Blue Wave Trumps Capitol Hill Chaos

Good morning, I hope everyone's well. It's the 7th of January and just got 7 AM here in London, so let's get this briefing kicked off and look ahead of the day. I'm looking at the S&P chart here on a daily time setting, and as you can see, despite some of the sensational, uh, sort of headlines coming off Capitol Hill last night, S&P not really blinking. And on the futures here, just nudging up and edging up and right up there around the highest point ever traded, which was set on Monday and indeed tested again yesterday. But as you're waking up, you're going to be seeing sensational images here as Trump supporters, um, stormed the US Capitol building late on Wednesday, and they were— they forced lawmakers and staff to seek shelter. Um, and it all of course disrupted what was the certification of President-elect Joe Biden's victory. Um, quite incredibly, uh, you know, armed supporters of Trump. Uh, there were 4 deaths unfortunately that occurred during the protests, although it looks like only one of those deaths was, was related to actually a gunshot. And a woman unfortunately died and shot by police as a crowd forced its way into the House of Representatives. The 3 other deaths were apparently more due to medical emergencies. Not too much info above and beyond that at this point, but calm was eventually restored after the National Guard was called in and more than a dozen people were arrested. You know, this was the joint session, you'll remember, to formally count electoral votes and certify the election result. And it got going again, the kind of, the formal process got going again after all of this kind of was The protesters were removed. Um, I don't know what to say about this other than it's kind of perhaps Trump's final hurrah in a way. I mean, the media will be all over it and loving it, but actually what's important for traders is it's not really relevant. This is Trump's final sort of death cry before he steps away from the White House just in 2 weeks' time. And so this procedure that was going on in Capitol Hill, it was all formalities. It's not going to change the result of the election. It's not going to change the fact that Biden's stepping into the White House at his inauguration, um, in a couple of weeks. And so really, from a market's point of view, it's a, it's a complete distraction. So I don't really want to talk more about that at all. What is more important And actually, you know, why are stocks up here nudging the highs again? Well, we talked about this in the briefing yesterday, myself and Anthony Cheung. This is the kind of blue wave trade, if you like. It's back on, and that's because the Democrats took control of the Senate. They won those two— let me bring up these sort of headlines here. Sorry, that's the Republicans recoiling from Trump as violence proves too much. And so some senior Republicans have really, of course, you know, forcefully separated isolated themselves from Trump. And, um, but, um, but yeah, in terms of the headlines with regards to the blue wave, so, um, the Democrats gained control of the Senate. They won both of those runoff elections in Georgia. Um, and so they have control. It's 50-50, but, um, in terms of the senators, 50 Democrats, 50 Republicans, but it's the vice president who is of course Democrat, carries the deciding vote in any event where there's a vote split. Um, so in effect, uh, Democrats have control of both the House of Representatives and the Senate. And obviously Biden sat in the White House, he's a Democrat. And so this is the blue wave, you've got a Democrat 1, 2, 3. And of course we talked about this in detail yesterday, so I won't go over it other than to summarize that this scenario means that it's just more likely that Biden will be able to get his policies through Congress. And that— those are policies such as a larger and perhaps a faster and larger stimulus package to fight the coronavirus situation. It also means, you know, other stuff. We— again, I talked about this yesterday, so I won't go over it too much, but the NASDAQ certainly underperformed yesterday compared to the S&P. And that's because the idea is that Biden, with, with a clear pathway on getting legislation through Congress with this blue wave, is more able, we think, to implement more regulatory burdens on the tech industry. And plus, we talked about this whole idea about how the inflation— the inflationary trade here is back on. More stimulus may lead to a more rapid increase in inflation, and we talked about how this is negative for what— in one respect it's negative for tech stocks and it's kind of good for value stocks. And you're seeing a rotation trade out of tech into value. And the other thing is, I mean, one good example yesterday, uh, Biden of course is very much pro-green, uh, environmentally friendly policy. And now that he's got his blue wave, I mean, it was the, uh, sort of, uh, renewable energy stocks that were just on an absolute tear yesterday. Uh, what I look at quite closely is called, uh, renewable energy. Uh, that was up almost 13% on the back of this, um, on the back of the Democrats taking control of the Senate with that, with that win in the two runoffs in Georgia. So we talked about this yesterday. I wanted to touch on what we didn't talk too much about yesterday, um, was what's happening over in the dollar. We'll come back to the stocks in a minute, but If we look at the EURUSD here, then certainly let me just get rid of these two lines and tidy up this. So, um, obviously this dollar weakness trade has been the theme of the last couple of months, and it's certainly been extended and ongoing. Yesterday again, um, EURUSD punching, um, some new highs here