Macro Trading Update: USD & Yields Hold Firm While Extreme Temperatures Cause US Energy Crisis

Okay, very good morning, hope you're well. Good to be back after a couple days off the desk, so I hope everyone's had a good week so far. And just going to get up to speed with quite a few different things, uh, from the cold snap ongoing and implications in energy sector in the US. Obviously saw yesterday WTI crude futures in the front month contract get up to close to $61. We had a higher— well, I had a record print in US equities, but generally a fairly flat finish overall in the major 3 indices in the cash market. But again, generally keeping that theme alive of equities fairly elevated, the dollar seeing a degree of strength, and we're back above a key long-term trend line which we'll look at in a moment. So just inserting a bit of downside pressure on both major currency pairs in the euro and pound this morning, which you can see both are down each respectively 30 pips. So quite a uniform response to persistent dollar strength. The Dixie up about 2 tenths this morning. And then it did come after US bond yields surged to their highest in a year yesterday as everyone kind of continues to have this reflation focus with forthcoming stimulus and so on and so forth. So yeah, definitely. Meaningful moves in yesterday's session following the US holiday we had on Monday. But let's get straight into it and start talking about a couple of things. And I wanted to talk first of all about this, which was whenever equities get up to these types of levels of which we've been trading out of late, which is record territory, a lot of people start asking the question, of course, of, you know, is this getting a little bit overstretched? Is it overdone? And Bank of America released their global research report yesterday, which was reflecting actually quite a broad optimistic mood. So of respondents, only 13% saw the US equity market as in a bubble. 27% thought US shares were in early stage bull market, while slightly more than half believed US stocks were in late stage bull market. So, you know, the large proportion there, you know, whether early or late, still suggesting we're in a bull market. However, it's not all such optimism shared across the street. Citi strategists have actually said they see a 10% correction in US stocks as very plausible, and they're noting several factors— just kind of these current sentiment readings, stretched valuations, slipping earning revision momentum— as a couple of things. But just having a look at the S&P 500 as a bit of a case study for the time being. In the short term, we've had quite a nice technical response in yesterday's session here. This top kind of rectangle, this was the breakout trade that we saw going into the close on Friday when US stocks just went rampant into the close. And that area of last week's general area of resistance was quite a nice area of support where price responded in the overnight Asia-Pacific session. And much like we've seen over the course of really 2021, any aggressive selling like this, which often I think is more byproduct of, you know, I don't think it's, um, you should be thinking, right, the Fed are going to start talking up and removing the kind of punchbowl and becoming less dovish, because ultimately, as I'll share with you in a moment, that's the opposite. They're actually toeing the line as far as some of the Fed rhetoric from Bowman and Daly yesterday. And so on any of these dips, they do tend to get bought into at technical levels of interest, and that's exactly what we've had in the Asia-Pacific session. So part of that move already being reversed, and we're back up to 3931, having dropped to around 3913 yesterday. But what, what would a 10% correction look like in the S&P if that ever did materialize, if Citi were right? Well, actually, 10%, you know, 10% sounds obviously large. It's the definition of a correction. However, if you look at it in the journey that we've been on in the post-pandemic environment, 10%, you could argue, looks quite healthy for a pullback for us to then continue this rally on to the upside. I mean, definitely a 10% pullback would feel— depending on how quickly that percent was hit, i.e., the faster, the more material kind of I guess panic it creates, spikes in the VIX would likely accelerate then along the momentum on the downside, and definitely we could drop quite quickly. But if it did come down there, there's such solid levels of technical relevance as we kind of scale the price back down, and that 3,600 level really is very important if you're looking on the, the bigger picture. That would be the, the previous all-time highs in September, the the fake break we had on the Pfizer vaccine news on the 9th of November. We've had some retests on the 30th of November, 21st of Dec. Obviously there's areas we'd need to get through even before then. Here you can see at 3656.5 and even further up if we started going up to this kind of area, 3862. So yeah, I personally at this point, you know, I know there's a few Um, there always is the, the kind of bears banging the drum trying to find metrics as to talk this market down. But I'm still of the belief, for the time being at least, that any significant selling will be bought into as far as US equities are concerned at