Month: January 2021

Now that the deflation narrative which marked most of 2020 is dead and buried, and instead traders are focusing not only on breaking out 10Y nominal yields…

… as well as the highest 5Y5Y fwd swaps and breakevens in years…

… prompting Morgan Stanley to list five reasons why even higher inflation is coming in the next few months, attention has turned to the only key variable that matters: what yield on the 10Y Treasury will be the catalyst that send stocks plunging?

We touched briefly on this point last Wednesday when we said that just a 1% increase in 10Y yields would slash P/E multiples by 18%.

Of course, if this multiple contraction is accompanied by an offsetting increase in corporate profits (which one would expect in a reflating world), all shall be well and stocks would be flat, all else equal. Of course, all else is never equal, and a question that is perhaps even more important than “what rate” will break stocks is how fast we get there. Recall what Morgan Stanley said last week:

While there is still very good potential upside for many of the stocks we like in this new bull market, one should be prepared for an adjustment in valuations lower as interest rates catch up to what other asset markets have been saying for months. If this adjustment is gradual, then stocks and other assets will likely go sideways for a while until earnings eventually take them higher.

However, should that adjustment in rates occur more rapidly, all stock prices will adjust lower, perhaps sharply, rather than just go sideways.

We suspect such an adjustment is more likely than most if we are right about growth and inflation surprising further on the upside.

Picking up on the critical topic of rising yields as a catalyst for a stock crash, is – who else – SocGen’s resident permabear Albert Edwards, who last week echoed the latest Jeremy Grantham note (see “Investing Legend Turns Apocalyptic: Bursting Of This “Great, Epic Bubble” Will Be “Most Important Investing Event Of Your Lives“), underscoring the key line namely that “This bubble will burst in due time no matter how hard the Fed tries to support it.“

While that may be right ultimately, the more immediate question is the one under consideration, namely “At much higher valuations what level of bond yields will it take to break the equity market?”, which Edwards has represented in the following chart, which he prefaces as follows:

We all understood in 2018 (and we still know now) just how dependent this equity bull market is on low bond yields, especially in recent years with the ‘Growth’ and FAANG stocks leading the market higher. But back then, with the S&P just shy of 3000 and much more moderate multiples than today (see chart below) it took a rise in 10y bond yields above 3% to ‘break’ the bull run. Now with the US tech sector on a forward PE close to 30x (vs 20x back in Q4 2018, see chart below), it will clearly take a lot less to break the equity market and trigger the bursting of this bubble.

While there is little argument there, Edwards proceeds to the heart of the matter: “what is that ‘danger level’ of bond yields?”

To be sure, while yields may be still in their long-term downtrend (as Edwards shows in the next chart below), “they have broken out oftheir recent trading range” as we showed in the first chart up top, “and the US 10y has now risen above 1%.” The SocGen strategist then reminds his readers that due to an optimistic view of the recovery and given the supply issues (discussed below) SocGen’s own US rates strategist, Subadra Rajappa, “expects US 10y yields to continue rising to 1.5% this year.”

Our US rates strategist writes “The Federal deficit and Treasury issuance are breaking records. With deficits set to exceed $2.4tn in FY21 and $1.3tn in FY22, Federal debt as a percentage of GDP is expected to surpass WWII levels. Since mid-March, the Fed has purchased $2.0tn of Treasuries, reducing the pressure on markets to absorb the additional supply. Nonetheless, the pressure on markets to absorb long-end supply is palpable as auction metrics continue to deteriorate.”

 

While perfectly reasonable and logical, to Edwards all of this is a non-starter because, as he puts it, it’s simply impossible: “the equity market will collapse long before we reach 1.5%.” 

As Edwards frames it, a key part of the market’s reflexivity will again be driven by the coming Fed error of tapering which just like in 2013, just like in 2018, was the catalyst the broke the bond market and sent equities spiraling (it’s also why the second most important question in the market today after “what rates will burst the stock bubble”, is when will the Fed start tapering as we discussed last week):

The bond market’s increasing jitters about a tsunami of issuance were not just exacerbated this week by the Democrat success in the Georgia Senate race, but also from comments made by the Atlanta Fed. I must admit when I saw the title “Fed’s Bostic says bond-buying ‘recalibration’ could happen in 2021”, I assumed Bostic was talking about stepping up purchases because of the supply issues above. Instead the Reuters article quoted Bostic saying “the Fed could begin to trim its monthly asset purchases this year if the distribution of coronavirus vaccines boosts the economy as expected”. Wow! No wonder the long end is selling off. (Article here).

Personally, I have never been so hung up on supply as a deciding factor for bond yields. My experience of following Japan closely in the 1990s and 2000s was that the constant refrain about JGB supply driving yields higher was always wrong. If the fundaments in the way  of weak growth and deflation justify low bond yields, then massive supply only affects yields at the margin. In any case I don’t believe there is a cat in hell’s chance that the Fed can tighten and/or that US 10y yields can rise to 1½%. The equity market bubble will burst long before we get there!

Why? Here Edwards quotes Dhaval Joshi at the Bank Credit Analyst (BCA), who has identified an important tipping point for the ever –  inflating tech (FAANG) bubble that has led this equity bull market “to infinity and beyond”. Dhaval writes:

“Since early 2018, a rise in the long bond yield has sent shudders through the stock market on four occasions: February 2018, October 2018, April 2019, and January 2020. On all four occasions, the tipping point was the earnings yield premium on tech stocks versus the 10y T-bond yield falling towards its lower limit of 2.5 percent.” (see chart below).

