Currency and Stock Markets. Daily Insights

[stoch]

OPEC decision is likely to have short-term impact as focus turns to demand side

Positive update on oil inventories in the US pulled WTI above the key level of $ 45, however, prices have been moving in a narrow box as OPEC is dragging its feet on key output decision:

EIA data unexpectedly indicated US crude oil inventories declined by 679 thousand barrels. Stocks at Cushing decreased by 317 thousand. Drawdown in inventories was an unexpected outcome which produced some upside in the market as it came against the backdrop of an increase in oil imports and a decrease in refinery utilization rate, indicating that increased oil exports in the reporting week made up for this decline. The data showed that oil exports from the US surged by 625 thousand bpd to 3.5 million bpd, which indirectly indicates a rapid recovery in demand from foreign refineries.

OPEC is making an important decision today about output cuts. Initially, the decision was supposed to be made on December 1, but disagreements arose among the participants and it was decided to postpone the meeting. The market is leaning in favor of a positive outcome of the meeting, but in my opinion, OPEC will opt for balanced solution because recent economic data around the world indicates brisk recovery and oil producing nations may be reluctant to miss this demand opportunity.

 

[stoch]

Oil market appears to be slow to digest OPEC+ new trade-off

The new OPEC+ deal appears to be a massive success both for oil producing nations and the market. Agreeing to boost production in January the group could convince market participants that surplus inventories will nevertheless decline. The deal was somewhere in the middle between the worst and the best possible outcome of the meeting. Oil-producing nations will start to increase output from January 2021, but great flexibility of the new plan was a key to soothe market concerns.

This week was difficult for OPEC as due to disagreements the meeting scheduled for Tuesday had to be postponed to Thursday. The deal participants came to a new agreement, but initial market reaction to it was tepid. OPEC+ plans to increase production from the current level by 500K bpd starting from January 2021, which is less than in the worst-case scenario (1.9 million bpd). In doing so, the organization will monthly assess market conditions in order to better adjust the supply. The deal also included the condition that the members cannot increase output by more than 500K bpd per month.

The best outcome for prices would be to extend current output cuts for another three additional months, however, judging by the market reaction, the market liked the OPEC+ flexible output plan.

At first, the market reacted with a small upward leap, but on Friday spot prices increased by another 1%. A barrel of WTI was trading above $ 46 a barrel, the highest level since early March while Brent was trading above $49 a barrel. An important point was the very fact of the deal - recall that in March prices collapsed due to the fact that among the main producers a short-term situation arose where "everyone produces as much as they want."

The parameters of the deal were determined in such a way that implementing it OPEC+ should keep the market in a deficit, thus drawing down inventories and pushing prices up. As a new coronavirus shock becomes less likely to happen, there are no major obstacles for a recovery in demand, so prices have a room to rise. In December, Brent will probably be able to touch $51 per barrel, but it is preferable to wait for a pullback, if we want to bet on this outcome:

However, next year, after Biden moves to the White House, Iran's return to the market could become a serious threat to the market. In other words, the risk of successful negotiations between the United States and Iran on the nuclear program. If sanctions on Iran are lifted, the market will face a challenge in the form of a potential 1-2 million barrels of additional supply from Iran. However, this risk is not traced on the horizon of 3-4 months.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

A case for a bearish pullback in S&P 500. What could go wrong?



US job growth fell short of expectations in November, pointing to waning recovery momentum in the US economy. However, it didn’t stop the US equities from renewing all-time highs. SPX inched closer to 3700 points, DOW rose above 30,000 mark.


On Monday, equity markets went into a mild retreat while US currency recovered some of the lost ground. The biggest question is the strength of this downside move. In my view, fundamental background and news flow expected this week suggest that the 3700 mark should remain a local resistance for SPX for a week or so and a retracement to 3650 (100-hour SMA support) is likely. The next target that we could then consider is a test of an intermediate trend line at 3620 points:

Let’s look at the arguments.


