Month: February 2021

Exxon is an odd stock: one day after extremely bullish news hit that the company had negotiated a potential merger with Chevron in what clearly was a trial-balloon, the stock slumped. Yet on Tuesday morning, with Exxon reporting its first annual loss in 40 years, the stock us jumping.

For the fourth quarter, Exxon posted a previously disclosed $19.3 billion writedown of U.S. natural gas and other assets, capping the first annual loss for the Western world’s largest oil company in at least four decades. However, excluding the historic impairment, Exxon returned to profit in the fourth quarter, earning 3 cents per share, above the 0.02 consensus estimate, and ending a run of three consecutive quarterly losses.

Some more highlights from the Exxom report:

• Q4 20 Adj. EPS 0.03 (exp. 0.01),
• Revenue 46.5bln (exp. 48.76bln)
• CapEx USD 4.77bln (exp. 3.99bln)
• Exceeded cost-reduction objectives, with 2020 capital spending of USD 21 bln below target by USD 2bln;
• Cash operating expense more than 15% below 2019, of which USD 3bln is a structural reduction
• Additional annual structural operating expense reductions of USD 3bln expected by 2023, resulting in total annual structural reductions of USD 6bln versus 2019
• Cash flow this year expected to cover capex and maintain dividend and strong balance sheet.
• Assumptions include Brent prices of USD 50 per barrel and lowest annual Downstream and Chemical margins during 2010-2019; portfolio flexibility enables further adjustments
• XOM will continue to evaluate organization and cost structure
• Total non-cash, after-tax fourth quarter impairment charges were USD 19.3 billion.

Looking ahead XOM expects surging cash flow growth:

Some more details on the XOM production front:

• Quarterly oil equivalent production 3.7mln BPD, consistent with Q3
• Permian volume averaged 418,000 oil-equivalent barrels per day, +42% Y/Y.
• FY production averaged 367,000 oil-equivalent barrels per day.
• FY 2020 drilling and completion costs were more than 25% lower than 2019. Over the same period, drilling rates (lateral feet per day) improved more than 20 percent and fracturing rates (stages per day) improved more than 30 percent.
• ExxonMobil continued to progress major deepwater development in Guyana. Exploration, appraisal, and development drilling continues across four rigs with plans to add additional rigs in the first half of 2021.

Some context: Exxon’s full-year production was just 3.76 million barrels of oil equivalent per day in 2020, the lowest since its merger with Mobil some two decades ago, according to Bloomberg data.

As Bloomberg notes, Exxon is emerging from the wreckage of 2020 facing the worst crisis in its modern history. In addition to growing criticism of its environmental record, financial performance has eroded to the point where its fabled dividend, the third-largest in the S&P 500 Index, is under pressure. Exxon extended the $3.7 billion payout for another quarter last week but hasn’t increased it since early 2019 and is relying on borrowed cash to sustain.

That said, the company did go all-in on its defense of its massive dividend, with Bloomberg noting that “gone is any wiggle room on its statement: the company is pledging investors that even if oil prices average $50 a barrel (Brent basis) in 2021 and refining margins are horrendous, it would make enough money to cover both shareholders payouts and spending in projects.”

This means that XOM has a remarkable 8% div yield – one of the wonders of the NIRP world – when German bunds yield -0.5%; if and when oil rebounds further, expect this stock – which has the highest leverage to the price of oil – to soar.

Furthermore, the company also made it very clear that if prices drop lower (to $45 a barrel), it would sacrifice spending (and therefore growth) to protect the payouts. “Exxon is, in effect, saying that it isn’t BP or Shell, which cut the dividend last year” as Bloomberg puts it. For a company besieged by activist investors, policy makers, and climate-change campaigners, it’s a big statement. It’s trying to curry the favor of investors with a tool that always worked for Exxon: money.

And yet, the stock refuses to give XOM credit for its commitment to its dividend. In fact, such was the pressure exerted by last year’s price collapse that Exxon’s Chief Executive Officer Darren Woods held preliminary talks with his counterpart at Chevron Corp. about a megamerger, the Wall Street Journal reported Sunday.

Separately, while Exxon’s debt levels surged in 2020 they have now also come under control. Total debt was $67.6 billion at the end of 4Q, up 44% from a year earlier but relatively static now for the past three quarters.

Looking ahead, the oil giant predicted some very optimistic cash flow growth…

… even though Exxon’s growth will likely be severely challenged over the coming years, despite roaring production from Guyana and the Permian Basin, its two key projects. The reason: protecting the dividend has come at the expense of massive capex cuts which limit the growth potential. No new changes today but this chart shows how much future investment has come down vs the company’s 2018 projections (courtesy of Bloomberg).