Well, with last week’s spike in 10y TSY yields above 1%, the danger level 2.5% yield gap Dhaval highlights has now been breached:

As Edwards concludes, already at these much lower bond yields – the 10Y closed Friday at 1.12% – tech valuations are now stretched beyond breaking point, and as a result “the US equity market might crack any time now.”

But it won’t crack for long because as even the world’s most popular permabear echoes what we said last week…

Dear @federalreserve when YCC

— zerohedge (@zerohedge) January 8, 2021

… namely that “if/when it does, the Fed will increase QE to implement effective yield curve control to pin the 10y below 1%.” 

And yet, “by then it might be too late if an equity market retreat is in full swing and taking on a momentum all of its own. For as Jeremy Grantham points out, this equity bubble will ultimately burst “no matter how hard the Fed tries to support it”. And that is something many simply cannot comprehend.”

Or… they comprehend it, but realize that with financial assets to GDP now at a record 650%, the Fed has no choice but to never allow stocks to drop, and if the Fed has to buy not only ETFs but single-name equities in the next crash, well… so be it.

US equity futures and world stocks dropped from Friday’s record highs on Monday as a mood of caution swept across trading desks as faltering economic indicators tripped a solid run on hopes of more fiscal stimulus. Anxiety ahead of Trump’s second impeachment process was also palpable coupled with concerns over rising coronavirus cases, while elevated Treasury yields helped the dollar hit its highest levels in over two and a half weeks, in a reversal of the most consensus trade of 2021 which as we predicted would happen last week.

S&P 500 E-minis were down 22.5 points, or 0.60% after rising 1.8% last week; Dow E-minis were down 223 points, or 0.7% and Nasdaq 100 E-minis were down 81.25 points, or 0.7%.

Twitter’s shares plunged 6% premarket after it permanently suspended U.S. President Donald Trump’s account late on Friday. Tesla stock was also down despite the latest Wall Street upgrade, this time from BofA which raised its price target from $500 to $900. Boeing was down 3% after a Boeing 737 plane crashed shortly after take off in Indonesia, killing everyone on board.

As Bloomberg notes, weighing on the minds of investors are worries that equities are running too hot and valuations are stretched at a time when major parts of the world are grappling with the worst of the pandemic. In Germany, the health minister called on citizens to drastically curtail social contact after the death toll from the virus climbed above 40,000.  “Risky assets have come a long way and they are now in a pause or profit taking territory,” said Mohit Kumar, a strategist at Jefferies International. “Investors are getting worried about a rise in yields.”

“There was an awful lot of optimism about prospects for stimulus with the Biden administration winning those two Georgia Senate seats,” said Michael Hewson, chief markets analyst at CMC Markets in London, noting Friday’s record highs that followed the Democrats winning control of the U.S. Senate. “Friday’s (U.S.) payrolls report was disappointing, underscoring the need for more significant fiscal response. But as we head into week two (of the new year), I think some of that optimism has been tempered a little bit with profit-taking.”

Bets on a rebound in business activity in 2021 fueled by vaccine rollouts, larger checks and infrastructure spending under U.S. President-elect Joe Biden have underpinned Wall Street’s rise to recent peaks. However, last week Wall Street bankers warned of toppy stock markets and a looming retreat after exuberance from unprecedented economic stimulus had led to “frothy” asset prices and surging bond yields.

“I think there’s a perception perhaps markets are getting slightly ahead of themselves,” Hewson said.

He may have been on to something: European shares dipped in early trading but were off worst levels, with the pan-European STOXX 600 index down 0.3% (after dropping 0.6% earlier) as rising coronavirus cases across the continent and China dragged down commodity stocks.  Germany’s DAX lost 0.55%, Britain’s FTSE 100, Italy’s FTSE MIB, and France’s CAC 40 fell about half a percent each, and Spain’s IBEX fell 0.2%.  Autos, utilities down the most, sliding 1.2% or more, while banks are only industry group to rise.  Stoxx 600 on Friday had rallied to highest since February 2020 on bets of more stimulus under Democrat-controlled Congress, vaccine rollouts.

Earlier in the session, Asia’s MSCI index of Asia-Pacific shares ex-Japan dipped 0.2%, having surged 5% last week to record highs, its best weekly gains in two months last week. Japan’s Nikkei was closed for a holiday after ending at a 30-year high on Friday. China’s stock benchmark fell 1% as investors questioned whether the highest valuations in 13 years for the CSI 300 Index make sense. Malaysia’s stock gauge dropped 1% as investors awaited new coronavirus measures. Australia and New Zealand were also among laggards. South Korea stocks closed 0.1% lower after rising as much as 3.6% earlier led by Samsung Electronics. The nation’s retail investors bought a record amount of Kospi shares on Monday. Shares of EV-related companies enjoyed a strong start to the new week. Hyundai Motor rallied another 8.7% to highest since 2012 after a positive sector research note from Credit Suisse. Hong Kong-listed BYD jumped 6.7%, extending gains to a new peak, as the company said it won orders from Colombia. India IT outsourcing companies jumped, boosted by strong results from Tata Consultancy Services. Japan is shut for a holiday

In the latest covid news, global infections surpassed 90 million and several health experts said the rollout of vaccines in many countries will not provide herd immunity from the pandemic this year, citing limited access for poor countries, community trust problems and potential virus mutations.

