The broad US equity market stumbled rather badly relative to intraday highs yesterday, although the Nasdaq 100 hung on for a slight gain yesterday, and global markets were rather mixed to indifferent on the day. Markets should remain nervous through the FOMC meeting tomorrow evening, where the Fed is expected to continue providing maximum accommodation.
What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the broader US market posted one of its uglier days in recent memories as an intraday rally was roundly rejected into the close, with the S&P cash session closing on the day’s lows. Even the small cap Russell 2,000 index couldn’t sustain new all-time highs and closed on the day’s lows for a small loss. This points to the risk of a test of lower support, which for the S&P 500 means a possible look at the important 3,600 area and then the next pivot zone around 3,530-3,500. The Nasdaq 100 index was somewhat more resilient and managed a small gain on the day, if still closing off the day’s highs. If a more cautious attitude settles over markets, the next areas lower are the 21-day moving average now at 12,264 and then the 12,000 area followed by the 11,600-500 zone which has more structural implications.
- AUDUSD and EURUSD – the US dollar put up a bit of a fight yesterday and clawed back some of its losses on the day in places, although EURUSD remains perched near the highs of the cycle after its rally fell short of the cycle high of 1.2178 by one pip. The AUDUSD rally was beat back a bit more heavily, perhaps on the latest sign of a deepening showdown on trade policy (more below). The AUDUDS sell-off also looks correlated with the weak day on Wall Street yesterday as the Aussie is sensitive to global risk sentiment. Still, there is considerable room for the Aussie to consolidate lower – to at least the 0.7400 area – without disrupting bullish developments – the FOMC meeting tomorrow night (more below) is the next key risk for USD traders.
- EURGBP and GBPUSD – sterling will continue to trade nervously until we understand whether the UK and EU are headed toward a deal. The relief rally in sterling after the week-end saw an extension of talks rather than a collapse has already faded. It seems unlikely that a comprehensive deal can be struck before the end of the year, with the “best” outcome for sterling perhaps some indication that the current, EU-era terms of trade will continue as during the transition period for some time longer, with negotiations to continue on some key areas next year.
- Gold (XAUUSD) has moved higher after surviving a challenge below $1825/oz yesterday on stimulus hopes, fresh Covid-19 related lockdowns and the FOMC potentially responding to these developments when they meet on Wednesday. A weaker dollar and lower U.S. long bond yield also adding support with focus on $1875/oz, last week’s high. Silver (XAGUSD) meanwhile remains stuck in a $23.50/oz to $24.60/oz range.
- Brent crude oil (OILUKFEB21) and WTI crude oil (OILUSJAN21) trade softer but still within their established tight ranges. Rising risk of a second full lockdown in New York and a third consecutive 2021 demand downgrade from OPEC being offset by heightened risk in the Middle East together with strong economic data and record amounts of crude oil processing in China. Brent remains stuck close to $50/oz after retracing 61.8% of the January to April collapse. The short-term direction hinges on the markets ability to look beyond deteriorating demand fundamentals and instead focus on the expected recovery next year. On tap today, IEA’s monthly Oil Market Report followed by OPEC+ JMMC on Wednesday.
- Electoral college confirms Biden victory, market is concerned the Fed will disappoint, New York considering a full lockdown (10YUSTNOTEMAR21). Treasury yields spiked yesterday in the middle of the day as New York mayor Bill De Blasio warned of a full lockdown. The market is also started to think that the Fed will not change the bond purchasing program in order to buy longer dated maturities, this will send a hawkish message that might provoke yields higher in the midst of a Biden victory.
What is going on?
- A cyber espionage operation was uncovered that breached US government systems and may have affected other governments and major private sector corporations. The operation was carried out via malware installed on SolarWinds’ Orion platform. The alarm was raised by FireEye, a cyber security firm. Many industry sources suggest that the sophistication and target of the operation can only indicate that it was state-sponsored and point their finger at Russia as the likely culprit. FireEye and SolarWinds both suggest that not all of SolarWinds’ 275,000 customers have been affected, as the attacks were customized.
- Australia seek clarification from China on coal purchasing policy. China will allow its power plants to import coal from any source without clearance restrictions, with the exception of Australia – suggesting that China is looking to limit one of Australia’s top exports to the country. This comes after a spate of recent import bans from Australia on charges of dumping, but more clearly aimed at its objections to Australia’s moves to inquire into the origins of Covid-19 and its stance on Hong Kon and other issues. Australia’s Prime Minister Scott Morrison said that any restrictions on importing Australia’s coal would violate WTO rules.
- Uranium stocks have rallied hard since the U.S. Presidential election in early November as the green transformation and lower carbon emission themes drive renewed demand. One of the leading ETF’s (URA:arcx) tracking the industry is up by one-third during this time while Cameco Corp in Canada (CCO:xtse) has jumped by 42%. Yesterday it briefly touched a five-year high on news that it had temporarily halted production at its Cigar Lake mine due to a Covid-19 outbreak. In addition, the U.S. Senate may add domestic supplies of Uranium as vital to national security.
- China fines Alibaba and Tencent on acquisitions. The Chinese government has fined Alibaba and Tencent related to previous and pending acquisitions as it tightens it grip on the technology sector. Alibaba shares are down 3% in today’s session. The penalty itself is not a big deal, but it sends a signal to the technology giants in China that they cannot continue expand unconstrained as government is clearly seeking to increase competition and limit the power of technology companies.
What we are watching next?
- Brexit situation – considerable headline risk here at any time – sterling backed down again after rallying on the announcement that talks are set to continue this week – more above in comments on sterling pairs.
- FOMC meeting on Wednesday – this is one of the last major event risks of the year that could disrupt the market narrative. After recent disappointing US employment figures, some believe that the Fed will announce an extension of the maturity of its purchases with an eye to guiding long rates lower. Any failure by the Fed to signal that it is moving in this direction (even if it could be as a forward guidance if things don’t improve) could be seen as “hawkish” and see a back-up in the US dollar and some consolidation in risk appetite. And really, regardless what the Fed delivers, this FOMC meeting is the last major event risk of the calendar year and a general test of the market’s confidence ahead of the last two trading weeks of the year.
- US stimulus package status – the latest move to separate out the $160 billion state- and local government aid portion of the originally proposed bipartisan $908 billion stimulus package may be the way forward – stay tuned, as a breakthrough is critical for sustaining any positive market narrative.
Economic Calendar Highlights for today (times GMT)
- 1315 – Canada Nov. Housing Starts
- 1330 – US Dec. Empire Manufacturing
- 1415 – US Nov. Industrial Production
- 1930 – Canada Bank of Canada Governor Macklem to Speak
- 2130 – API’s weekly oil and fuel stock report
- 2200 – Australia Dec. Flash Services/Manufacturing PMI
- 2350 – Japan Nov. Trade Balance
- During the day: IEA’s Oil Market Report
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