kaplan (Non Voter) to Speak  John Hardy Head of FX Strategy Saxo Bank Topics: Forex USD EUR JPY USDJPY EURUSD AUD AUDUSD CAD NZD NOK GBPUSD EURGBP USDCAD EURJPY Coronavirus

  • Fixed income market: the week ahead
    by Althea Spinozzi on January 11, 2021 at 10:30 am

    This week, there is the risk that Treasury yields will continue to rise as Federal Reserve's speakers might expand on the tapering comments in the FOMC minutes last week. Suppose a Democratic Congress has pushed tapering expectations forward. In that case, Treasury yields will rise faster than expected trying as early as this week their resistance level at 1.20%. As bond yields rise in the U.S., more pressure is applied on emerging market bonds as E.M. borrowers' cost of funding increases bearing an elevated refinancing risk. In Europe, it is crucial to understand whether more stimulus is coming from the ECB as a new strain of Covid-19 virus is leading to stricter lockdown measures. This Thursday, the European Central Bank's minutes will be crucial in understanding whether the ECB is prepared to do more to support the bloc's economy. Any discussion concerning more stimulus would translate in an upside for the periphery. In the U.K., Bank of England's speakers might expand on negative interest rates, underpinning a rise Gilts. This week may prove to be hectic for bond traders. After 10-year yields broke the pivotal 1% level last week as Democrats secured the majority in the Senate, yields continued to rise. Treasury yields closed the week on the upper resistance line of the trend channel they have been trading in since August. If they break above this level, they will trigger a selloff that could push them to try the next resistance line at 1.2%. This week, the focus will be on Federal Reserve speakers as the market is still trying to digest December's FOMC minutes released last week. The report showed that although there is no intention to alter the bond-buying purchasing program, tapering is starting to be discussed. At this point, any mention to tapering cannot be ignored, mainly because things have profoundly changed since Democrats secured the Senate furthering the reflation story. In a speech last week, Fed's Raphael Bostic said that if the U.S. economy gets strong, the central bank might taper earlier than expected. Bostic is speaking twice this week: today and on Thursday. For bond investors, it is crucial to understand whether the Fed could envision earlier tapering. It is enough for tapering expectations to be moved forward to 2022 for the market to continue to sell off and the U.S. yield curve to bear-steepen. We see more downside for Treasuries across the yield curve at this point of time. Firstly, real yields are deeply negative meaning that investors are losing money by holding nominal Treasuries. Secondly, low yields are causing Treasuries to be highly price-sensitive, especially for long durations. In just five trading days, 10-Treasury yields moved up by about 20 basis points, representing a loss of around 2% for bondholders. Thirty-year Treasury yields moved up by 23bps inflicting a loss of 5% on bondholders. While there is a large room for downside, any upside is limited as the Fed is unquestionably not looking to cut the benchmark interest rate below zero. Hence, we remain underweight ETFs exposed to long-duration such as the iShares USD Treasury Bond 20+yr UCITS ETF (TLT) and the iShares Barclays 10-20 Year Treasury Bond Fund (TLH). At the same time, we continue to favour inflation-linkers such as the PIMCO 15+ Year US TIPS Index (LTPZ) and PIMCO Broad U.S. TIPS Index Fund (TIPZ). As Treasury yields continue to rise in the U.S., emerging market debt starts to sound the alarm bells. Although on one side a weaker dollar benefits E.M. debtors as they can service their debt cheaper, on the other their cost of funding is rising making them vulnerable to refinancing risk and defaults if they rely on external financing. Last week, U.S. dollar-denominated bonds from Indonesia, Peru, Mexico, Turkey and Brazil widened on average by 15 basis points. Brazil led the group widening by 20bps as Bolsonaro said that the country was “broken” indicating that it may need to raise expenditures. Even though we are cautious on E.M. government debt as U.S. yields are rising, we believe that emerging market corporates remain a reliable source of coupon income to protect against negative real yields. However, it is indispensable to limit duration exposure. Among EM corporates, energy companies remain our favourite, especially as commodity prices are recovering. In case you look for opportunities within this space, refer to the analysis here. In Europe, the focus will be on the ECB's minutes from December as more stimulus might be needed in light of new lockdown measures to slow down Covid-19 cases and hospitalizations. In case the ECB has discussed more stimulus to underpin the bloc's economy, we might see the periphery rising. Contrary to what we see in the U.S., bonds with long duration will benefit the most from more stimulus, representing an upside for ETFs such as the Xtrackers II Eurozone Government Bond 25+ (DBXG). In the U.K. watch out for Bank of England's speakers. Last week when testifying with the Treasury Select Committee, Governor Bailey said that the economic downturn of the last quarter of 2020 wasn't as bad as they initially had forecasted. However, he made sure to say that negative rates continue to be an essential tool in the box. Today, Gilts may rise as BOE's Silvana Tenreyro, one of the biggest advocates for negative interest rates, is speaking. Since early December ten-year Gilt yields have started to trade in a descending trend line, which may lead them to test 0.1% in case the BOE cuts interest rates negative. Economic Calendar Monday, January the 11th Australia: Retail Sales China: Consumer Price Index Spain: Industrial Output Eurozone: Sentix Investor Confidence England: BOE’s Tenreyro speech, BOE’s Governor Bailey speech Canada: Bank of Canada Business Outlook Survey United States: 3- and 6-Months Bill and 3-Year Note Auction, Fed’s Bostic speech Japan: Current Account and Trade Balance Tuesday, January the 12th United Kingdom: Like-For-Like Retail Sales, BOE’s Broadbent speech Italy: Retail Sales United States: NFIB Business Optimism Index, Redbook Index, Fed’s Brainard and Rosengren speech, 10-Year Note Auction Wednesday, January the 13th China: Foreign Direct Investment Italy: Industrial Output Eurozone: Industrial Production, ECB’s Lagarde Speech United States: Consumer Price Index, Fed’s Brainard and Clarida speech, 30-Year Bond Auction, Fed’s Beige book Thursday, January the 14th China: Trade Balance Germany: Real GDP Eurozone: ECB Minutes for December United States: Initial Jobless Claims, Fed’s Chair Powell speech, Fed’s Bostic speech Friday, January the 15th United Kingdom: Trade Balance, Manufacturing and Industrial Production, Gross Domestic Product for November, National Institute of Economic and Social Research GCP Estimate Eurozone: Trade Balance United States: Retail Sales, Michigan Consumer Sentiment Index Althea Spinozzi Fixed Income Strategist Saxo Bank Topics: Bonds Corporate Bonds Government Bonds Emerging Markets United Kingdom United States Central Banks European Union (EU) Inflation Federal Reserve