In FX, as we warned last week, the dollar surged against all its major peers, with demand supported by elevated Treasury yields as   Traders unwound record short positions and weighed the implications of higher Treasury yields amid President-elect Joe Biden’s push for huge fiscal aid; the dollar’s haven appeal got a boost after Speaker Nancy Pelosi said the House planned to impeach President Donald Trump unless Vice President Mike Pence and the cabinet act to remove him.

The euro fell to its lowest since Dec. 23 at $1.2155, from a recent higher of $1.2349, breaking support around $1.2190. The dollar also gained to 104.18 yen from a trough of 102.57 hit last week. The pound declined as much as 0.6% after the Telegraph reported that the U.K. may tighten lockdown restrictions. Norway’s krone led G-10 losses followed by New Zealand and Australian dollars. The Japanese yen held up best versus the dollar, but still slipped to its lowest in a month.  Baidu shares rose 6% after the Chinese search engine giant said it will set up a company to partner with carmaker Zhejiang Geely Holding Group to make smart electric vehicles

“Risky assets have come a long way and they are now in a pause or profit taking territory,” said Mohit Kumar, a strategist at Jefferies International. “Investors are getting worried about a rise in yields.”

And speaking of yields, Treasury yields were at their highest since March after Friday’s weak jobs report fanned speculation of more U.S. fiscal stimulus now that the Democrats have control of the government. President-elect Joe Biden is due to announce plans for “trillions” in new relief bills this week, much of which will be paid for by increased borrowing. At the same time, the Federal Reserve is sounding content to put the onus on fiscal policy. Vice Chair Richard Clarida said there would be no change soon to the $120 billion of debt the Fed is buying each month.

With the Fed reluctant to purchase more longer-dated bonds, 10-year Treasury yields jumped almost 20 basis points last week to 1.12%, the biggest weekly rise since June. On Monday, yields dipped after outperforming bunds and gilts during European morning, leaving yields richer by ~2bp at long end. Treasury 10-year was richer by ~1.5bp on the day at ~1.10%, outperforming bunds, gilts by ~1bp. The auction cycle begins with 3-year note sale at 1pm ET; 10- and 30-year follow Tuesday and Wednesday.

BofA rates strategist Mark Cabana warned stimulus could further pressure the dollar and cause Fed tapering to begin later this year. “An early Fed taper creates upside risks to our year-end 1.5% 10-year Treasury target and supports our longer-term expectations for neutral rates moving towards 3%,” he said in a note to clients.

In commodities, gold was flat at $1,843 an ounce after skidding as low as $1,816. Brent crude oil prices fell, hit by renewed concerns about global fuel demand amid tough coronavirus lockdowns across the globe, as well as the stronger dollar. Brent crude futures fell 1.3% to $55.25. U.S. crude futures lost 0.7% to $51.84 a barrel. In crypto, Bitcoin plunged as much as 21% over Sunday and Monday to as low as $32,389.

Looking at the week ahead, Q4 results from JP Morgan, Citi and Wells Fargo on Friday will kick-off the earnings season, which could offer more clues on if company executives reflect the enthusiasm of a rebound in 2021 earnings and the economy. After official data pointed to a significant slowdown in labor market recovery on Friday, investors will focus on inflation, retail sales and consumer sentiment indicators this week to gauge the extent of economic damage.

On today’s calendar, no major economic data is expected. Carnival is reporting earnings; later in the day the House of Representatives Democrats plan a vote to urge Vice President Mike Pence to take steps to remove President Donald Trump from office after his supporters’ deadly storming of the Capitol, before attempting to impeach him again.

Market Snapshot

• S&P 500 futures down 0.6% to 3,795.00
• MXAP down 0.2% to 207.91
• MXAPJ down 0.1% to 694.83
• Nikkei up 2.4% to 28,139.03
• Topix up 1.6% to 1,854.94
• Hang Seng Index up 0.1% to 27,908.22
• Shanghai Composite down 1.1% to 3,531.50
• Sensex up 1% to 49,262.71
• Australia S&P/ASX 200 down 0.9% to 6,697.16
• Kospi down 0.1% to 3,148.45
• STOXX Europe 600 down 0.4% to 409.36
• German 10Y yield fell 0.6 bps to -0.525%
• Euro down 0.3% to $1.2186
• Italian 10Y yield fell 2.8 bps to 0.42%
• Spanish 10Y yield unchanged at 0.04%
• Brent futures down 1.3% to $55.29/bbl
• Gold spot up 0.1% to $1,851.55
• U.S. Dollar Index up 0.3% to 90.34

Top Overnight News from Bloomberg

• Trump is confident Pence and members of his cabinet won’t attempt to remove him under the 25th Amendment
• Biden is set to release his proposals for an economic stimulus package on Thursday
• Traders are reporting strong demand from leveraged funds for the dollar
• The fallout from U.S. sanctions on Chinese military-linked companies widened as banks and money managers raced to comply with an executive order that bans new investments from Monday
• China’s state-run media called for retaliation after the Trump administration removed decades-old restrictions on interactions with Taiwan officials

