This Week In Markets: 8th - 12th February 2021

Okay, very good morning to you. Hope you've had a great weekend, managed to avert the snow. But yeah, just wanted to kick things off then with this. You might have seen it, some of you I know have already listened, but if you haven't, we have now officially over the weekend had approved and launched our new podcast. And so in summary, it's a conversation that happens at the end of the week, so at 10 AM London time, I have a chat with basically Piers, our head of trading. We put out a really informal chat about what our thoughts are on some of the main themes of that week. So do check it out. It's on all major podcast platforms. Here it is on, on Spotify. Just need to search for Market Watch. And it's also on Apple as well. I know on Apple there is an ability to rate and leave a comment as a review. So if you do enjoy it, please do so. It'd be amazing to really help the launch of the podcast as it gets up and running. So Check it out. If you're watching this on YouTube, I'll put the link below. Really appreciate your support as we get the new podcast series underway. But look, let's get straight into things and start talking markets then for this morning. And overall, when I was putting together the weekend press, things were pretty quiet, to be honest. There wasn't much in the way of major news. But if you actually— as I talk through the news items in the different sections, most of it is fairly upbeat, I would say. So taking a look at the cross-asset class mix this morning, equity markets still up at around their all-time high levels. So the S&P 500 in terms of the futures in the overnight Asia-Pac session touching 3,900. So here we are, the next symbolic kind of marker. Felt inevitable we'd get there. We did talk about this last week. Uh, and the NASDAQ as well in a similar fashion. Oil as well following suit. So on those long-term daily higher time frames, we're right up there at that $57.36, which is around that low point we printed back at the beginning, uh, on the 15th of Jan as support. So any breach above here for the week, then the next obvious target basically is up at $60, which is $59.73. And obviously there's going to be some ebb and flow until we get to that point, but you can see quite clearly here on the daily chart, just how much more clear as a target that that would be of any further run-up in price, up to these highs here. So at that resistance level at the moment, hasn't yet broken through, but you can see here some decent performance straight out of the gate. Electronic trade on Globex. Elsewhere, metals markets a little bit higher, both gold and silver, the former up around $3.50 at the moment. In the currency markets The dollar index saw a very minor gap up, but still lower generally following the non-farm weaker print that we had last week. And, you know, that is a really quite meaningful chart technically we're keeping an eye on. This is that trend line from May, the retest in November, and the break we had last week, which was really important actually for consequent movement that we were seeing where gold silver, some of the other precious metals markets were trading quite heavy on the back of the persistent kind of dollar strength. And we have come back, obviously the weakening of payrolls, we were kind of quite dollar bid going into that given all the precursors were looking very positive. But if anything, payrolls was a bit of a dampener and the dollar pulled back and we've kind of leveled off since then. So we're still above that trend line for now and that's going to be a key level whether or not that holds throughout the coming sessions as to what then might consequently happen on the major pairs in EURUSD and cable and so on. So at the moment, obviously those markets saw a really powerful recovery, um, in the second half of Friday session, and now we're kind of sitting there waiting for the next potential move. So definitely, uh, I'll be keeping an eye on that dollar level as we go through the week. So let's get straight into it. Let's talk about some of the news headlines and what's going on. I'm going to kick things off with talking about COVID-19 because there's been some positive news, actually. And this is what lends its hand quite neatly to this idea of something that Piers and I actually spoke about on the, on the podcast on Friday, which was this kind of Goldilocks scenario. And the slightly softer payroll number comparative to some of the other employment data we were seeing last week actually lends its hands to support that Goldilocks scenario. Which is the economy generally is finding a little bit of momentum in the US. Things are seeing some signs of improvement, but not enough that the Fed or the Treasury are going to change what they're doing. So you've got an improving economic picture in the backdrop of forthcoming stimulus and also a loose monetary policy, irrespective of the fact that inflation expectations continue to rise at the moment. So that in itself, a perfect storm if you like, for just keeping equities on the, on the front foot even at these very elevated levels for the time being. So this is the COVID situation as it stands at the moment. US states on Sunday reported fewer than 100,000 cases for the first