this point. Um, just looking at the broader asset class mix, um, as you can see, EURUSD and Cable are both down each respectively around 30 pips at the moment. So quite a uniform I would say, um, dollar response to the general move higher that we saw yesterday in tandem with the breakout up in US yields moving to their highest in a year. The DXY is up about a quarter percent again this morning, having gapped up a little bit overnight in terms of the DXY futures. And just having a look at this chart here, this is a very familiar one I've been looking at for, for the last couple of weeks. And this is that kind of trend line going back from May to November test. And it was an area of which when we broke out above had, had quite strong implications for how the major currency pairs were performing. If we actually go back to where we were towards the end of last week, we can see there that, that wick about 3 candles ago, we had a firm test there and it got rejected. This one here. We had another test in yesterday's session, rejected. But you can see now we're above that marker. So I'm quite interested to see this morning how the dollar performs. Technically, I think this has been quite a good sign, a good barometer for then the dollar sentiment on the day. And this would be intonating towards perhaps a more bullish day for the greenback. If that is the case, then I'd definitely be keeping an eye on these major currency pairs. And as I speak, on cue, the DXY, um, strength just imparting downside pressure on the euro. And the euro is just seeing a bit of further weight come in just on the break as well of technically some fairly interesting levels here in the short-term price activity. So just seeing a spill down to S1 now in the euro future on the dollar strength. Cable obviously has been holding up a little better, but again susceptible perhaps to a little bit of dollar strength just given the breakout strengths that we've had generally. There was that level I was looking at in the briefing that I did on Sunday, you know, now we're above that key area of congestion of 38. Did feel like we were going to push up to towards 140, and certainly we have got close proximity to that, in fact only within around a 50-pip range. So a bit of a pullback from there as well with some of the dollar strength, I think, um, wouldn't be too untoward. I guess a key level to watch today in the future is 138.63. You can see here has been a pretty good level of late. And just under there on the daily pivots, you've got the S1 as well. But still a little way to go for cable as the euro just touches fresh lows. Um, okay, so some other news then. Uh, elsewhere in the broader metal space, um, copper climbing to its highest since 2012, and tin extended a dramatic surge yesterday. So some of the Bit of a disconnect at the moment, I would say, between industrial and precious metals. Industrial still being buoyed by this whole reflation picture and this pickup with the adoption of vaccines and reopening expectation of economies in, in due course. Citigroup actually forecasts copper prices will rally to $10,000 a tonne in 6 to 12 months on better than expected recovery in demand. Most notably outside of China. And that's obviously a key metric to support then, uh, those types of metals because it has been underpinned a lot by a fairly early recovery in China post-pandemic. But if you start to see that spill out into the rest of the globe, then that's going to be another, um, key catalyst of potential upside in, in copper. Meanwhile, elsewhere though, if you were looking at the likes of gold, still remaining a bit pressured by this kind of dollar yield view at the moment. And the yellow metal still remains in the futures below $1,800 for the time being this morning. Moving over though, I've got a few notes I wanted to cover on energy markets. And obviously natural gas and WTI crude have seen some meaningful movement over the last 48 hours. And to get you up to speed— getting myself up to speed having been off the desk the last couple of days— Extreme temperatures in North America have curtailed more than 2 million barrels a day of US oil production, so a meaningful amount. Demand from refineries is also being crimped, with over 3 million barrels a day of processing capacity being idled, according to Energy Aspects, as quoted in Bloomberg. The polar blast left approximately 73.2% of the US covered with snow, and a deep freeze is expected to cause havoc on the oil and gas production in North America for several days, if not weeks, according to industry experts. Production of gas in the lower 48 states has plummeted to a 3-year low as frigid weather triggers blackouts and causes liquids to freeze inside pipes, forcing wells and processing plants to completely shut. So underpinning the rally is the prospect in terms of gas of tighter inventories by the end of winter as heating demand starts to soar. Liquified natural gas export terminals are shut or curtailed operations amid now a disaster declaration that we've had in Texas, which is experiencing blackouts at the moment. New York gasoline futures closed at their highest since August 2019 on on Tuesday as a reference point. So yeah, this is, um, some, some really significant news actually. And definitely I think a lot of this, uh, to a certain