A quick look at global markets courtesy of Newsquawk

Asian equity markets began the week indecisive amid tentativeness following the US NFP jobs data and with Japanese participants away for Coming of Age Day, while ongoing COVID-19 concerns and US-China tensions also contributed to the cautious overnight mood. ASX 200 (-0.9%) traded negative with better-than-expected Retail Sales and the lifting of the 3-day lockdown in Brisbane failing to lift the index which was pressured as tech and miners led the broad declines across sectors, while NZX 50 (-1.8%) was the worst hit after the RBNZ announced an illegal breach of one of its data systems. KOSPI (-0.1%) initially extended on record levels boosted by continued gains in Samsung Electronics which also notched fresh all-time highs after last week’s preliminary results and Hyundai Motor briefly surged by another 10% on the Apple EV tie-up reports, although the index then fluctuated between gains and losses with the latest trade figures providing headwinds after South Korean exports declined 15.4% Y/Y during the first 10-days of the 2021. Hang Seng (+0.1%) and Shanghai Comp. (-1.0%) were choppy as optimism from firmer than expected inflation data was offset by increased tensions after US Secretary of State Pompeo announced the US is to remove all self-imposed restrictions on executive branch agencies’ interactions with their counterparts from Taiwan ahead of the US Ambassador visit which China have already warned against. Furthermore, the White House is said to be examining additional options to respond to China regarding the virus and Hong Kong, while it was also reported that MOFCOM issued new rules which prevent companies from complying with foreign laws that prohibit transactions with Chinese companies

Top Asian News

• China Is Said to Let Banks Sell Bad Personal Loans to Ease Risks
• WHO Gets Access to China After Virus Origins Experts Delayed
• China Telcos Rally as Mainland Funds Buy Record Hong Kong Stocks
• China Traders Net Buy Record Stocks Through China-H.K. Connect

European bourses trade with modest losses across the board (Euro Stoxx 50 -0.3%), albeit off worst levels following on from a similarly downbeat APAC handover where Japan was away and the Hang Seng remained the only gainer, albeit modest, with some reports citing Chinese traders purchasing a record amount of HK stocks via links. News-flow for the session thus far has been light in what feels like cautious trade, with the ramp-up in US-Sino rhetoric and COVID-19 variants weighing on investors’ minds after Japan found a new strain distinct from the UK and South African types. Further, some have also suggested the vaccine rollout to provide headwinds for stocks in the form of an earlier-than-expected unwind in loose policy. US equity futures meanwhile succumb to the losses across the stock markets whilst Twitter (-7.5%) sees substantial pre-market losses after permanently suspending the outgoing US president on the platform. Back to Europe, bourses see broad-based losses with the AEX (-0.1%) narrowly faring better amid gains across some of its larger constituents. Sectors are mostly lower with Banks, Financials and Telecoms eking mild gains with the former two aiding by a similar outperformance in Hong Kong and against the backdrop of the recent rise in yields. Meanwhile, the other end of the spectrum sees Travel & Leisure pressured amid ongoing COVID-woes, whilst Auto names reside as the laggard amid a string of production halts amid semiconductor scarcity. Furthermore, Chinese EV-maker NIO (+4.8% pre-mkt) has partnered with NVIDIA (+0.8%) to develop a new generation of automated driving electric vehicles whilst Geely and Baidu (+5% pre-mkt) confirmed EV ambitions. In terms of some individual movers, Airbus (+0.7%) trades with gains as the Co’s CEO said he is cautiously optimistic for 2021. Additionally, EU’s VP/Trade Commissioner Dombrovskis said he is ready to end the Boeing/Airbus dispute and he hopes the incoming US government will be more cooperative. Roche (+0.5%) meanwhile is firmer after announcing that Xofluza approved by the European Commission for the treatment of influenza, the first new influenza antiviral for patients in almost 20 years.

Top European News

• Sanofi to Buy Antibody Maker Kymab in $1.45 Billion Deal
• Total Buys French Biogas Producer Fonroche Biogaz in Green Push
• Brexit Drags U.K. Below U.S. in Business Location Ranking
• CD Projekt Jumps as Morgan Stanley Reports Stake

In FX, the Buck is regrouping after backing off broadly with the DXY edging just over 90.500 after holding above overnight lows. Hence, the Greenback remains firm and in recovery mode against the backdrop of waning risk sentiment following a bullish start to the new year that has boosted global stocks and US benchmarks to fresh record highs. Perhaps, Friday’s sobering drop in non-farm payrolls has prompted some retrenchment, while the ongoing spread of COVID-19 and lag before vaccines can make some in-roads along with restrictive measures is also reining in some exuberance, as the index extends its parameters to 90.520-238 parameters ahead of employment trends and a couple of Fed speakers.

• AUD/NZD/CAD – No retail therapy for the Aussie even though final consumption figures for November were revised a tad higher, or relief that Brisbane has come out of its 3-day lockdown, as Aud/Usd hovers just over 0.7700 and also feels the weight of weaker iron ore prices and a softer Yuan. Similarly, the Kiwi is struggling to keep sight of 0.7200 and Loonie contain losses through 1.2750 as the crude complex also falls victim to the US Dollar revival in the run up to Canada’s Q4 business outlook for future sales. Back down under, the Aussie may also be capped by decent option expiry interest at the 0.7725 strike (1.3 bn) into the NY cut.
• CHF/GBP/EUR/JPY – All giving way to the Buck, with the Franc near the base of a 0.8850-0.9000 range after another decline in weekly Swiss sight deposits, Cable hovering just below 1.3500 awaiting comments from BoE’s Tenreyro and a statement on the economy from UK Chancellor Sunak amidst speculation about even tighter pandemic restrictions. Elsewhere, the Euro is sub-1.2200 and eyeing 1.2150, while the Yen is back under 104.00 in thinner volumes due to Japan’s Coming of Age market holiday, with ECB President Lagarde looming before the latest Japanese Economic Watchers survey on Tuesday.