  • Is there an alternative to reflation and a renaissance in earnings?
    by Peter Garnry on January 11, 2021 at 9:45 am

    Has the reflation trade gone too far already? Our view is no, as there is no policy alternative to the reflation trade, which means that the economy will be stimulated until employment and earnings have been restored to levels before the pandemic started. Last week was all about the reflation trade, which was expressed across all asset classes with equities, and especially emerging market equities, rising together with commodities while interest rates surged higher. Over the weekend, China released its producer price index for December beating expectations showing a -0.4% y/y change, which is the highest level since February 2020 and showing that prices on consumer goods produced out of China is rising. When we get to March and April numbers will begin to see the base effects from the big economic contraction last year. While some are beginning to question the reflation trade and whether the markets have gone too far, our view is that we have just started. However, there is no alternative to the reflation trade from a policy perspective as it would leave the economy stagnant and potentially in a deflationary stagnation amplified by high debt levels. Stagnating earnings need to get back fast The chart below shows the 12-month rolling earnings per share in the MSCI World Index showing earnings are down 29% in 2020 for global companies. While earnings have begun to recover for the S&P 500 Index due to it larger share of technology companies the rest of the world has not shown a rebound yet making the Q4 2020 earnings season even more important for sustaining buoyant equity markets. The negative impact on employment and corporate earnings from the Covid-19 pandemic have shifted global policy away from that of forward guidance to that of goal-based policies, which means that accommodative fiscal and monetary policies will be in place until we recover employment and earnings. As a result, we expect massive fiscal stimulus from every major economy to be announced this year, which will fuel the reflation trade as successful vaccine rollouts will help normalize the economy unleashing the huge private savings that have been accumulated during the pandemic. The reflation trade was also reflected in the S&P 500 dividend futures Dec22 rising 5.2% reducing the drawdown since late 2019 to only 8%. This is the best market indicator on the impact from stimulus and vaccine rollout. The stimulus provided so far on top of expectations from Biden’s upcoming stimulus have so far almost closed the growth gap to 2022. If the vaccine rollouts go as we expect then the gap will be closed by Q2 2021 and then the cumulative impact from everything done on the policy side will kick the reflation into gear in the 2H 2021 causing the inflation rate and interest rates to go higher. We are unsure on the impact on technology stocks, although as we have communicated lately, we do expect value and commodity sector stocks to outperform. We have the Nasdaq 100 interest rate sensitivity at around 15% for the first 100 basis points, so aggressive overweight of US technology stocks should be revised throughout 2021. The Q4 2020 earnings season starts this week The first week of the earnings season is always light on earnings releases. This we will get earnings from the following companies in the S&P 500 and STOXX 600 indices. Monday: Carnival Tuesday: Games Workshop Group Thursday: BlackRock, First Republic Bank, Delta Air Lines, Chr Hansen Friday: Charles Schwab, PNC Financial Services, JPMorgan Chase, Citigroup, Wells Fargo While earnings from Carnival today and Delta Air Lines on Thursday will give a good insight into the rebound in these hard hit companies due to mobility restrictions, the real insight will come from the major US banks reporting on Friday. They will provide an update on the credit developments in the US private sector while providing an outlook for broader US economy. We expect the investment banking divisions driven by trading activity to have been very strong lifting earnings in Q4. Peter Garnry Head of Equity Strategy Saxo Bank Topics: Equities Inflation Commodity Corporate Earnings Jpmorgan Chase Citigroup United States Government Bonds