time in more than 3 months, citing the COVID Tracking Project, as you can see here. However, there is a slight caveat you must be aware of here. As with all things to do with data, particularly COVID tracking, is the weekend, the way that they aggregate those figures. And basically Sunday's data is missing updates from several states, some of which regularly do not report over the weekend, and some others having technical difficulties. So the point here though is that COVID cases in the US are decreasing. So irrespective of the symbolic value of it being below 100,000 for the first time in a couple of months, prior day it was teetering at around those levels. So the point still remains, we're seeing a continuation of a decline in new cases in the US. Hospitalizations themselves were the lowest, uh, on Sunday since November of 19— 19th, 2020. Moving elsewhere, another country that definitely was in focus because of the fact that then it's as a result led to further restrictions, which is obviously impeding things like mobility and consequently the economic activity situation, is in Germany. In mainland Europe. And Germany added 8,632 new COVID-19 cases at the weekend on Sunday. That is actually the lowest in 4 days. The R number held below the key level of 1 for a 5th day, and that lends then its hand to the prospects of decreasing COVID cases going forward in Germany. Uh, the economy minister though did comment at the weekend, uh, dampened hopes for a quick end to social restrictions, saying it could take another 6 to 8 weeks until shops and restaurants will be allowed to open, which doesn't come as a surprise that that seems to be the kind of timeframe you'd be working with. You need to see consistency in the decline before you could take that type of action. And then finally, France. France, if you remember, was seeing very elevated numbers that was putting the country at risk only 2 weeks ago of going into its third national lockdown. They decided not to follow that kind of path in order not to place too much more pressure on their hospital system or infrastructure. But France reported a fall in new COVID-19 infections on Sunday, and that marked the fourth success— successive day of declines. So overall, these are quite key areas, and particularly like Germany and France, which have been getting materially worse for quite a period of time. Everywhere is declining in COVID cases, as we know. Then as the the knock-on effect we tend to then see over a period of weeks, as long as those trends continue, decrease in pressure on, on hospitals, uh, and also then the consequent death rate. So some positive signs there. And that does come as there was some attention drawn to an FT article that came out. I think this was on late Saturday when I saw this, but let me give you the overview. AstraZeneca's vaccine has shown limited efficacy against mild disease caused by the variant first identified in South Africa, according to early data in a small phase trial. Results have not yet been peer-reviewed. The official results are due to come out later today. Um, and note that none, none of the more than 2,000 mainly healthy young patients in the study died or were hospitalized though, and the sample size in itself is from a scientific point of view, considered to be relatively small at just over 2,000 people. So a couple of things here. We have seen from other drug data, we saw that more recently from the likes of Johnson Johnson, for example, that the efficacy rate does have a slightly fluctuating performance depending on what it is, whether it's the base kind of COVID-19 or it's a variant like the UK, South Africa, Brazil, and so on. And there have been a variety of generally different rates lower than for some of the variants. So the fact that this doesn't have any impact is a kind of a step further, if you like, in a negative way. However, the one of the important things here is that it doesn't lead to basically more hospitalizations or deaths. And that's a really important point. When I had a conversation with one of the guys last week that we were trying to stress is that with all of these drugs, even though efficacy rates might fluctuate from, say, 65, 70, up to 90%, the idea here is in terms of the rollout programs that the, the death and hospitalizations are not actually impacted by these vaccines, of which the former is actually 100% proven across all vaccines once you've had it. So yeah, I wouldn't read too much into this. I don't think it's a big headwind or a negative. And as we know, a lot of these pharmaceutical companies are already trying to adapt the, the kind of vaccine makeup in order to have more higher effectiveness against some of these other strains, because that is something they're going to have to do going forward as the virus continues to mutate over the long term. So yeah, something to be aware of, not something I'd be particularly spooked by, uh, though, at the market open today. Looking elsewhere then, talking of stimulus, um, there's a couple of things. The US Senate voted, of course, 51 versus 50, to pass the budget measures to adopt and fast-track Biden's stimulus plan, which starts the reconciliation process. So in terms of timing, House Speaker Pelosi hopes the House can send the COVID relief