In commodities, WTI and Brent front month futures experience a soft start to the week in lockstep with overall sentiment and alongside a firmer Dollar. Complex-specific newsflow has remained light. Over the weekend, Japan found a new COVID-19 variant which differs from the one found in the UK and South Africa, although specifics around the variant remain scarce. Elsewhere, Iraq said it has raised their OSP for all its crude grades into Asia in a similar move seen by Saudi Aramco. WTI Feb trades sub-52/bbl after declining from an overnight peak at USD 52.70/bbl, whilst Brent Mar eyes USD 55/bbl to the downside vs. high ~56.40/bbl. Turning to metals, spot gold and spot silver see gains despite the firmer Buck with some citing outflows from bitcoin into the traditional safe-haven metals whilst others also cite the inflationary playbook. In terms of base metals, Dalian iron ore future fell almost 2% overnight as the Dollar firmed and Australia’s Port Hedland iron ore shipments to China jumped 16% in December. LME copper also trades on the backfoot today amid similar dynamics. Finally, something to be aware of – the outgoing US president’s admin is reportedly moving to loosen some mining regulations and give the go-ahead for some mineral projects before leaving office, with some stated that the incoming administration may be unable to reverse some of the moves.

US Event Calendar

• Nothing major scheduled

DB’s Jim Reid concludes the overnight wrap

After being back from holiday less than a week this year, many interesting themes are developing and I’m increasingly thinking that this is not going to be a low vol dull year. Let me stress that I think economic growth could increasingly get revised up once we hit Q2 onwards and that we could see some pretty major pent up demand once we get into the summer months. So it’s difficult to get too concerned about the economy. However a combination of the melt-up in risk, bubbles blowing everywhere, more likely stimulus from the Democrats and what are already elevated inflation breakevens in the US means that we have a number of high octane moving parts that are going to be very difficult to calibrate in 2021.

So for me I think the probability of a smooth year for markets is rescinding. For now it feels that risk on is very hard to argue against but the biggest risks that I outlined in my 2021 outlook have probably intensified in the first week of the year. They were there being a yield shock/taper tantrum at some point and there being a tech bubble that bursts. So far this year US 10yr USTs are up +20bps and US 10 year breakevens are already up +8.5bps to 2.07% from 0.55% in March and only just over 10bps off 6 year highs. It would be difficult to go too much higher without serious talk of tapering and the more immediate pricing in of the first hike of the cycle. With regards to a bubble, so far this year Bitcoin is up +22.8%, Tesla +24.7% (already added $165.3 bn market cap), with my favourite story being small-cap Texas healthcare company Signal Advance (with no full time employees other than the CEO as of a March 2019 filing) surging nearly 1500% at one point on Thursday after Elon Musk tweeted “use Signal”. He was referring to a rival messaging app to WhatsApp but instead fuelled a frenzy in a company that surged from low millions to nearly a $100m company on that one misinterpreted tweet. It was still up c.1100% over Thursday and Friday even including Friday trading when the error should have been known. These are not normal markets!! Ride the liquidity for now but this does not feel like the ingredients for a low vol market year.

This week isn’t the busiest in terms of planned events with the data highlights including the US CPI (Wednesday) and retail sales (Friday) data for December, while there’ll also be the release of the ECB’s account of its December meeting (Thursday) and the Federal Reserve’s Beige Book (Friday). Perhaps the highlight will be Biden outlining more details on his new administrations priorities on Thursday. This may give us some clues on the direction of travel for stimulus that he aims to get through Congress. Outside of that they’ll be lots of attention on whether the Democrats try to impeach President Trump with less than 10 days left in office but it will be more of a curiosity than a market moving event. Overnight, the House speaker Pelosi has said that Democratic leaders will move to impeach this week unless VP Mike Pence and the cabinet invoke the 25th Amendment. So a busy few days ahead in the Capitol.

Finally, there are a limited number of earnings releases, ahead of a much busier earnings calendar over the coming weeks. Blackrock (Thursday), JPM, Citigroup and Wells Fargo (Friday) are the highest profile companies kicking things off. The full day by day week ahead is at the end of the piece today.

Asian markets are trading mixed this morning with the Hang Seng (+0.81%) up while the Kospi (-0.20%) and Shanghai Comp (-0.10%) are down. Japanese markets are closed for a holiday. Meanwhile, futures on the S&P are down -0.55% and the US dollar index is up +0.36% overnight. Elsewhere, gold prices are down -0.78% while bitcoin is trading down -6.36% this morning after declining by -6.88% on Sunday. To highlight the continued volatility we nearly touched $41,500 earlier Sunday morning yet sunk just above $33,500 at the lows this morning. A wild ride. In terms of data releases, China’s December PPI came in at -0.4% yoy (vs. -0.7% yoy expected) while CPI stood at +0.2% yoy (vs. 0.0% expected).

Last week was a bullish start to the year across the world. In the US, the anticipation of further fiscal stimulus gave the cyclical and reflation trade another push forward. The S&P 500 gained +1.83% on the week (+0.55% Friday), while the NASDAQ composite rose +2.43% (+1.03% Friday). Bank stocks on both sides of the Atlantic gained as core rates rose, with US banks rallying +7.65% while European Banks were up a slightly less +6.01%. European equities outperformed overall as the STOXX 600 ended the week +3.04% higher (+0.66% Friday) while the FTSE (+6.39%) and IBEX (+4.14%) notably outperformed. Energy stocks also outperformed as Brent crude rose +8.09%, with OPEC+ coming to an agreement on oil output with an eye toward more economic restrictions through the next quarter.