  • COT: Record commodity long and elevated dollar short as 2021 kicked off
    by Ole Hansen on January 11, 2021 at 9:15 am

    Positions and changes made by hedge funds across commodities, forex, bonds and stock index futures during the week to January 5 Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial. The below summary highlights futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, January 5. A holiday shortened week that saw the rally across assets extend into the first week of trading in 2021. Not least commodities where the Bloomberg Commodity Index jumped 4.2% while the dollar weakened. However, the cut off last Tuesday, was before key events in the US where Biden after a tumultuous day in Washington was confirmed as President and the Democratic Party secured a senate majority after winning both seats in the Georgia run-off elections. Two events that turbocharged hopes of large stimulus measures thereby triggering a jump in US Treasury yields, new record highs in US stocks and a stronger dollar. In commodities, these events led to a sharp reversal in gold and silver while copper and crude oil extended their already strong gains from December. Commodities The broad commodity rally that saw the Bloomberg Commodity Index rise by 10% during the last quarter extended into the new year with the index gaining 4.2% during the holiday shortened week to January 5. This as inflows to value, cyclical and reflation investing strategies continued.  Speculators responded to the continued rally by increasing an already record long commodity exposure by 3% to 2.6 million lots, representing a nominal exposure of $134 billion. Some of the commodities that have received strong attention and demand from a tightening supply outlook in 2021 an beyond has been copper, soybeans and crude oil. Following the weakness in precious metals, these key commodities may however now be at risk after reaching overbought territory. We are bullish commodities in 2021, but following the rapid buildup, the market may in the short-term be in need of a period of consolidation. The slump in gold and silver last that was triggered by the rise in yields and the dollar being a potential warning sign to the everything rally that we have witnessed in commodities and stocks during the past couple of months. With this in mind stay focused on the dollar and yields and the risk of further increases temporarily impacting the bullish technical outlook. Forex Speculators maintained an unchanged dollar short exposure during the holiday shortened reporting week to January 5. Against ten IMM currency futures and the Dollar Index, the net dollar short stayed at $32.6 billion, some $2.6 billion above last August’s record. Despite trading broadly weaker, dollar net-selling was only seen against AUD, BRL and not least JPY where the net-long increased by 6% to 50,190 lots, the highest since October 2016. Table What is the Commitments of Traders report? The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class. Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other Forex: A broad breakdown between commercial and non-commercial (speculators) The reasons why we focus primarily on the behavior of the highlighted groups are: They are likely to have tight stops and no underlying exposure that is being hedged This makes them most reactive to changes in fundamental or technical price developments It provides views about major trends but also helps to decipher when a reversal is looming   Ole Hansen Head of Commodity Strategy Saxo Bank Topics: Commodities COT Commodities Crude Oil Natural Gas Gold Silver Copper Platinum Corn Sugar Coffee Gasoline Palladium Wheat Cocoa Cotton Hogs Cattle Energy (Sector) Futures Coronavirus COT FX Forex EURUSD AUDUSD CADUSD GBPUSD NZDUSD USD USDCAD USDCHF USDJPY USDMXN Usdrub