The NFP report was actually worse than the headline numbers suggested. Job growth calculated on the basis of firms' payrolls (so-called establishment survey) slowed to 245K (460K exp.). The same indicator, calculated through the household survey (more precise measure), was -78K. There is a backstory that indicated that we had to expect this kind of a surprise - November dynamics of initial claims for unemployment benefits (which I wrote about here). Unemployment rate decreased by 0.1% but it remains a highly biased indicator - if we look at employment rate (share of employed from working-age population), it is still significantly lower than it was in February:

Over the weekend, the data showed that the US hit a fresh record for daily cases of Covid-19, hospitalizations, and ICU occupancy rate:

In other words, the pressure for local government to tighten restrictions at least for some time, increased, which present a near-term risk for the markets.


Certainty about the vaccine, unfortunately, does nothing to ease the short-term pressure from rising Covid-19 positivity rate. The latter has intensified thanks to lax rules during Thanksgiving and the start of shopping season which led to more crowded shopping places. Therefore, there is a risk that social restrictions in the US could be briefly tightened again, and with the economy losing momentum in November, December could be very weak in terms of employment and economic recovery. It is no coincidence that Congress stirred in December and is going to adopt a $ 900 billion stimulus package within a week or two.


Basically, swift approval of the stimulus bill is a key obstacle for prolonged decline as positive headlines can quickly spur another leg of buying momentum making bearish pullback quickly losing integrity.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

This broken link between banks and bond markets indicates Central Bank support is the only thing that matters for stocks


Price action in European equities and US futures lack clear direction on Tuesday as markets wait for a "Christmas gift" in the form of a fiscal deal. In the absence of news headlines signaling about progress in stimulus talks, there is a chance for equity markets to stage a minor pullback (scenario that we discussed yesterday) and the signs of bearish pressure do persist. The greenback remained weak against other majors, trading below the key foothold at 91 points.


While stocks markets trade near all-time highs, sustained by expectations and liquidity backstop from the Central Banks, signaling that the worst is over, the Bank of International Settlements issued a warning, saying that the crisis is moving from liquidity to default phase.


In its quarterly report released on Monday, the "bank of all central banks" said that while the recent rally in global equity markets was justified by compression of interest rates in bond markets and rotation of investors into risky assets, quick development of vaccine and thus foreseeable end of the pandemic, current market valuations may not fully reflect the risks of defaults. This is better reflected in dynamics of credit spreads in the US and Europe which rapid decline remains out of step with stalling recovery of firm revenues, key measure of quality of a firm as a borrower. It means that bond market valuations may underestimate risks of corporate defaults as well.


In this regard, it is significant how the two major groups of lenders - banks and market investors (indirect and direct channel of financing) changed their lending attitude. If the former has been tightening their credit standards, the latter, on the contrary, has been lowering the credit risk bar:

Bank and bond market assessment of credit risk usually move in sync, but now we a strong divergence which suggests there is a strong factor breaking the interplay. This factor is obviously “unlimited” credit facilities offered by Central Banks and it means that complacency in bond markets may hinge heavily on the Central Bank backstop.


Anyway, current focus remains on the stimulus talks in the US. In addition to disagreements between parties, there is another obstacle on the way to a fiscal deal - a Christmas shutdown. The work of Congress is funded until December 11, so in order not to interrupt negotiations, legislators will first have to approve a bill that will finance another week of work and bring fiscal negotiations to their logical conclusion. Therefore, the focus of the markets is primarily on whether Congress will succeed in approving funding bill. The voting on the bill is due on Wednesday.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

US stocks dodge correction as new US stimulus plan seems to suit both parties


US stock market once again dodged looming bearish pullback on Tuesday thanks to positive news on the stimulus package.


Treasury Secretary Mnuchin presented a new stimulus plan on Tuesday that takes into account the priorities of both Democrats (funds for federal and local authorities) and Republicans (liability protection for businesses). The news immediately had an effect on the markets - the S&P interrupted the onset of a slump and swiftly climbed above the 3700 mark:

European stocks and oil prices rose on positive news from the US on Wednesday emerging market and commodity currencies strengthened against the USD. The move is very common to risk-on environment, which so far is based only on positive expectations from fiscal aid and start of a new economic cycle in 2021.


