S&P Futures Rebound Even As Treasury Yields Blow Out Into “CTA Redline” Territory

S&P Futures Rebound Even As Treasury Yields Blow Out Into “CTA Redline” Territory

Global stocks and US equity futures rebounded from the recent selloff as investors paused to assess how much worse the COVID-19 pandemic could get while waiting for a new earnings season on Wall Street to inject fresh direction, even as 10Y yield jumped to new post-covid highs.

S&P futures were 0.3% higher, while Europe’s Stoxx 600 Index traded little changed. Oil jumped to a 10 month high as the dollar resumed its decline and benchmark Treasury yields spiked to a level where CTAs are now shorting. After Bitcoin tumbled more than 20% on Monday, with many fly by night “experts” predicting the bursting of its bubble, the largest cryptocurrency quickly bounced back above $36,000. Tesla and Twitter are among the best performers in premarket trading.

The market mood markets was mildly positive after yesterday’s selloff, as investors continued to assess how the sharp rise in yields will change the financial landscape. While progress on a vaccine gives reason to be hopeful, there are lingering concerns over the speculative excess and froth that’s driven stock markets to all-time highs in the middle of a pandemic.

“Stocks are fading the bad news,” said Sebastien Galy, a senior strategist at Nordea Investment Funds. “What we are seeing is a feedback loop from higher expected fiscal spending feeding into higher U.S. Treasury yields, which translated into the fear that the price of risk is increasing. But there is realization that if this process is getting too fast, the Fed is likely to step in.”

Europe’s Stoxx 600 Index erased earlier gains of as much as 0.4% and turned modestly red with utilities and media shares dropping the most on higher rates, while travel and leisure and banks lead gains. Indices in London, Paris and Frankfurt were little changed in early trading on Tuesday. The STOXX Europe 600 Energy Index gained 0.7%, climbing for the fifth session in six, with crude prices rising as the market assesses the potential for more supply after the International Energy Agency said a “big chunk” of U.S. shale is profitable at current prices. Oil majors BP, Royal Dutch Shell and Total gained as crude prices rose on expectations of a drawdown in U.S. stockpiles. Zur Rose Group AG, a Swiss drug retailer, jumped 12%. Bank of America Corp. initiated the company with a buy recommendation, calling it among the “most compelling” online equity stories in Europe.

“It’s a little bit of a pause for reflection after getting off to an absolute flyer this year,” said Michael Hewson, chief market analyst at CMC Markets. “The main focus now is how much worse can it get in respect to COVID in the UK and Europe, and is China starting to see evidence of a second wave.”

Earlier in the session, Asian stocks also consolidated with the MSCI index of Asia-Pacific shares ex-Japan falling 0.5% after touching an all-time high on Monday, led by a 2.6% drop in South Korea as investors took some profit from a soaring Kospi. The regional benchmark strenghtened in late trading as Chinese shares climbed to a 13-year high. China’s CSI 300 Index rallied the most in three months, driven by a surge in financial and securities stocks, and boosted by strong inflows. The index climbed 2.9% to close at highest level since early 2008 as gains accelerated in afternoon trading.

“Funds, ourselves included, are taking advantage of the dips on Friday and Monday to readjust their portfolios,” said Wu Xianfeng, chairman of Shenzhen Lonteng Assets Management Ltd. “There are also investors who may have waited on the sidelines last week for a dip that are now beginning to buy.”

Malaysia’s stock benchmark slipped as much as 1.6% after the nation’s king declared a state of emergency until August, as the country tackles a worsening coronavirus pandemic. Banks fell while glove makers advanced. The Kospi slipped as investors took profit following its recent rally to historic highs. Japan’s Topix finished higher after fluctuating for most of the day, as the country laid plans to expand its state of emergency to the Osaka region. Drugmakers lifted Japan’s Nikkei to a fresh three-decade high after reports of another effective COVID-19 treatment, though the index eased to be 0.16% lower in the afternoon.