Exxon isn’t alone in facing serious challenges even as commodities are on a tear. Chevron disappointed investors at the end of last weak with a surprise loss grounded on weaker-than-expected refining margins. Earlier Tuesday, BP squeezed out a small profit that was a fraction of what the explorer earned in pre-pandemic days. ConocoPhillips posted a third consecutive loss.

To meet his targets, CEO Darren Woods has taken an axe to capital spending and operating costs, all but abandoning his circa 2018 blueprint for expanding output while drilling and construction costs were low. Exxon announced 14,000 job cuts, delayed megaprojects from the Permian Basin to Mozambique, and has pledged to keep a tight rein on spending through the middle of this decade. The cutbacks helped turn Wall Street analysts more positive on the stock, with most banks upgrading it the stock to a Buy in December; expect more optimism especially with oil prices rebounding this year (Brent just hit $57/bbl the highest since Jan 2020) but investors are still nursing deep losses after a 41% plunge in 2020 and years of underperformance compared with peers.

Finally, the activists are also all over XOM, assuring even more upside: as Bloomberg reminds us, last Wednesday, activist investor Engine No. 1 formally took up the cause for a change in strategy, nominating four directors to the board ahead of Exxon’s annual meeting in May. The investor, which has the support of the California State Teachers’ Retirement System, is calling on Exxon to invest more in clean energy, commit to reducing emissions and improve returns on capital.

XOM stock was a little higher on the Q4 earnings, after inexplicably tumbling on Monday following the Cheveron merger report.

Did the ‘Reddit-Raiders’ suddenly shift their crosshairs onto the energy complex?

The last few days have seen WTI Crude surge over 6%…

…topping $55 this morning for the first time since Jan 2020.

Source: Bloomberg

The catalysts for the move is uncertain amid mixed data from OPEC – on the bullish side, compliance with planned cuts was extremely high; on the bearish side, the cartel cuts its oil demand growth outlook to 5.6mm b/d (down from previous 5.9mm b/d).

Citing an internal OPEC document, Reuters reported on Tuesday that the organization lowered its oil demand growth forecast to 5.6 million barrels per day (bpd) for 2021 from 5.9 million bpd in January’s report. Additional takeaways:

“OPEC+ panel sees global oil demand at 97.9 million bpd in December 2021 under the base scenario.”

“Under the base case scenario, the oil market deficit is expected to reach a peak of 2 mln bpd in May.”

“Under the alternate, lower demand scenario, market is expected to flip into 600,000 bpd surplus in April 2021 and 100,000 bpd surplus in December 2021.”

And on the other side of the ledger, OilPrice.com’s Irina Slav notes that OPEC+ members complied almost completely with their production cut quotas last month, an unnamed source from the extended cartel told Bloomberg.

At 99 percent, according to the source, the compliance level was based on preliminary estimated, to be reviewed tomorrow by the Joint Technical Committee of the group.

OPEC+ agreed to cut 7.2 million bpd in combined production in January, in what was widely seen as a compromise decision for aggressive cutters like Saudi Arabia and more reluctant ones like Russia, which proposed adding 500,000 bpd to the group’s production each month between January and April. For February and March, the cartel agreed to keep production cuts at 7.2 million bpd.

This may change after tomorrow’s meeting but is not very likely. Global demand has been on the mend but so has supply. Therefore, chances are that OPEC+ will stick to its current production cut levels, with Saudi Arabia unilaterally cutting an additional 1 million bpd to keep prices higher.

Meanwhile, however, OPEC’s overall oil production rose in January, according to a Reuters survey, for the seventh month in a row. That’s despite Saudi Arabia’s deep cuts and Iraq’s compensatory output reductions that the country said it would implement in January and February to make up for its non-compliance last year.

“The increase is natural with the higher production ceiling from January,” one OPEC delegate told Reuters.

Interestingly enough, the biggest additions to OPEC’s total for January came from Saudi Arabia and Iraq despite their commitments, the survey found. The third-largest output growth came from Iran, which is ramping up both production and exports in anticipation of the Biden administration lifting sanctions.

Authored by Bill Blain via MorningPorridge.com,

“Adam ate the Apple, and our teeth still ache.” 

Yesterday Apple launched a new $14 bln multi-tranche bond deal, raising new debt up to 40 years. It was a classic deal. Although the firm has $196 bln in cash, the world’s most valuable company says it doesn’t really want to be sitting on a large cash position, and many suspect it would much rather give it back to stock holders. Why not? When rates are this low, what’s not to like about leveraging up and monetising equity into debt!