package to the Senate within the next 2 weeks. So that seems to progress at this point. And then over the weekend, the newly appointed Treasury Secretary Janet Yellen has said the US can return to full employment actually by next year if it enacts a robust enough coronavirus stimulus package, that without adequate support could take until at least 2025 for the labor market to fully recover. So this isn't new really from Yellen, it's another kind of call to arms politically timed with the passage of the US Senate vote that went through as well to fast-track the Biden stimulus, and just repeats what she said before. But it just goes some way to show that, you know, supporting this economic underlying momentum is further forthcoming stimulus. So hence the reason why then you are seeing a little bit of this at the moment, which is people's general view of inflationary conditions is continuing to tick higher, and that's what's kept the US 10-year moving lower at the moment as US yields continue to rise and the US 10-year inflation breakevens hitting their widest level since 2014. So, uh, again, I don't personally see too much of an issue with this happening because of the fact that I don't really see much in the way of a sustained move in inflation. And I'll talk about that a little bit more in a moment because we've got US CPI coming out this week. And one of the factors that's going to really elevate that CPI reading this week in the US is the fact that oil prices have moved higher very quickly, and that energy underlying component is going to really inflate what that inflationary condition looks like. But again, that's not a stained thing. And that's just a reflection of, given the relatively low base of which we're coming from in crude oil prices. And so this idea of inflation, I think, still being somewhat of the understanding that it's going to definitely go higher in the period ahead, but then will fade, or at least become more controlled as time goes on. As the kind of— as I'll talk about, there's a couple of stats and things to be aware of. So I'm not too concerned by this. I'm definitely not in the camp of thinking that we should be panicked by inflation. I'm definitely in the camp of that I see it as a temporary thing. And given the flexibility ultimately that the Fed have now over inflation, average inflation targeting allows then these types of figures to run hot for a period of time and for a fairly lengthy period of time before they would ever consider taking any course of action. So, um, something to watch but not something I think to sweat about at this point in time. Uh, the other thing on a stimulus side from the UK worth noting then, as we get closer towards the beginning of March, about a month's time, we hear the latest budget from Rishi Sunak, the Chancellor. The Sunday Times was reporting at the weekend that Sunak is to extend furlough and business support measures when the budget comes out later. So again, another, another real positive, I guess, in terms of the UK, which is somewhat being cushioned by the success of the vaccination rollout program. But if the government continues to provide this rollover of stimulus, that's only going to help support the economic kind of narrative at the moment in the UK. And then elsewhere, just taking a quick look over at Europe before we look at the calendar for this week, Christine Lagarde spoke, and she warned stimulus must be removed only gradually. She went on to say that our commitment to the euro has no limits. We will act for as long as the pandemic is causing a crisis situation in the euro area. The ECB is due to publish, um, what basically their new quarterly forecast next month, and several members of its governing council told the FT at the weekend that they believed that growth of 3.9% this year looked realistic even if the short-term recovery was delayed. However, one council member said there's a big downside risk was the vaccination delays, new more infection strains of the virus could force governments to restrict curbs in place for longer. I don't think that comes as much of a surprise there, but ultimately Christine Lagarde kind of using, coining her own whatever it takes kind of phrase Uh, and this fundamentally could be another thing that if, as long as dollar index can stay above that trend line, um, keep the greenback a little bit firmer from some of its recent gains, then this should be a counteracting, or this should be a force to weigh on the euro to some extent. The ECB are just willing to do, you know, as she said, not remove anything too quickly, do it very gradually. That would play its hand to a more downward directional play in EURUSD. So technically, I'll be interested to see how it plays out this week, having seen some of that recovery late on Friday session, but in what ultimately has been a lower trending euro of late. Um, talking of Europe, going to talk a little bit about Italy. Draghi will start a second round of talks starting today with different political parties is expected to meet trade unions and business lobbies as well. And let's just have a quick look at BTPs this morning. Yeah, BTPs are still trading up again. We've had another— well, let me just quickly show you on the chart just so you get a sense of how positive