 In an otherwise quiet session, the most notable move has been that in US Treasurys which remained under pressure, as yields continued to drift higher, and having tipped above 1.17%…

… the 10Y is now well into CTA shorting territory as we noted last week, which means we could see a violent repricing higher in yields at any moment which in turn would drag stocks sharply lower.

The selloff in bonds has been fueled by the prospect of more U.S. government stimulus under President-elect Joe Biden. Yields were also propped up by markets bringing forward bets on Federal Reserve interest rate hikes to 2023, and a withdrawal or tapering of asset purchases before then.

In FX, the Bloomberg Dollar Spot Index inched lower as the greenback fell against almost all of its Group-of-10 peers, its first drop in 3 days. The pound led G-10 gains after traders in U.K. money markets pushed back bets for a 10bps interest-rate cut to 0% by the Bank of England to December, from August on Monday. The move got a boost after Bank of England Governor Andrew Bailey said that there were “lots of issues” with cutting rates below zero. Commodity-linked currencies led by the Australian and New Zealand dollars rose as oil prices climbed, and China’s yuan surged to its highest since 2018 versus a basket of peers on upbeat growth prospects. The yuan reached the highest since 2018 versus a basket of trading partners’ currencies on upbeat growth prospects.

Bitcoin rebounded strongly after flirting with a bear market on monday.

Inflation expectations got another kick as oil climbed to a new 10-month high as the dollar declined, increasing the appeal of commodities priced in the currency. Futures rose 1.5% to above $53 a barrel, to the highest since February 2020, while Brent traded as high as $56.75, the highesdt since February. Prices have climbed in recent days after promises of unilateral output cuts from Saudi Arabia spurred a further rally.

Oil has surged more than 45% since the end of October, boosted by Covid-19 vaccine breakthroughs and commitments from OPEC and its allies to curb oil output. Recent Democrat victories in U.S. elections have also spurred expectations of economic stimulus, while commodity index rebalancing is also expected to buoy prices this week.

“Oil prices are rising again after a brief timeout,” said Eugen Weinberg, head of commodities research at Commerzbank AG. “On the demand side, hopes of economic recovery and the massive fiscal stimuli being taken by governments are lending support.”

There was little in the way of major corporate earnings news or key economic data as markets waited for the new earnings season on Wall Street, with banks JPMorgan, Citi and Wells Fargo reporting on Friday.

“The big takeaway from those will be, how much more will they set aside in terms of loan-loss provision, as they were quite heavy in 2020, and how many of the U.S. banks restart buybacks and dividends,” Hewson said. “I suspect it won’t be as many as people think.”

Market Snapshot

  • S&P 500 futures up 0.3% to 3,802.00
  • MXAP up 0.3% to 207.86
  • MXAPJ up 0.3% to 694.38
  • STOXX Europe 600 up 0.2% to 409.28
  • Nikkei up 0.09% to 28,164.34
  • Topix up 0.2% to 1,857.94
  • Hang Seng Index up 1.3% to 28,276.75
  • Shanghai Composite up 2.2% to 3,608.34
  • Sensex up 0.6% to 49,546.61
  • Australia S&P/ASX 200 down 0.3% to 6,679.08
  • Kospi down 0.7% to 3,125.95
  • Brent futures up 1.7% to $56.60/bbl
  • Gold spot up 0.8% to $1,858.88
  • U.S. Dollar Index down 0.1% to 90.36
  • German 10Y yield rose 2.1 bps to -0.475%
  • Euro up 0.1% to $1.2168
  • Italian 10Y yield rose 3.4 bps to 0.454%
  • Spanish 10Y yield rose 2.7 bps to 0.085%

Top Overnight news from Bloomberg

  • The House is set to issue a largely futile ultimatum to Vice President Mike Pence on Tuesday, demanding he invoke constitutional authority to remove President Donald Trump from office, as a prelude to an expected vote to impeach the president for the second time in little more than a year
  • The past week has seen a surge in option bets which pay off as more Federal Reserve hikes are priced in, though all of them are targeted at rates two or three years from now
  • Investors are braced for another milestone in the global migration away from Libor as the benchmark’s fallback spread calculations may soon get se
  • The European Central Bank will disregard any temporary pickup in inflation this year caused by pent-up demand, according to Executive Board Member Isabel Schnabel
  • President Xi Jinping issued an unusually upbeat assessment about China’s future, noting that “time and the situation” were on the country’s side in a new year marked by domestic turmoil in the U.S.
  • A junior partner in Italy’s ruling coalition is considering ditching the alliance as early as Tuesday, threatening to bring down Premier Giuseppe Conte’s government just as the country is battered by a resurgence of the coronavirus pandemic, according to officials