The new Apple bonds pay a 96 basis point premium over US Treasuries for the 40 year bond deal. That may be even be a bargain! If Apple was a sovereign nation, you would not be worried – it has around $126 bln debt out-standing, which is peanuts when its last quarter generated $110 bln revenues and $28 bln profit. The Reinhart & Rogoff rules says 70% debt to GDP is where you should start to worry about a nation’s debt. The US, with around $27 trillion in debt is around 136%. Ouch. Apple or Treasuries?

But having a lot of cash not doing very much isn’t a good thing. Although Apple has demonstrated it is an astute investor in financial markets, it’s has always been under pressure to do something with its cash pile or hand it back to investors. 

What could it do? I read rumours of its hooking up with Korean car makers to launch its own Electric Vehicle (although the rumours also say the Koreans don’t want to give up their own chance to simply become white-label production for iCars.) Another item was about Apple’s coming take on Smart Glasses, or its new headphones at $600. Or it might go acquire something new, disruptive and innovative in the services sector – the area its’ targeted for growth.

While Apple is not in any imminent danger, it really has to do something. For those of us of a certain age it remains stylish, fashionable and a design icon. I’ve said it before – I am an Apple Addict. But just like me it’s becoming a bit sedentary. Just like me its’ getting older, more mature, and is hardly the disruptive force that pioneered and popularised personal computers, won the laptop battle, revolutionalised digital music via the iPod, created the smartphone (well got the credit) in the iPhone, the iPad.. and er… what else? 

Not so much recently.

Analysts are noticing revenues on its core computing and mobile products are excellent, strong but essentially static. Someday.. someone else might disrupt its niche with a better smart-system everyone wants. If its earnings are ultimately capped, it can’t expect its equity to continue its stratospheric trajectory, and repaying debt before it becomes a zombie becomes the issue credit analysts will look at.

To kickstart new revenues, the firm is now focused on services, but iCloud is just another cloud service (I use Dropbox. Easier.) Or maybe its Streaming – maybe, Spotify is the clear music leader, while Apple TV is lacking in the steady stream of binge-watch series that Netflix deluges us in. (Full marks for Ted Lasso, but everything else is aimed at the other side of the pond.) I am sure Apple will be very good and competent in services, but it’s unlikely to dominate in the same way it has in mobiles the last 10-years. 

As it continues to mature, its multiples will change. History shows no firm remains top for ever. Something else will replace it. 20 years in the top ten is a very good result. At some stage Apple will enter old-age. All firms get old eventually. 

But for the meantime, Apple’s debt binge is likely to mean further upside for stock holders. For years it has been under pressure to use its healthy cash balance. Use it or lose it. Unless it has plans to make major acquisitions, then it would prefer to give it back to stock holders – which means the debt issue from y’day is great if you hold equity in Apple (as I do). 

I’m seldom a fan of stock buybacks – it usually shows a lack of imagination by company management, but when rates are this low and a company can tap the market multiple times, then why not? (Y’day was the third time Apple has tapped the debt markets in 12 months.) All that cash will likely be used to push up the stock price via buybacks. 

However, what happens in 40 years time when it comes to repay the debt? That will be interesting? Nations last longer than companies. US treasuries or principal back on Apple Bonds as the company resides in a care home? Just asking..

Yesterday, when GME was still trading at $300, we warned traders that the squeeze was almost over because as calculated by S3 Partners, the short interest had collapsed from over 110% to 53%…

… and warned subs in our private twitter feed to take cover.

For some reason, we got a lot of grief from the “diamond hands” crew for simply reporting the facts (and as we explained for those wondering, the most desperate shorts went so far as raiding the XRT ETF to obtain GME shares), which are manifesting themselves vividly this morning, with GME crashing by more than half from when we warned yesterday, and was last trading at just $142…

… while the other top meme stock, AMC was down to $9 after rising as high as $18 on Monday.

There was no respite across the most-shorted sector, with virtually all of last week’s most popular names tumbling including silver..

… as attention now seems to be shifting to biotechs where names like VXRT, DVAX and BCRX sharply higher today.

US equity futures have continued their Monday rally, rising above 3,800 as the collapse in most shorted stocks continued, with European indices firmer following the positive Asian session…

… while silver slid from an eight-year high as the latest short squeeze reversed.