We hold our bearish view on USD and bullish on US stocks in December because US fiscal stimulus remains key theme that drives equity valuations and the potential from it is still untapped due to lack of conclusive information.


On the bearish side, the US credit agency Fitch said on Tuesday that it’s not planning to upgrade credit rating of any advanced economy for 2021, despite positive vaccine developments and favorable economic outlook. Fitch's chief economist told Reuters that the first positive changes in economic growth are shifting to 2022 due to downbeat impact of the second wave of social curbs in developed economies. Also, mass vaccinations in emerging market economies will begin later than previously thought due to logistics problems, as well as modest volume of pre-orders of the vaccine.


ZEW Expectations Index, the leading indicator of economic activity in Germany, significantly exceeded expectations in December. Key leading gauge of business conditions printed significantly higher, rising by 16 points to 55 points:

In the Eurozone, the index of economic expectations made a huge jump by 21.6 points to 54.4.


The uptick suggests that economic expectations in Germany almost fully recovered after a sharp decline in the previous month (against the background of lockdowns). It’s a very good sign for Eurozone that economic expectations responded to vaccine news as this suggests that everything is fine with forward-looking indicators, which include investment spending. If propensity of spending remains high, the only thing that Eurozone government needs to do to protect future recovery is to offset short-term transient impact from lockdowns on consumption.


Robust expectations tell us that the investment component of Eurozone GDP will likely show quick recovery in the first quarter of 2021, as investment spending depends on perception of future economic conditions like level of uncertainty and consumer demand and is highly correlated with economic expectations.


The index of current conditions remained in a deeply negative zone (-66 points) but markets mostly likely ignored it as near-term lockdown impact has been priced already before lockdowns were introduced.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Is there anything to stop stocks decline except fresh fiscal headlines?


The ECB meeting had little chance to send Euro lower: recall that on November meeting, Lagarde warned investors that they should expect a major policy adjustment in December, but since then various ECB officials have been steering market expectations towards much less easing. Which, in fact, happened on Thursday - the bank just raised the limit of the pandemic asset purchase program by 500 billion euros (which in no way obliges the bank to ramp up asset purchases) and increased long-term cheap financing to banks (the so-called TLTRO program). The ECB did not increase the monthly QE purchases which of course was a major disappointment. We discussed such an outcome in our previous analyses and likely impact on the euro (mainly bullish).


The second important point, which at the same time surprised and upset, is that EURUSD is already above 1.20, and the ECB did not even blink an eye. There was something like usual phrase "closely monitoring Euro exchange rate", which is of course not enough to contain Euro rise. Furthermore, the statement like equals acknowledging that exchange rate is fair and there is nothing super-speculative in it that needs to be suppressed.


EURUSD uptick in response to the ECB meeting is completely justified and indicated that the ECB was definitely underdelivered to easing expectations. Of course, it is bullish sign for the common currency:

Friday pullback is, in my opinion, a decent opportunity to consider medium-term long positions on the pair. Corrective pressure was caused by a decline in US futures and weakness in European markets (not the euro). As soon as this correction runs out of steam, we will probably see 1.22+ on the pair.


Considering other European currencies, such as SEK, NOK, which are also sensitive to the ECB's policies, the outcome of yesterday's meeting will probably also add weight to them and purchases against major outsiders in major currencies such as USD are most justified.


Regarding the stimulus in the US, there was yet another disappointment - the final decision on fiscal aid may not be made until Christmas. Speaker of the House of Representatives Pelosi hinted at this. The main catalyst of growth has been taken away from the stock markets and it’s clear that there is little to stop the decline except fresh clues about the fiscal deal.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Key near-term risks for risk-on. USD targets for the next week



Risky assets saw modest losses on Friday amid the emergence of a new roadblock in the stimulus package negotiations - Republicans' proposals to restrict the Fed and the Treasury to use credit facilities created in response to the pandemic. In particular, this concerns the Main Street program (direct lending by the Federal Reserve to small and medium-sized enterprises), which expires at the end of this year.