Your 3 minute video recap courtesy of Amplify Trading:

A more detailed look at global markets courtesy of Newsquawk

Asian equity markets traded cautiously as the region struggled to break from the weak performance among global peers including the tech-led declines on Wall Street amid fears of tougher regulation on the tech giants and with sentiment also dragged by ongoing COVID-19 concerns. ASX 200 (-0.3%) and Nikkei 255 (+0.1%) were rangebound for most the session with strength in Australia’s top-weighted financials sector just about kept the local benchmark afloat although pressure in tech and miners ultimately wiped out gains at the close, while Tokyo trade was indecisive on return from the extended weekend with Japan facing a possible State of Emergency declaration this week for the Osaka, Kyoto and Hyogo prefectures. Nonetheless, Chugai Pharmaceutical was the biggest gainer on recent news that the UK government found the Co.’s arthritis drug Actemra to be effective against COVID-19 and Tepco was also boosted by record power prices amid cold weather conditions and tighter supply. KOSPI (-0.7%) was worst performer after its recent record streak with Samsung Electronics also pulling back from all-time highs and South Korea’s FSC to lift the ban on short sales from March 16th which had been implemented last year due to COVID-19. Hang Seng (+1.3%) and Shanghai Comp. (+2.2%) pared opening losses to trade in the green after the mainland eventually shrugged off the PBoC’s tepid liquidity operations and with the Hang Seng flirted with resistance around the 28k level, led by a continued rebound in the Chinese telecom giants. Finally, 10yr JGBs were lacklustre after the continued pressure seen in stateside peers and indecision in stocks, but with downside cushioned by the BoJ’s presence in the market for over JPY 1.1tln of JGBs.

Top Asian News

  • Malaysia Emergency Suspends Parliament for First Time Since 1969
  • Thailand Unveils $7 Billion Plan to Cushion Hit From Outbreak
  • Toyota, Honda Slash Output Further as Chip Shortage Worsens
  • Chinese Stock Index Heads to Record in Best-Ever Start to Year

European stocks are exhibiting a somewhat mixed and directionless picture thus far (Euro Stoxx 50 -0.1%) with a similarly cautious tone observed during APAC hours amid a lack of catalysts, and with the ongoing COVID-19 concerns weighing on investors’ minds ahead of a plethora of central bank speakers in the run-up to US earnings season. US equity futures meanwhile tread water with mild gains. Sectors in Europe are also mixed and portray a pro-cyclical bias with clear outperformance seen across the energy names amid price action in the crude complex. Financials also see support from steeper yield curves, with the US 2s/10s topping 100bps in early European trade, whilst the IT sector eyes the new tech unveiled at CES 2021. Travel & Leisure continue to grind higher on vaccine rollout hopes, with the latest via Axios suggesting that the Trump Admin is poised to issue new guidelines to ramp up COVID-related vaccination. To the downside, the defensive Healthcare, Consumer Staples and Utilities alongside underperform. In terms of individual movers, Kingfisher (+3.3%) resides as one of the top Stoxx 600 gainers after reporting LFL revenue +16.9% YY and noting that it continues to experience demand across its markets. Meanwhile, German heavyweight BASF (+1.0%) benefits from a positive broker move at Bernstein, with Sodexo (+3.3%) also bolstered by an upgrade at JPMorgan Chase. Finally, UBS (+0.9%) is supported by the broader gains across the banking sector, whilst the Co’s APAC Investment Chief said the group is looking for asset management partners in China in a bid to double their wealth management footprint in the region within the next 3-5 years. Furthermore, Chairman Weber said the group will increase the search for a new chairman post-AGM and will be looking for wealth or asset management acquisitions.