the market has viewed the return of Super Mario. So here we were before he got confirmed You had the big gap up in price from, uh, this time last week, and now we're right up here at this point, trading up, retesting around the high that we saw, um, towards the back end of last week, which is just short of its respective R1 at the moment. So yields in Italy continue to decline. Their domestic situation, um, looking to come to some kind of progress on the political instability in action from the breakup of the Conte coalition. And what we have here then is that assuming all talks go well, Draghi could announce his cabinet picks this week before facing confidence votes in both houses of Parliament. To give you an idea, there was a poll done by La Repubblica on Sunday, and it showed that more than half of Italians would like Draghi to remain in power until 2023, which is when the actual next scheduled general election is to take place in Italy. And I would say if that were to materialize and he was to be in place for the next 2 years, the market would probably see that as very favorable, and that would probably then help suppress Italian yields and keep things relatively calm on any risk factors associated with snap elections and so on. Quick look at the calendar then. What have we got? Um, today's session is pretty quiet. Just going to quickly note that you do have Bank of England's Bailey giving evidence to the Treasury Select Committee. Whenever Bailey speaks at the TSC, it's always a dull event. It's more central bankers reporting to a select group, a committee from the government. In terms of the Treasury Department, it's really about conveying the decisions that they've already taken. So very rare is anything new come out of this, but just be aware. Bailey does speak again later on, gives the Mansion House speech on Wednesday. Sometimes the Mansion House speech has been used as a bit of a platform to say new kind of ideas on economic picture or policy. However, given the close proximity of the BoE was just last week, I don't anticipate much coming out of that. The hot topic of kind of negative rates was very much kind of not mentioned particularly explicitly, and hence more we had that sterling rally over the last Thursday. Otherwise, going back to the calendar, so Monday, Tuesday, things are fairly quiet. We've got German trade balance coming out Tuesday morning. Then going into Wednesday is really kind of the one of the main data days because you get the US CPI figure, expected to be lifted primarily by a 10% increase that we've had. Let me just quickly scroll over to here. So this is Wednesday here. US CPI, yeah, expects to be lifted primarily by a 10% increase in gasoline prices. Despite the outlook for rising inflation ahead, ING have noted at the weekend in their latest note that assuming that bottlenecks in production and freight are rectified, the ongoing sizable pool of available labor should limit wage pressure and mean CPI settles back down to 2% and 2.5%. For much of next year. So as I said, that in combination with average inflation targeting, I think will keep investors calm over this, this development that we're seeing in the likes of the bond market where inflation breakevens are moving higher. I think this is definitely a reflection of reality and also with the forthcoming more stimulus. However, for those aforementioned reasons, as I, um, ING were mentioning. That's why I don't think that it's anything to get too spooked by, at least for the time being. Otherwise, um, Fed Chair Powell does speak at the Economic Club in New York. Again, sometimes it's quite an interesting event. It happens on a yearly basis, worth keeping an eye on. That's going to be much later into the, into the day. So I think, yeah, the GMT time's here, so 7 PM And then Thursday, very quiet, initial jobless. And then Friday, equally so, not too much coming out, um, in, in all honesty, from a set data perspective this week. On the earnings side of things, there are 77 S&P 500 companies reporting, 3 of the Dow. However, most of the index movers have reported now, so this is kind of everyone else, if you like, from a more mid-cap sort of size. A couple of names: Twitter, Cisco, GM, Coke, Pepsi, Disney. So there's a few to, to be aware of, but overall it's not going to be something that's going to really shape and define kind of global sentiment at this point. But earnings season overall has been another kind of silver lining element that's helped this equity bid back to all-time highs, because irrespective of the, the stimulus, the policy, the economic momentum that we're seeing, some of the data points. The other thing is some of the, some of the earnings have been excellent, particularly the likes of the mega-cap tech. So hence the reason why we're trading it where we're trading at the moment. Um, and that's, that's pretty much it. So that is the wrap for this, uh, the briefing this morning. Any questions at all, feel free to drop me a comment. Again, please do check out the podcast, really I would like to get as many people plugged into this because it's a really informal chat, a little bit different from perhaps what we normally put out. So hopefully you enjoy it and yeah, have a good week ahead. Thanks very much, guys.