extent obviously has, has been reflected in price already. But I guess this is going to be a rolling thing which energy traders will be keeping an eye on day to day, is getting an idea then on the timeline of some return of normality which is hard to get an accurate read on at this point in time. And obviously, given the fact that, you know, as I just said, that, you know, the snow and deep freeze is causing havoc for not just gas, but also oil, for refining, for wells, for everything, then this could be something which could be a real focal point for the rest of this week, at least for crude oil traders. So definitely worth keeping an eye on that. Develops. The other thing I wanted to have a look at was, uh, we'll stick with the US, and this was a few Fed comments because, you know, one of the things that the market's very, um, apprehensive about is potentially when does the Fed start to talk about the idea of optimism that's being reflected in this general reflation view at the moment, start to then, um, impact and and force the need for change in Fed rhetoric to something less accommodative than it currently is at the moment. That's probably one of the key risks actually that we're looking out for in the FOMC minutes later on tonight, and that is that there's a slight risk of upset in the bond market should a few members want to discuss the appropriate timing of the withdrawal of stimulus. Now you remember going into that last Fed meeting, it was pretty much sturm und drang on that point. However, commentary about withdrawing stimulus will just further fuel the type of moves that we were seeing yesterday. Yield, dollar strength, probably equity weakness, uh, if it was that they were having discussions about having the discussion, if that makes sense. So that's the key point we're looking at in the minutes. But with all that being said, actually you've had two speakers I saw from overnight news, Fed's Bowman and Fed's Daly both are voters and both have a kind of neutral disposition as far as the hawk-dove spectrum is concerned. But they said the US economy still has— this is Bowman, she said the US economy still has a long way to go to heal from the COVID-19 pandemic, and new variants of the virus are seen as troubling. While Fed's Daly said don't be fearful about too high inflation. And so again, paying heed to the fact that they see it or at least she does, as a relatively temporary thing. Also given the fact of the, the degree of flexibility offered by average inflation targeting, allowing inflation to be able to run hot above its traditional 2% target. So the reason why I think Fed commentary will be very important going forward is that if all things continue at this point in time and things like the vaccine continue to be rolled out, that allows then restrictions to be loosened and economic activity starts to then in real terms reflect some of this overall optimism being priced in right now, then the Fed have got to change their rhetoric at some point. I think probably now is a little bit too soon, but when that moment comes, that's going to be a real point then of which will undoubtedly, undoubtedly will cause some degree of response and volatility in markets because the Fed have got to tread very carefully, of course, not to spook the market, they're going to act too quick. So something to be aware of. And then the final thing I wanted to talk about was COVID-19 in, in the UK. And obviously the UK has been a real talking point because of the degree of success that it's had with the implementation of its vaccine program, which is still well underway at this point. It's by far no means over, but there was a report here in Sky News last night that I saw. And this is what I'm looking for now, is we've got Boris Johnson to give a strategy update on the COVID lockdown strategy on Monday, on the 22nd. But then also, well, what are the subsequent timelines thereafter to give us a roadmap at least of when we can anticipate the economy to start reopening to a certain degree through this tiering system, which is obviously critically important for then ascertaining the type of value of which current Assets UK related to trading today. And every adult in the UK could receive both doses of coronavirus vaccine by August or September, maybe sooner if we need to, according to the head of the UK's vaccine task force. This was yesterday. And let me just run you through a few different things. Now, this was something I saw then which slightly counter to that headline. This was in the FT last night saying the UK is anticipating a dip in COVID supply in the coming weeks. Now obviously a dip in supply would be impactful then for the type of numbers that we could hit and the speed at which we could, we could reach them. Now the FT has reported UK is anticipating a dip in coronavirus vaccine in the coming weeks, with their analysis suggesting that if it can continue at its current rate the government's latest inoculation target could be achieved by the end of March. Actually, the government's much longer target of April 30th, which we know of, suggests that ministers either expect supply levels to drop in the coming weeks or want to play down expectations, stung by the criticism that they suffered during the pandemic, which started— stated deadlines have not been