Top European News

  • ECB to Disregard Any Temporary Inflation Rises, Schnabel Says
  • SAS Chief Unexpectedly Bolts at ‘Critical’ Time for Airline
  • Checkout.com Nearly Triples Value to $15 Billion After Funding
  • Italy’s Coalition at Risk With One Party Threatening to Quit

In FX, it’s too early to call time on the Greenback revival, but Tuesday is shaping up to be one of those testing, if not make or break sessions as buyers continue to draw encouragement from rising yields and sellers seem more inclined to trade along risk appetite and aversion lines. To recap, the Dollar extended recovery gains broadly yesterday to the point where the DXY reached a high of 90.730 before fading when US stocks pared some losses, and the index has subsequently pulled back further within a 90.620-302 band ahead of more Fed orators and the Discount Rate minutes, NFIB sentiment, weekly Redbook sales, JOLTS and Usd 38 bn 10 year supply that could all have a bearing on direction.

  • GBP – The major beneficiary of the waning Buck as Cable retests 1.3600 from almost the big figure below at one stage, but the Pound has also rebounded in relation to the Euro from circa 0.9000 to 0.8950+ at best in wake of remarks from BoE Governor Bailey highlighting plenty of ‘issues’ on the controversial subject of NIRP, adding that it is too soon to determine whether the economy needs more stimulus. For the record, MPC member Broadbent steered clear of negative rates in a speech on the coronavirus and consumption.
  • AUD/NZD/CAD – No real surprise to see Monday’s G10 laggards recover more lost ground than most currency counterparts, bar Sterling, with the Aussie firmly back above 0.7700, Kiwi within a whisker of 0.7200 and Loonie over 1.2750 with some assistance from buoyant oil prices awaiting Canadian PM Trudeau’s cabinet reshuffle.
  • EUR/JPY/CHF – All relatively contained and narrowly mixed against the Greenback, as the Euro pivots 1.2150 where decent option expiries reside (1.1 bn) and the Yen hovers under 104.00 also eyeing expiry interest at the strike (1.2 bn). Elsewhere, the Franc is straddling 0.8900 amidst a lack of independent impulses and this prone to Dollar moves and overall risk considerations.
  • SCANDI/EM – The Nok is also drawing some support from crude surpassing Usd 53/brl in WTI terms and Brent breaching Usd 56.50, but perhaps the fact that contraction in Norwegian GDP slowed considerably in November. Turning to EMs, a broad reprieve or sigh of relief is the overriding theme as losses vs the Usd are reclaimed to varying degrees, but the Try is labouring after dipping below the psychological 7.5000 level irrespective of conciliatory vibes between Turkey and Greece, so could be lamenting the higher cost of oil.

In commodities, WTI and Brent front month futures extend on APAC gains as the softer Buck and reflationary hopes and nations attempt to ramp up mass vaccination in a bid for a return to pre-COVID times. The complex could also feel support from measures to keep the travel sector afloat – which namely translates to jet fuel demand – as the UK government is poised to announce that requirement for COVID-19 negative test prior to departure on those travelling to England will begin from Friday, whilst the Greek government is reportedly proposing a vaccine certificate within the EU in order to facilitate travel for those who have received a COVID-19 vaccine. This, coupled with efforts by OPEC+ to balance supply and demand, has led UBS to expect the oil market this year to be undersupplied by some 1.5mln BPD. WTI Feb futures grind higher above USD USD 52.50/bbl (vs. low USD 52.07/bbl) as it briefly topped the USD 53/bbl mark. Brent Mar meanwhile extends gain above USD 56.00/bbl and test the USD 56.50/bbl psychological mark at the time of writing. Elsewhere, precious metals nurses some of their recent losses as the softer Buck and vaccine-driven reflation playbook aids the complex, with the yellow metal gains more ground above USD 1850/oz as it inches closer towards the 50 DMA at ~1866.50/oz. Turning to base metals, Shanghai copper fell to one-week lows as a mild resurgence of COVID-19 prompted China to impose new virus-related curbs. Further, Shanghai steel futures declined over 3% in APAC hours amid a build-up of steel inventories in China.