for the year. But if you look back, let me go back to a monthly view, because this move yesterday to new highs for the year, and I guess new highs you know, that's not only for 2021. We're obviously only 4 days in here, but it's new highs compared to last year as well. And in fact, it's higher than anything the year before. And actually, you've got to go back to 2018, and actually very start 2018, to find the last time that this currency pair was trading up at these levels. And so, you know, I think the, the dollar weakening story, they're very much is, is aligned with the blue wave and, you know, Biden um, you know, being able to get his policies through much more easily, and the Democrats being able to set their agenda much more easily now with control of both houses on Capitol Hill. So this dollar weakening scenario I'd expect to continue. The key— the clear target is 125, and just above that, 125.80, which as you can see is a very prominent, very proud double top here from the start— double, triple top from the start of 2018. Okay, so we're expecting that dollar weakening, uh, theme continue. Um, what else is going on in the headlines then? Um, well, uh, just looking back this morning actually at some positive data out of Germany. So Germany, German manufacturing goods unexpectedly increasing by 2.3% month on month in November, and that follows, that follows an upwardly revised 3.3% jump in October, so beating expectations. So good news on the data front this morning out of Germany. What wasn't so good, the focus for tomorrow really will be the US labor market where we're going to get the The December 2020 non-farm payrolls result that will be announced tomorrow afternoon, and the kind of one leading indicator for that is the ADP— US private sector ADP employment number— that came out much worse than expected yesterday and printed negatively, which is of note just because that's the first negative print since, if you like, the first wave of COVID which was back in April. And of course, you know, we know what's going on here, and certainly in the UK we're in full still locked down. And, you know, when you're thinking about COVID um, you know, out over in the US, you know, the situation is still, you know, despite the vaccines starting to get rolled out, the situation, um, is still worsening. And so we should anticipate this, that as restrictions, uh, are tightened, we should anticipate that the labor market will suffer in the near term. So Um, well, you know, all eyes will be, you know, looking at that non-farm payrolls figure tomorrow. Here's the payrolls chart just as a reminder. In November we've got a 245 print, and of course you've seen a wild— the most remarkable year in history really for non-farm payrolls data. We'll talk, we'll talk more about this tomorrow because this payrolls data is, uh, tomorrow. Um, oil headlines, we talked about this, another big story of the week, and oil buoyant near $51. But let's take a at that chart right now. So we talked about this yesterday, and, you know, it was added to last night. We had a drawdown— uh, sorry, yesterday afternoon we had a drawdown for the US Department of Energy inventory data. But of course, the big story isn't that. The big story is the Saudis and how they've very surprisingly decided to cut production by a third of 1 million barrels a day for the months of January and February whilst we go into a bit more sort lockdown situation in Europe and indeed in the US. So oil, along with the weakening dollar, Saudi's cutting production, drawdowns in US inventories— this is that kind of trio of positive catalysts that's enabled oil to punch up through $50. And we're trading indeed up about $51 this morning. So let's just take this timeframe back and see the last time we were trading, uh, up at these levels. And you've got to go back to— let's see here— yes, February. So it's 24th of February. So as that sort of coronavirus scenario started to, to kick in, um, then that's where we had this big sell-off. Um, we had a big marker point at the end of 2018, which I've drawn in here at 42.36. And you can see that, that, um, obviously we've got the gap lower here off the wave 1 of COVID and then You can see that as things recovered through the summer, this kind of presented a very nice barrier of resistance, and we broke through that in November as we started to see maybe light at the end of the tunnel off the back of all the vaccine use, of course. And this crept higher and crept higher and crept higher. Now this latest punch has actually taken us up through the triple bottom area, well, up, up through and around the triple bottom area from, uh, 2019. So this is an important technical here that's been kind of breached. And so, you know, targets on the upside, technically speaking, uh, would be this high point that we had in February. But that's right up at $54.50, so that, you know, there's quite a distance to move to get up there. Of course, you know, looking back at 2019 as a whole, then the high for that year was right up at $66, but we're way off there. And, you know, you know, I'm certainly not thinking $60, never mind $66 at this point. That might be a scenario that plays out only if the vaccine rollout is very successful, and at the moment— so further updates on that, the US reported that they've now managed to vaccinate 5 million people, that's with the first dose, but 5 million, you know, that's still behind the expected sort of rate of vaccination, so that whole vaccination program as you'll have seen in the press, has— is being rolled out, but some bottlenecks are just slowing things down. So traders are hoping that those bottlenecks will be alleviated and the rate of vaccinations will be