The Senate runoff results midweek mean that the ‘Blue Wave’ scenario has finally come about resulting in a slim Democratic majority in both chambers of Congress. The main implication being the prospect of a substantially larger US stimulus package in the near future. In anticipation there was a substantial selloff in US Treasuries, with 10yr yields up +20.2bps to 1.12%. 10yr yields are now above the 1% barrier for the first time since mid-March, when yields sunk to all-time intra-day lows in the early days of the coronavirus pandemic. There was a sizeable steepening in the yield curve, with the 2s10s curve up +18.6bps to 97.6bps, which is the steepest level in 3 years, while the 5s30s hit its steepest in 4 years. Yields in Europe rose as well, but not to the same degree. 10Yr Bund yields were +5.0bps (+0.3bps Friday) higher to -0.52% and 10yr Gilt yields rose +9.1bps (+0.4bps Friday) to 0.29%.

On the data front the highlight from Friday was the US payrolls data, which showed the US labour market losing jobs month-over-month for the first time since April. Nonfarm payrolls (+50k expected) fell -140k from the November print, with the unemployment rate staying steady at 6.7%, breaking a 7-month streak of improvement. The majority of the weakness was in service industries like restaurants, bars and other businesses hindered by pandemic restrictions. On the other hand, Euro area unemployment showed continued improvement, falling to 8.3% (8.5% expected) but it is more backward looking (referencing November data) and does not take into account the renewed lockdowns.

As it turns out, Wall Street isn’t happy with Twitter’s decision to permanently ban President Trump, one of the service’s high-profile users. Analysts are afraid the decision could expose Twitter to more regulation, as Mirabaud analyst Neil Campling said the ban could open Twitter up to more regulation under the next administration now that the platform is clearly making editorial decisions about what type of political content is, and isn’t, appropriate.

Traders are clearly worried, as Twitter shares are down 7% in premarket trade, building on losses from after-hours trading on Friday, as well as Sunday night.

According to Bloomberg, Twitter was Trump’s preferred channel for “amplifying attacks on his rivals, spreading conspiracies and provoking other nations during his four years in power.”

In other social media news, Amazon’s decision to bar Parler, the pro-free-speech alternative social media platform, has resulted in the service being de facto barred from the Internet.

Twitter’s decision to ban Trump followed a similar decision by Facebook, which blocked Trump’s accounts on Facebook and Instagram, with CEO Mark Zuckerberg saying Trump’s most recent posts show he intended to undermine a peaceful transition of power.

Parler CEO John Matze said recent statements from Amazon, Google and Apple about dropping access have prompted most of the platform’s other vendors to drop support as well. In a statement before the platform went down, Matze told users he wasn’t sure when the platform might be back up.

“We will likely be down longer than expected,” Matze wrote in a post on his network before Amazon restricted hosting. “This is not due to software restrictions – we have our software and everyone’s data ready to go. Rather it’s that Amazon’s, Google’s and Apple’s statements to the press about dropping our access has caused most of our other vendors to drop their support for us as well. And most people with enough servers to host us have shut their doors to us. We will update everyone and update the press when we are back online.”

Matze, who frequently sits for interviews on CNBC and with other news organizations, says he will not make any account on any social media network other than Parler.

“Parler is my final stand on the Internet,” he said.

Joe Biden has nominated Bill Burns, a former deputy secretary of state and a career diplomat, to lead the CIA under his administration. in an attempt to appear non-partisan, Biden’s team pointed out that Burns is an experienced foreign policy and national security official who has served under 5 Democratic and Republican administrations. Burns has achieved the highest rank in the US foreign service, that of “career diplomat”.

During his three-decade-plus career, he has served as ambassador to Jordan and Russia, along with a stint as deputy secretary of state.

In a press release, Biden’s team called Burns a “consummate professional full of integrity who will bring the facts and independence that our national security demands.”

“Bill Burns is an exemplary diplomat with decades of experience on the world stage keeping our people and our country safe and secure,” Biden said in a statement.

“He shares my profound belief that intelligence must be apolitical and that the dedicated intelligence professionals serving our nation deserve our gratitude and respect. Ambassador Burns will bring the knowledge, judgment, and perspective we need to prevent and confront threats before they can reach our shores,” Biden added. “The American people will sleep soundly with him as our next CIA Director.”

Burns presently serves as president of the Carnegie Endowment for International Peace, a major think center-left think tank that espouses “neoliberal” views.

Cori Bush, who made history last year when she became the first black woman, and also perhaps the first formerly homeless individual, to win a Congressional race in MIssouri, is leading the charge against GOP lawmakers who supported President Trump’s election challenge. The “homeless Congresswoman”, has prepared a resolution to expel them from Congress. According to Bush, lawmakers who backed Trump’s push to question vote tallies in certain swing states are equally responsible for helping to incite the Capitol Hill riot.

Bush announced her plans to introduce the bill in a tweet, where she added “we can’t have unity without accountability.”

Tomorrow, I’m introducing my resolution to expel the members of Congress who tried to overturn the election and incited a white supremacist coup attempt that has left people dead. They have violated the 14th Amendment.

We can’t have unity without accountability.

— Cori Bush (@CoriBush) January 10, 2021

Bush accused GOP lawmakers of violating the 14th Amendment, and insisted that “we can’t have unity without accountability.”

Bush’s proposal quickly garnered support from other progressive members of the House, who pushed for an ethics investigation into President Trump’s Congressional supporters.

Per my statement last night:

I will be a cosponsor of the articles of impeachment being introduced in the House.