US Event Calendar

  • 6am: NFIB Small Business Optimism, est. 100.2, prior 101.4
  • 10am: JOLTS Job Openings, est. 6,400, prior 6,652

Central Banks

  • 9:35am: Fed’s Brainard Speaks at Artificial Intelligence Symposium
  • 11am: Three Fed Presidents Speak at Event on Racism
  • 1pm: Fed’s George Gives Economic Outlook Speech
  • 2pm: Fed’s Rosengren Speaks on Economic Outlook

DB’s Jim Reid concludes the overnight wrap

As I outlined yesterday I really don’t think this is going to be a dull low volatility year. The moving parts are just too big. Stimulus cheques, huge central bank liquidity, high savings rates, pent up demand and a global economy that is likely to rapidly reopen quickly once vaccines get past a critical mass is a heady cocktail. At the moment financial markets are benefitting from the liquidity and the story of the moment for me remains Signal Advance – a very small healthcare company in Texas. As I highlighted yesterday (in the EMR and CoTD here) it went up 1500% in 24 hours (before dipping back) after a misinterpreted tweet from Elon Musk on Thursday. Well yesterday initially it went up close to another 1000% intra-day in a move that nearly made it a billion dollar company for a short period, 48 hours after it was a $7 million company and a penny stock for the last 5 years. It still closed up +438% even though the error is now well in the public domain. I wonder whether the bubble stories that future historians will write might include this story. Clearly there have been others in this pandemic, notably sound alike companies to Zoom, but this story has really made an impact on me. Maybe I should set up a company called Tolsa Botcoin and see how rich I can get.

Not withstanding the huge liquidity sloshing around in the system, markets started the week with a mild risk-off tone, pulling back as investors were asking increasing questions about the sustainability of current valuations. With the notable exception of the US dollar, which had its best day since before Christmas, the selloff was across the board, with even some of the traditional safe havens like core sovereign bonds and precious metals losing ground alongside equities and other risk assets.

By the close of trade, US equities had fallen back from their record highs, with the S&P 500 (-0.66%) and the Dow Jones (-0.29%) both moving lower. Tech stocks were the big losers however, with the NASDAQ falling -1.25% as the sector came under intense global scrutiny following last week’s events in the US and the suspension of President Trump from Twitter. Indeed, Twitter itself lost -6.41% yesterday in its worst daily performance since October, as other big tech firms including Facebook (-4.01%), Apple (-2.32%) and Amazon (-2.15%) similarly underperformed as pressure rose from global policymakers to increase regulation on major platforms. The rotation to more cyclical parts of the market continued as yield curves continued to steepen, with Energy (+1.62%) and Banks (+1.23%) among the best performers in the US. Meanwhile European equities saw very similar losses to the US, with the STOXX 600 (-0.67%), the DAX (-0.80%) and the FTSE 100 (-1.09%) all experiencing losses.

The declines in equity markets proved no respite for sovereign bonds, which reversed their morning gains to lose ground through the afternoon. US Treasuries continued the selloff that we’ve seen since the Georgia Senate race, with 10yr yields up another +3.1bps to 1.146% as the prospect of further fiscal stimulus moves into view, their highest level since mid-March. Furthermore, the 2s10s curve steepened once again, rising +2.1bps to reach a fresh 3-year high. Breakevens were relatively flat (+0.1bps) at 2.07% after the strong recent move higher. As mentioned earlier, the US Dollar index had its best day in nearly three week, gaining +0.41% (up a further +0.14% this morning), to mark its fourth straight daily rise since falling to its lowest levels since April 2018.

Over in Europe it was much the same fixed income story, with yields on 10yr bunds (+2.3bps), OATs (+2.4bps) and gilts (+2.1bps) all rising. Nevertheless, one milestone reached was that both the Spanish and Portuguese 10yr spread over bunds fell to levels not seen in over a decade, now at 55.4bps and 49.0bps respectively. Elsewhere Bitcoin having traded above $42,000 on Friday, traded as low as $30,324 yesterday before setting at $33,964. It’s trading at $35,038 this morning.