  • Podcast: Markets stumble into a new week. Ferocious volatility in crypto space.
    by Saxo Market Call on January 11, 2021 at 8:20 am

    Today, we look at the vicious volatility in crypto currencies over the weekend and at the start of a new week, a week that has likewise started on a sour note for global equities, possibly due to fresh Covid-19 dread. A discussion today on what equity markets are best positioned for commodity reflation, whether the commodity trade is a bit overbaked in the short run, and a discussion of the US yield breakout as the prime mover across markets. Today's call with Peter Garnry on equities, Ole Hansen on commodities and John J. Hardy hosting and on FX. Listen to today’s podcast and have a look at today’s slide deck. Follow Saxo Market Call on your favorite podcast app:       If you are not able to find the podcast on your favourite podcast app when searching for Saxo Market Call, please drop us an email at marketcall@saxobank.com and we'll look into it.   Questions and comments, please! We invite you to send any questions and comments you might have for the podcast team. Whether feedback on the show's content, questions about specific topics, or requests for more focus on a given market area in an upcoming podcast, please get in touch at marketcall@saxobank.com. Saxo Market Call Saxo Bank Topics: Podcast Forex Equities Commodities Macro Nasdaq EURUSD Gold Crude Oil US Election

  • Market Quick Take - January 11, 2021
    by Saxo Strategy Team on January 11, 2021 at 7:10 am