Democrats see this as an attempt to tie the hands of the Biden administration (in terms of ability to respond to possible economic shocks) and, of course, will not easily back down on this issue.


Senate Republican leader McConnell said the talks could drag on over the weekend. It seems that politicians are trying to hold out until January's Senate run-off elections in Georgia where representatives from the two parties will compete for key seats that will determine whether the Republicans will receive a majority in the Senate.


While the pandemic has lost some of its news coverage, data shows it continues to wreak havoc on key economies:

At the end of November, the curve seemed to be drawing a peak, however, as we are now seeing, it was only a pause before new highs. And if the United States is trying to cope without lockdowns, then Europe is more conservative in this regard. The data shows that the path is open for greater social constraints.


From the fundamental statistics, it is worth paying attention to the update on applications for unemployment benefits, which indicated that worrying trends in labor market gain momentum. Regarding to initial claims, consensus was + 800K but the indicator printed + 880K. Initial claims have sped up sharply in the past two weeks:

As the US labor market began to show weakness in November, jobless claims have become more significant in understanding how quickly the recovery wanes and how much the economy needs new stimulus. Judging by the data, December promises to be very weak in terms of US employment growth and the NFP in January is likely to show a negative surprise.


In my opinion, unless we get a breakthrough in fiscal negotiations over the weekend, next week will be a correction week for the dollar index in line with the technical idea I described on Wednesday. The target of bullish retracement is 90.50 mark.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Two reasons to sell USD in January


The beginning of the new year was not distinguished by any surprising moves in FX space. USD remains under heavy pressure, ceding ground to majors, comdollars and EM currencies. It was though unusual to see that USDJPY and USDCHF (i.e. safe-haven vs. safe-haven pairs) also saw sharp downside moves.


There are two ideas of why the USD can test new lows in the first half of January.


The first idea (the macro one) which drives USD fall is that no global central bank can beat the Fed in easing monetary policy. Recall that following the Fed meeting in December, all voting members of the Fed, with the exception of one, expect that the first rate hike will take place no earlier than 2023. No other central bank has dared to provide such strong forward guidance about interest rate path. And they won’t dare, because if we assume that the worst is over in the latest economic downturn, then it is reasonable to expect that central banks (except for the Fed) will gradually move towards normalization of interest rates, which will only widen the gap in policy easing between the Fed and other central banks. This is a strong factor of weakening of US currency.


Only a rapid acceleration of inflation in the United States (first of all, its “precursor” - inflationary expectations) can prevent the realization of such a scenario, which will require an urgent increase of the interest rate. However, given the Fed's new inflationary concept, it won’t be easy for inflation to scary the Fed. It would need, for instance, to accelerate to 2.5% -3.0%, and do it in a short time. Over a timespan of next quarter - six months, such an outcome can be safely considered a tail risk.


Technically, the US currency was held in a downward sloping channel despite some attempts to break higher over the Christmas holidays. Earlier, we discussed that short positions should be a priority, and given that upward correction from 89.50 has been completed, the next targets are 89.00 and 88.75 horizontal levels, and then, after a rebound, the lower border of the bearish channel in the range of 88.75-88.50. The big question is about the timing of realization of this scenario.

The second idea for shorting USD, especially over the next week or two, is sharply increased chances that Democrats will be able to strip Republicans of the Senate majority:

Recall that the second round of elections in Georgia will take place in mid-January, where Democrats and Republicans will compete for two seats that will play pivotal role in determining which party will control the Senate.


If Republicans lose their majority, their opponents effectively gain control of the Senate despite the tie in seats distribution. Economic initiatives of Democrats, as we saw from the battle over the fiscal deal in October-December, are often associated with a more aggressive accumulation of national debt (and most likely the money supply, since the Fed will be forced to join), which is likely to result in faster USD devaluation. In my opinion, “sell USD on the rumors” idea will likely grab markets’ attention this week.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

There is too much tax uncertainty for US big tech right now. Time for shorts?