I am also supporting @RepCori‘s legislation for the House Committee on Ethics to investigate Members of Congress who helped incite Wednesday’s attack. https://t.co/DYoNON6kpg

— Rep. Val Demings (@RepValDemings) January 7, 2021

Bush shared the text of the bill on Twitter a few days ago.

I believe the Republican members of Congress who have incited this domestic terror attack through their attempts to overturn the election must face consequences. They have broken their sacred Oath of Office.

I will be introducing a resolution calling for their expulsion. pic.twitter.com/JMTlQ4IfnR

— Congresswoman Cori Bush (@RepCori) January 6, 2021

Of course, Bush’s proposal is a mere sideshow compared with Nancy Pelosi’s impeachment vote, which she has promised to hold on Monday. The speaker has said she hopes Trump will instead choose to resign. But with VP Mike Pence insisting that removing Trump via the 25th Amendment is off the table, and with the Senate still short of the votes needed to remove Trump, all she can do right now is talk.

Though, to be fair, that’s more than Trump can do, now that he has been barred from every major social media platform, and those that resisted – ie Parler – have been effectively forced off the web in an unprecedented example of political censorship.

Authored by John Hunt, M.D. via InternationalMan.com,

In the setting of COVID-19, almost every country in the world closed its borders, locked down its citizens, and forced businesses to close. Today, most governments still restrict travel, economic activity, and social gatherings.

The justification for these unprecedented measures has been a growing number of COVID-19 cases. This has unleashed an epidemic of COVID testing – with PCR and rapid antigen tests as the means of identifying positive COVID cases. Our very own Dr. John Hunt examines the science behind COVID testing, whether the testing paradigms are effective, and the rationality behind government response to the virus.

What COVID tests mean and don’t mean

RT-PCR tests can be designed to be highly sensitive to the presence of the original viral RNA in a clinical sample. But a highly sensitive test risks poor specificity for actual infectious disease.

Rapid antigen tests are different. They measure viral protein. They do so by reacting a clinical sample with one or two lab-created antibodies that are labeled with a measurable marker. These antigen tests are often poorly specific, meaning they can show as positive in the absence of any actual viral protein or any COVID disease.

For a lab test, what does it mean to be sensitive? What does it mean to be specific?

I’ll use COVID to help explain these terms. In order to do this correctly, we need to avoid using the language of the media and government because those institutions tend to mislead us via language manipulation. For example, they’ve wrongly taught us that a COVID-positive test is synonymous with COVID- disease. It isn’t, as you will soon see.

So for this article, I will use the term “Relevant Infectious COVID Disease” to mean a condition, caused by COVID-19, in which a patient is sickened by the virus or has (in their airways) living replicating virus capable of being transmitted to others. This seems a fair definition of what we should be caring about in this disease. If the patient isn’t sick and isn’t capable of transmitting the disease, then any COVID RNA or protein that may appear in a test is not relevant, nor infectious, and therefore of little to no consequence.

You can think of a test’s sensitivity like this: In a group of 100 people who absolutely have Relevant Infectious COVID Disease, how many people does the test actually report as “positive?” For a test that is 95% sensitive, 95 of these 100 patients with the true disease will be reported by the test as COVID positive and 5 will be missed.

Specificity: In a group of 100 people who absolutely do not have Relevant Infectious COVID Disease, how many will be reported by the test as “negative?” For a test that is 95% specific, 95 of these healthy people will be reported as COVID-negative and 5 will be incorrectly reported as COVID-positive

Sensitivity and Specificity are inherent characteristics of a test, not of a patient, not of a disease, and not of a population. These terms are very different than Positive Predictive Value (PPV) and Negative Predictive Value (NPV). PPV and NPV are affected not only by the test’s sensitivity and specificity but also by the characteristics of the people chosen to be tested and, particularly, the patients’ underlying likelihood of actually having true Relevant Infectious COVID Disease. The Positive Predictive Value—the chance a positive test actually indicates a true disease—is greatly improved if you test people who are likely to have COVID, and, importantly, avoid testing people unlikely to have COVID.

If you do a COVID test with 95% sensitivity and 95% specificity in 1,000 patients who are feverish, have snot pouring out of their noses, are coughing profusely, and are short of breath, then you are using that test as a diagnostic test in people who currently have a reasonable up-front chance of having Relevant Infectious COVID Disease. Let’s say 500 of them do actually have Relevant Infectious COVID Disease, and the others have a common cold. This 95% sensitive test will correctly identify 475 of these people who are truly ill with COVID as being COVID-positive, and it will miss 25 of them. This same test is also 95% specific, which means it will falsely label 25 of the 500 non-COVID patients as COVID-positive. Although the test isn’t perfect it has a Positive Predictive Value of 95% in this group of people, and is a pretty good test overall.

But what if you run this very same COVID test on everyone in the population? Let’s guesstimate that the up-front chance of having Relevant Infectious COVID in the US at this moment is about 0.5% (suggesting that 5 out of 1000 people currently have the actual transmittable disease right now, which is a high estimate). How does this same 95% sensitive/95% specific test work in this screening setting? The good news is that this test will likely identify the 5 people out of every 1000 with Relevant Infectious COVID! Yay! The bad news is that, out of every 1000 people, it will also falsely label 50 people as COVID-positive who don’t have Relevant Infectious COVID. Out of 55 people with positive tests in each group of 1000 people, 5 actually have the disease. 50 of the tests are false positives. With a Positive Predictive Value of only 9%, one could say that’s a pretty lousy test. It’s far lousier if you test only people with no symptoms (such as screening a school, jobsite, or college), in whom the up-front likelihood of having Relevant Infectious COVID Disease is substantially lower.