Overnight in Asia there is no real pattern to markets with the Nikkei (+0.02%) flat after reopening post a holiday. The Hang Seng (+0.56%) and Shanghai Comp (+0.86%) are up but the Kospi (-2.59%) is down. Meanwhile, S&P 500 futures are trading broadly flat.

House Democrats introduced a new impeachment resolution against President Trump yesterday, with a vote scheduled for tomorrow (Wednesday) unless Vice President Pence gathers the cabinet and invokes the 25th amendment to remove the President. All indications are the VP Pence is not open to such a move, which means the vote is likely to go ahead. House Majority Leader Hoyer has said that House is ready to vote on the measure and another House member said that there is currently enough support for the impeachment resolution to pass. Some House Republicans are expected to cast votes for impeachment, though it would not be necessary. While the vote to impeach may come quickly, some Democrats are asking on Pelosi to delay sending any resolution to the Senate in order to allow President-elect Biden to get cabinet members confirmed and new policy rolled out. Once the Senate trial were to start, the Senate would not be able to take up other business and it could stymie the early days of the new administration.

From politics to the virus and in our daily vaccine table we’ve added a weekly change for each country in terms of % of additional population vaccinated. We should highlight that we are looking at the number of doses which is ok for now as most countries have only administered one dose whatever their planned regime is. However over the days and weeks ahead hopefully we’ll able to be able to separate people vaccinated with the number of doses. For now it’s still a good guide to the pace of change of vaccines administered for a large number of countries.

The U.K. is leading the charge of the largest countries and in the four days from Thursday to Sunday, when the country rolled out the Oxford vaccine to primary care, they have vaccinated at a rate of 210k per day and that’s before the mass vaccination sites opened yesterday. So the U.K. could still achieve their aspirational target to vaccinate all vulnerable groups by mid-February (with one dose). This requires over 2 million per week until then so we’ll now watch with interest the daily numbers the U.K. government is promising to provide. Interestingly 40% of over 80 year olds have received at least one dose in the U.K. now. France continues to be a concern amongst the major economies as vaccine hesitancy and logistics mean a poor start so far.

In the US, NYC Mayor DeBlasio announced they had vaccinated 100k residents last week, with plans to administer another 175k by the end of this week and reach 1 million by month end. On the other side of the country, Los Angeles is planning on using a baseball stadium as a mass vaccination center with the ability to offer the jab to 12,000 people a day. President-elect Biden is expected to offer more details on his administration’s federal guidance around vaccine deployment in a speech on Thursday.

Elsewhere on Covid, the main development yesterday was that Pfizer and BioNTech announced that they’d be supplying an additional 500m vaccine doses this year, bringing their 2021 production total to 2bn doses. Furthermore, it was reported by the Johannesburg-based Business Day that we should get preliminary results for the Johnson & Johnson vaccine trial in South Africa by January 21. Nevertheless, case numbers have yet to durably move lower throughout the world, and yesterday saw another warnings from UK Prime Minister Johnson that there could be a further tightening of the rules if they weren’t being obeyed.

In other news, DB’s FX Research team published their latest Blueprint yesterday (link here), in which they made some important adjustments to their currency views. First, they have turned tactically neutral on the broad USD, and even like buying the dollar against the yen, shifting away from their dollar bear view last year. This is because the Blue Wave will bring more fiscal stimulus and see the market price in earlier Fed tightening, as well as the fact that the US has run ahead of Europe in its vaccination programme. The second important change is in the EM space, where they’ve shifted from their positive view on EM FX last September to now see more scope for differentiation. They now prefer concentrating on a narrower set of currencies with more positive fundamentals as well as relative value trades.

To the day ahead now, and data highlights from the US include the NFIB small business optimism index for December and the JOLTS job openings for November. Central bank speakers include the Fed’s Brainard, Rosengren, Kaplan, Kashkari and George, the ECB’s Hernandez de Cos and the BoE’s Broadbent.

Tyler Durden
Tue, 01/12/2021 – 08:02

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