In my Monday post we discussed why it may be appropriate to short US Dollar in the first half of January. Yesterday we’ve got the first signal of development of this our scenario. USD index (DXY) fell from 90 points to 89.20 on Wednesday, while EURUSD rose above 1.23, GBPUSD tested a new multi-year high at 1.37 while Gold sticks to its plan to climb above $ 2000, and I think it will succeed. Recall that the key chart I recommended to keep an eye on is the odds of Democratic win in Georgia run-off elections:

Betting odds of Senate elections outcome in Georgia

​

The likelihood that both Democratic candidates will win the hearts of voters in Georgia rose to 98.04%, up from about 50% on Monday. At the same time, as we can see, the dollar index really sank noticeably. The point is that if the Senate comes under the control of Democrats, the markets will get two medium-term themes for trading:

- The prospect of Democrats pushing through a new large stimulus package;

-The prospect of Democrats raising taxes for corporations and the rich.

The first point implies that the US government will be forced to ramp up borrowing (to fund a new stimulus bill). If holders of US government bonds really expect new bonds to flood the market, they should be inclined to sell them now expecting price declines. As bond yield and prices are inversely related, we should see increase in bond yields as a market reaction. And we do observe it:

Additional stimulus package combined with the Fed's ultra-dovish forward guidance (keep interest rates at zero until 2023) is an almost guaranteed increase in inflation expectations (and then inflation). Then gold, which hedges inflation risk, should also increase in price what we currently observe as well:

On Wednesday, Nasdaq futures breached to the downside (-1.78% at the time of writing of this post):

If you remember what Biden's tax proposals included, then it becomes clear that if Democrats gain control over Senate, their plans for income redistribution will hit corporate America. According to BofA calculations, S&P 500 companies will see their profits decline 9.2%, with tech sector suffering the most if Democrats pursue their tax reforms. For big tech companies, potential drop in percentage profit is double digit. Hence the early negative reaction in the futures market, which I believe is far from over. In my view, rising uncertainty about corporate tax policy in the US, stemming from the rising odds of Senate Control by democrats, lends powerful bearish impetus to shares of Apple, Microsoft, Facebook, Amazon, Alphabet, at least in the near term.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Inflation expectations rise in the US. What does it mean for a new fiscal stimulus?



Judging by the recent developments in the US money and Treasury markets investors start to expect that the Federal Reserve will start to normalize policy sooner than expected earlier. If a month ago a first interest rate hike was expected no earlier than the second half of 2023, this month expectations have sharply shifting closer to present time, pricing in a rate hike at the start of 2023. While consumer inflation in the US is dormant, inflation premium in bond yields is rising very quickly, making it more expensive for the US government to use debt markets to finance new stimulus programs. For example, the interest rate on 10-year Treasuries has risen from 0.92% to 1.15% in just a week since the beginning of the new year:

Investors are demanding higher compensation in bond yields primarily due to rising inflation expectations. If future inflation is expected to rise, then purchasing power of future stream of payments is expected to decline more. Expected average inflation for the next 5 years as measured via 5y5y inflation swap climbed above 2.0%, but Core PCE (the Fed's preferred inflation metric) is still at 1.4%. The market is running ahead as usual, therefore, if the inflation data for December-January show an acceleration, the market will be hardly surprised as the rise should be priced in:

Although due to discrepancy in expectations and actual inflation, bond markets may express more sensitivity to negative surprises in inflation in the coming months, since in this case the market's error in assessing inflation will be revealed. If consumer inflation slows, Treasury yields may also quickly adjust downward, while extend its trend upwards.


Inflationary expectations are likely to maintain an upward trend, so discussions in the US Congress of new support measures will certainly imply the participation of the Fed in the form of an increase in QE. Otherwise, borrowing another $ 1 trillion (the estimated amount of fiscal impulse that the Democrats will approve) will be problematic, as future debt service costs will increase significantly. The dovish rhetoric of the Fed is known to be a negative signal for the dollar.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.