    After a strong close for equities on Friday despite a weak December US jobs report, the mood has turned a bit sour at the start of the week as Asia is stumbling out of the blocks this week, the US House Democrats threaten to impeach Donald Trump and Covid-19 remains a global phenomenon after a lockdown of a large city in China shows that the virus remains a challenge for everyone. Bitcoin has also tumbled deeply amidst ferocious volatility. What is our trading focus? Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures pulled to strong new record highs on Friday, with the Nasdaq 100 closing above 13,000 for the first time and the S&P 500 closing well north of 3,800. Given the bout of consolidation before this latest surge, this moves the first tactical support for this move higher to perhaps that 13,000 level for the Nasdaq 100 and perhaps 3,750 for the S&P 500. Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - crypto assets suffered a ferocious bout of volatility as Bitcoin corrected as much as 20% overnight from last Friday’s highs, and likewise Ethereum corrected by a similar amount. A major European broker of leveraged contracts on crypto assets demanded that clients post 100% margin by late yesterday, which coincided with some of the volatility. AUDUSD and EURUSD – the US dollar snapped back to the strong side in the latter half of last week and the culprit seems clearly the rise and breakout in long US yields, which has proven more aggressive than yield rises elsewhere, particularly European yields. There is plenty of room for further USD consolidation within the context of the overall downtrend, so as long as EURUSD stays north of the 1.2000 level (there is also an important Fibonacci retracement level around 1.2060) the bullish technical case remains intact there, while AUDUSD traders will want the 0.7500 area to hold (still quite far away, first area of support is 0.7600-25), but especially the 0.7400-25 level that was the resistance on the way up. USDJPY – the USDJPY pair is often the most sensitive to moves in US yields and traded well above 104.00 overnight, still within the descending channel, but crossing above the key 104.00 level, which distracted traders in previous months on the way down. If US yields extend higher, the USDJPY could threaten a breakout of the channel if it trades above 104.50, which could set in motion a squeeze on JPY positions. FTSE 100 (UK100.I) - the index best positioned for the reflation due to its high index weights in energy and materials sectors is struggling a bit this morning with the rest of emerging market equities and a small decline in US interest rates. On the positive side, China PPI y/y in Dec beat expectations and is now at the highest level since the pandemic started indicating further price pressures in the economy which is good for the FTSE 100 and the reflation trade. Gold (XAUUSD) and silver (XAGUSD) both trying to stabilize following the biggest drop in two months on Friday after hopes for large stimulus helped send bond yields and the dollar sharply higher while the US stocks hit another record high. Markets got caught off-guard following a strong start to the year and once the key $1900/oz got broken algo driven momentum strategies took over to send the price sharply lower. With inflationary pressures still building the run up in yields are likely to only have a short-term negative impact on precious metals. Having broken the uptrend from the December low, gold needs to find support (not close below) $1840/oz, the 61.8% retracement and 200-day moving average. Resistance (using Fibo’s) at $1871/oz and $1888/oz. Busy week for the bond market might push US 10-year Treasury yields as high as 1.20% (10YUSTNOTEMAR21). The focus this week will be on inflation and retail sales data as well as Treasury bond auctions for 10-year notes on Tuesday and 30-year bonds on Wednesday. However, Federal Reserve’s speakers might be the reason yields will continue to rise as tapering is further mentioned, starting with Bostic today. Bostic said last week that if the economy gets stronger the Fed might taper earlier than expected. Last week 10-year Treasury yields closed on the upper resistance line at 1.11% and if they break this level, they will find next resistance at 1.20%. There might be more upside for Gilts as negative interest rates are being discussed (GILTLONGMAR21, GILS). A Brexit deal was not enough to ignite risk-on sentiment. More aggressive lockdown measures might lead to a double recession as we might learn on Friday with the reading of the UK’s Gross Domestic Product. To foster sentiment in Gilts could also be today’s BOE’s Tenreyro speech. Tenreyro has been the most vocal member of the Bank of England to discuss negative interest rates. What is going on? Commodity rally: Too much too soon? The broad commodity rally that saw the Bloomberg Commodity Index rise by 10% during the last quarter extended into the new year with the index gaining 4.2% during the holiday shortened week to January 5 as inflows to value, cyclical and reflation investing strategies continued. Speculators responded to this by increasing an already record long commodity to 2.6 million lots, representing a nominal exposure of $134 billion. We are bullish commodities in 2021 but following the rapid buildup, the market could now in the short-term pause should the bullish technical and/or fundamental outlook change. US Fed Vice Chair Clarida optimistic on US economic outlook, not bothered by US yield rise. In an interview late Friday, the influential Fed figure sounded optimistic on the outlook for the US economy despite the latest virus developments, was happy to see the new stimulus package passing, and declared that the Fed would continue to support the US economy with asset purchases at current levels through this calendar year. At the same time, Clarida said he was not concerned with rates at current levels. What are we watching next? The ongoing development in US long yields – after the first week of the year saw US 10-year and 30-year treasury yields break above the key range highs of 1.00% and 1.75%, respectively, the ongoing development in US yields is important for the outlook across asset classes, as higher yields represent a tightening of financial conditions, which is benign if this is due to an improvement in the outlook and a strong economy, but comes at an interesting time as many speculative assets have had a remarkable run and could prove very sensitive to a persistent run higher in yields. Important FOMC Vice Chair Clarida failed to push back against the current yield levels on Friday. Smooth transition domestically and geopolitically to incoming Biden administration? – the unprecedented US political situation in the last days of US President Trump’s presidency is seeing hot tempers and threats to impeach Trump if he does not resign or Vice President Trump doesn’t remove Trump from power via the 25th Amendment. Some also fear the risk of unrest on Biden’s inauguration day after the mob of Trump supporters stormed Capitol Hill. Geopolitical tensions are another area of interest in the early days of the Biden administration as the lame duck Trump administration has ratcheted tensions with China higher with a number of moves to lay land mines for Biden as any move to unwind these measures would allow criticism of being “soft on China”. The other angle is China’s response to the moves themselves as well in coming weeks. Q4 2021 earnings season starts this week. Q3 2020 earnings season was the big comeback for corporate earnings and the market expect the momentum to continue in the Q4 earnings season. It starts today with Carnival (cruise line operator) reporting earnings, but the real start is not until Friday when JPMorgan Chase, Citigroup, and Wells Fargo report Q4 earnings and more importantly provide the market with an update on loan losses and the US economy. Economic Calendar Highlights for today (times GMT) 0900 – Switzerland SNB Weekly Sight Deposits 1440 – ECB President Lagarde moderates panel discussion 1530 – Canada Bank of CaanadaQ4 Business Outlook 1700 – US Fed’s Bostic (FOMC Voter) economic outlook 2300 – US Fed’s Kaplan (Non Voter) to Speak Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:     Saxo Strategy Team Saxo Bank Topics: Macro Equities Commodities Forex Quick Take Bonds Bitcoin Cryptocurrencies Ethereum Gold Silver AUDUSD EURUSD USDJPY Federal Reserve United States