able to ramp up quite, quite rapidly. And obviously the hope is that this will enable economies to open up, and developed economies first, they're the ones with the vaccine first, and these big giant developed economies like Europe, like the US, successful vaccine rollout leading to an opening up of the economy and a much more positive, strong, more nearer-term rebound in economic activity. You know, add in the blue wave and, you know, that's what investors are hoping for. Of course, with oil, you know, on the demand side, that would be a very positive situation. Of course, any hiccups or road bumps or speed bumps, sorry, in the vaccine rollout, well, then that demand side equation starts to turn negative again. You know, if lockdowns are being extended, uh, for longer periods, and of course this is, this is a negative situation. Also then you've got to think about the supply side, and you know, the Saudis so far, fine, have committed to a couple of months' worth of quite aggressive cuts, but you are having some of the other OPEC+ nations like Russia, um, increasing production only marginally. But it'll be interesting to see what the Saudis say in what is now more frequent monthly, uh, OPEC OPEC+ meeting. It'll be interesting to keep track on Saudi stance as we get, you know, into February, because then we'll have a much better idea. We'll be a few weeks on and we'll be able to see the rate of vaccinations and are they speeding up. Um, and then we'll be coming towards the end of that deadline of January, February where the Saudis said they'll cut production by a million barrels. What are they going to do in March? What are they going to do in April? So obviously the supply side is important. To monitor. But for now, for oil, uh, this is really key, you know, very significant from a technical point of view, and of course very significant from a fundamental point of view with that Saudi news yesterday. So up above 50, indeed up above 51, um, you may well see a push towards this next target on the longer term of 54.50 in the coming weeks, in the couple, in the couple of weeks ahead, as long as that vaccine rollout doesn't, doesn't disappoint. And as long as the Saudis don't start talking about increasing production again in March too soon. All right, let's turn— let's return back. Uh, well, actually, no, let's not return back to stocks. The one thing I wanted to just kind of look at with you is T-notes. And I talked about this yesterday, back to the kind of blue wave and, um, the Democrats winning those seats, uh, in Congress. So here we've got T-notes. I talked about this yesterday. This was a very important situation because we've got yields rising. This is all part of that inflationary trade story, of course. And we have yields rising, and yields on the 10-year T-note in the US punched about 1% briefly yesterday. From a technical point of view, from the price perspective, this is taking things down below that June low. We had a little bit of a low point back in March, which was at 136. The low point that we've had yesterday was at 137. So we didn't quite— we don't have a new low for 2018, of course. I'm sorry, 2018. We don't have a new low for 2020 because obviously here you can see the T-notes were trading all the way down below the 130 handle at the start of 2020. But I zoom in on a daily chart now. You can see that it's been added to this morning. I'm going to draw that line in there, just shift that one a little bit. And, uh, so very, very important from a technical perspective. Uh, this feeds into that whole story we were talking about in yesterday's briefing about how this is arguably negative for tech stocks, those big giant tech stocks that are carrying a huge amount of kind of free cash flow. So future valuation of free cash flow, um, you know, if yields are rising and inflationary expectations are rising, that's a negative for that, that value. So very important here, definitely keep an eye on T-notes. Key break technically here. So two couple of really big breaks technically, one on oil, one on T-notes. Uh, you've got euro-dollar, you know, kind of marching and continuing its trend. And I'll end on stocks here because, you know, the S&P is up here around, um, the highs. And again, you know, from a technical perspective, it's a continuation of the upward trend, of course. And, you know, as it stands, despite all this kind of chaos and quite remarkable remarkable scenes that we've had on Capitol Hill last night. It doesn't matter so much. It's not an important thing. It's not going to alter or change economic performance in the United States. And therefore, ultimately, um, you know, with the FOMC last night, by the way, where the minutes, you know, really didn't throw up much— so the, the minutes from the Fed's meeting, this is their meeting back in mid-December So the minutes were very consistent with the kind of statement that we had at the time. So really not much surprise at all. Officials unanimously backing holding the pace of asset purchases steady when they met last month, with some open to future adjustments if needed. So nothing kind of out of the Fed last night of any note, certainly no negative surprises. And so whilst Yeah, whilst the media is pumped full of Capitol Hill chaos, um, traders and investors are ignoring that and looking through that. Biden will be here in a couple of weeks. We have a blue wave. The blue wave trade is on. Inflationary expectations are rising. Renewable energy stocks are on a march. Uh, you've got a rotation out of tech and into value stocks, and that's, that's the theme of it, and nothing's changed. So that's it for today's briefing, guys. Enjoy your session, and I will catch you later. Thanks very much.