The very same test that is pretty good when testing people who are actually ill or at risk is lousy when screening people who aren’t.

In the first scenario (with symptoms), the test is being used correctly for diagnosis. In the second scenario (no symptoms), the test is being used wrongly for screening.

A diagnostic test is used to diagnose a patient the doctor thinks has a reasonable chance of having the disease (having symptoms like fever, cough, a snotty nose, and shortness of breath during a viral season).

A screening test is used to check for the presence of a disease in a person without symptoms and no heightened risk of having the disease.

A screening test may be appropriate to use when it has very high specificity (99% or more), when the prevalence of the disease in the population is pretty high, and when there is something we can do about the disease if we identify it. However, if the prevalence of a disease is low (as is the case for Relevant Infectious COVID) and the test isn’t adequately specific (as is the case with PCR and rapid antigen tests for the COVID virus), then using such a test as a screening measure in healthy people is forcing the test to be lousy. The more it is used wrongly, the more misinformation ensues.

Our health authorities are recommending more testing of asymptomatic people. In other words, they are encouraging the wrong and lousy application of these tests. Our health officials are doing what a first-year medical student should know better than to do. It’s enough of a concerning error that it leaves two likely conclusions:

1) that our leading government health officials are truly incompetent and/or

2) that we, as a nation, are being intentionally gaslighted/manipulated. Or it could be both.

(Another conclusion you should consider is that my analysis of these tests is incorrect. I’m open to a challenge.)

So what if you, as an individual, get a positive PCR test result (one that has 95% specificity) without having symptoms of COVID-19 or recent exposure to a true Relevant Infectious COVID Disease patient? What do you do? Well, with that positive test, your risk of having COVID has just increased from less than 5 in 1,000 (the general population risk) to about somewhere perhaps 5 in 55 (the risk of actual Relevant Infectious COVID Disease in asymptomatic people with a COVID-19-positive test). That’s an 18-fold increase in risk, amounting to a 9% risk of you having Relevant Infectious COVID Disease (or a 91% chance of you being totally healthy). That may be a relevant increase in risk in your mind, enough that you choose to avoid exposing your friends and family to your higher risk compared to the general population. But if the government spends resources to contact-trace you, then they are contact-tracing 91% of people uselessly. And they are deciding whether to lock us down based on the wrong notion that COVID-positive tests in healthy people are epidemiologically accurate when indeed they are mostly wrong.

For the 50 asymptomatic low-risk people falsely popping positive out of each group of 1,000, what makes them pop positive? For a rapid antigen test, it is because the test is never meant for use as a screening test in healthy asymptomatic people because it’s not specific enough. For a PCR test, positivity confidently means that there was COVID RNA in that sample, sure, but your nose or mouth very likely just filtered some dead bits of viral debris from the dust particles in the air as you walked through CVS to get the test before you learned you were supposed to use the drive-through. PCR can be way too sensitive.

A few strands of RNA are irrelevant. Even a few hundred fully intact viral particles are not likely to infect or cause disease. Humans aren’t that wimpy. But keep in mind that there is a very small chance that the test popped positive because you are about to get sick with COVID-19, and the test caught you, by pure luck, just before you are to become sick.

On top of this wrong use of diagnostic tests as screening tests, the government has been subsidizing hospitals for taking care of COVID-19-positive patients. Let’s say a hospital performs a COVID test 4 times during a hospital stay as a screening test in a patient who has no symptoms of COVID. If that test pops positive once and negative three times, the hospital will report that patient as having COVID-19, even though the one positive result is highly likely to have been a false positive. Why do hospitals do this testing so much? In part, because they’ll get $14,000 more from the government for each patient they declare has COVID-19.

When we see statistics of COVID-19 deaths, we should recognize that some substantial percentage of them should be called “Deaths with a COVID-19-positive test.” When we see reports of case numbers rising, we should know that they are defining “case” as anyone with a COVID-19-positive test, which, as you might now realize, is really a garbage number.

Summary:

1. We have an epidemic of COVID-positive tests that is substantially larger than the epidemic of identified Relevant Infectious COVID Disease. In contrast, people with actual, mild cases of COVID-disease aren’t all getting tested. So the data, on which lockdowns are supposedly justified, are lousy.

2. The data on COVID hospitalizations and deaths in the US are exaggerated by a government subsidization scheme that incentivizes the improper use of tests in people without particular risk of the disease.

3. Avoid getting tested for COVID unless you are symptomatic yourself, have had exposure to someone who was both symptomatic and tested positive for COVID, or have some other personal reason that makes sense.

4. Know that getting tested before traveling abroad puts you at a modest risk of getting a false-positive test result, which will assuredly screw up your trip. It’s a new political risk of travel.

5. There is a lot more to this viral testing game, and there are a lot of weird incentives. There are gray areas and room for debate.

6. Yes, the COVID disease can kill people. But a positive test won’t kill anybody. Sadly, every COVID-positive test empowers those politicians and bureaucrats who have a natural bent to control people—the sociopaths and their ilk.

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John Hunt, MD is a pediatric pulmonologist/allergist/immunologist, a former tenured Associate Professor and academic medical researcher, who has extensive experience and publications involving PCR, antigen testing, and analysis of respiratory fluid. He is internationally recognized as an expert in aerosol/respiratory droplet collection and analysis. He’s also Doug Casey’s coauthor for the High Ground novels Speculator, Drug Lord, and the just-released Assassin, and he is a founding member of the LLC that owns International Man.

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