met. So yeah, I do think this is actually probably prudent planning from the UK they've met that first target, which was, if you remember, this is the priority group order, and they've managed to get then the first 4 key categories completed, which is the priority groups going from care home residents, residential care workers, the 80+ category, you know, clinically extremely vulnerable. So all of these people have now received their first dose, which is that mid- February, beginning of this week, 15th target has been achieved. Now it's about where are we in April. And actually then, what this is suggesting is the data is telling us that here— I think it's on this chart here— at the current pace, in fact, the UK will have given a first COVID-19 vaccine dose to all over 50s by the end of March. Well, if you actually look at that then all over 50s is basically then the next 5 key priority groups, meaning then we've done all 9 and the only thing remaining then is the rest of the UK adult population. So it— again, strategy-wise, I think it makes a lot of sense on a couple of different fronts. I think the UK wants to avoid any further criticism, so they've effectively bought themselves here an extra month by setting the expectation bar relatively low in order then that they've got some flexibility should they face any type of supply disruption. So I think this has been well managed again by the UK government. The Telegraph this morning, to add to this, has said that COVID lockdown is to continue until cases drop below 1,000 a day. Now currently COVID cases as of yesterday were around 10,600 2025. So still some way to go there. And the plan from Boris Johnson, according to UK press sources, is that he's unlikely to commit to a clear timetable in the coming months and instead promising a series of reviews. And again, I think that's probably the most prudent course of action. Definitely do not want to be putting your flag in the ground saying, right, gets to this date, we're doing this, because with something so volatile as a as a virus and potential mutations, there's no way that you can really commit with great deal of accuracy to hitting these targets. Better then give yourself flexibility, even though you feel quite bullish about your ability to vaccinate people with the first dose and hit these other priority groups. And then also as well, only commit to then just giving very regular updated reviews and responding to the situation as you see it. So how impactful is this for the pound right now? Not particularly, but I do think it, it does favor the UK well in its COVID strategy going forward over the coming months. And so hopefully that's a fairly thorough update for you. A quick look then at the calendar for today. We have had the UK inflation data already come out, so let me just quickly read out the year-on-year 0.7% 7% CPI, expectations for 0.6%. No movement in pound, as you would expect. You know, inflation figures, they're just not that important right now because obviously they're particularly low. We're still in the midst, of course, of a national lockdown at this point. If there is any future pent-up demand inflation to emerge, it's not going to be until most likely later. It is the first of some important UK data they will get as updates this week. A few more things coming out later in the week— retail sales, and you've got the PMI flash data, which is going to be particularly important on Friday morning. So other than that, definitely I think currency-wise it's more of a dollar day than it is sterling for sure. So as I mentioned, keep an eye on the, the greenback. Otherwise, the morning quite quiet. We're going to the US afternoon and we've got retail sales coming out of North America alongside industrial production, manufacturing output, Now these figures should show the US economy started 2021 on a fairly firm footing. Retail sales expected to bounce back up to a positive 1.1% from a previous -0.7%. Um, bear in mind that stimulus checks, the previous ones, started hitting in early January, so should help to some degree to have lift that number a little bit. So again, This is not talking about the Biden proposal at the moment. These are the prior checks. And then you've got the FOMC minutes, which we've already discussed. And then speaker-wise, Fed's Rosengren, a non-voting member, speaking at 2:15 London. Bank of England's Ramsden speaking at 4 PM London time. And then from the US, fixed income— well, for fixed income traders, you are UK gilt auction this morning. I read about really solid demand we saw for Italian auction yesterday, obviously given the renewed optimism over Draghi coming in looking to steer the ship. Uh, you've then got a longer-dated German auction and $27 billion in a 20-year bond auction from the US coming later as well. And that's your wrap. So hopefully that's got you up to speed. Um, the guys will be going over the charts from a more technical perspective on Amplify Live. I'm going to be doing a masterclass myself tonight, 6 PM London time, where I'm going to be joined by my guest Merritt Black joining us from the States to share some of his insights and philosophy about trading with our community. So if you want to join that discussion live, just go to AmplifyLive.com. Thanks very much, guys, and have a great day ahead.