Sectors are broadly in the green though oil & gas is among the laggards as BP’s update offsets much of the positivity from crude benchmarks themselves. In top geopolitical news, China top diplomat Yang warned the U.S. not to cross the country’s “red line,” in a pointed speech that pushed back against early moves by President Joe Biden to press Beijing on human rights. The Dollar index continues to make ground above 91.00 this morning pressuring major counterparts but particularly so against the EUR which is also hindered via EUR/GBP action in-spite of firmer than expected GDP data. Overnight, the RBA maintained its key rate at 0.10% as expected but unexpectedly announced it is to extend its QE purchases by AUD $100BN. Looking at today’s session highlights include OPEC JTC meeting and speeches from Fed’s Kaplan, Williams, Mester, we also get earnings from Amazon, Exxon, Alphabet.

At 07:00 a.m. ET, Dow E-minis were up 247 points, or 0.82%, S&P 500 E-minis were up 32.5 points, or 0.86% and Nasdaq 100 E-minis were up 109.75 points, or 0.84%, building on the previous session’s momentum, as investors anticipated strong results from Amazon and Google-parent Alphabet while also looking for signs of progress on a pandemic-relief package. Alphabet, which will report the cost and operating profit of its Google Cloud business for the first time, added 1.3% premarket, while retail behemoth Amazon.com Inc gained 1.2%. Both companies, which report Q4 earnings after market close, have jumped more than 7% each after strong earnings from rest of the FAANG group last month. Ford added 2% after the U.S. automaker said it will invest $1.05 billion in its South African manufacturing operations, including upgrades to expand production of its Ranger pickup truck. Shares of Exxon Mobil rose 1.5% ahead of its results scheduled before the bell, which are expected to be marred by a charge of up to $20 billion on the value of its natural gas properties.

Meanwhile, the massive short squeeze appears over: “meme” stocks GameStop, AMC and Nokia tumbled between 23% and 30%, while miners Hecla Mining Co and Coeur Mining tracked a fall in spot silver prices. This was offset by buoyant mood in the broader market as President Biden and congressional Democrats signaled they’re intent on a large pandemic relief bill, and there’s clear evidence that the virus case numbers are starting to decline. The U.S. has been administering shots at a faster daily rate than any country in the world, giving about 1.34 million doses a day, according to data gathered by Bloomberg.

“We remain positive on risky assets. A combination of easy monetary and fiscal policy when the recovery is gaining momentum should bode well for them,” said Mohit Kumar, strategist at Jefferies International. “While it is still not clear whether the retail-led volatility is behind us, our view is that the impact should be temporary.”

Global markets were also buoyant: MSCI’s world equity index was 0.4% firmer after posting its strongest day in three months on Monday. European equities rallied from the open; with the Euro Stoxx 50 rising over 1.5% and the Stoxx 600 up 1.1%; the CAC 40 outperformed at the margin. Autos, travel and financial services are the best performers. Miners are the sole sector in the red. Shares in BP lost 3.8% after it plunged to a $5.7 billion loss last year, its first in a decade. The Stoxx 600 Automobiles & Parts index rose as much as 3.1%, the most since Dec. 15, led by gains for parts suppliers and Stellantis after it was initiated with a buy rating at Goldman Sachs. Airbus shares gain as much as 6.6%, the most since November, after Morgan Stanley upgraded the plane manufacturer to overweight on a positive view about its production plans.

Earlier in the session, Asian stocks rose for a second day, following a rally in U.S. peers as concerns eased that the recent turmoil spurred by speculative buying will derail the bull market. MSCI’s index of Asia Pacific stocks outside Japan rose 1.5%, with China’s benchmark CSI300 Index climbing 1.5%, helped by easing concerns about tight liquidity and falling cases of new coronavirus infections. Japan’s Nikkei 225 added 1%. Vietnam, India and Taiwan led gains among national benchmarks. Chipmakers TSMC and Samsung were among the biggest drivers of the MSCI Asia Pacific Index. Hong Kong stocks also advanced, boosted by Tencent after its chairman Pony Ma was praised in state media for his entrepreneurship. India stocks gained more than 2.4%, one day after the nation’s key stock gauges recorded their biggest budget-day gains in at least two decades

Global market are buoyant ahead of negotiations Tuesday between U.S. President Joe Biden and Republican senators on a new COVID support bill. The GOP’s $618bn stimulus plan released early Monday was about a third the size of the President’s proposal. Top Democrats later on Monday filed a joint $1.9 trillion budget measure in a step toward bypassing Republicans.

“If you have the ability to have stimulus compromise it’s going to be very supportive for financial assets in the medium term as it means you will have the ability to have an economic recovery,” said Francois Savary, chief investment officer at Swiss wealth manager Prime Partners. “The $1.9 trillion was set as a high bar of the possibilities and in a way to get into a negotiation to get something that would be smaller and more efficient.”

In FX, the dollar hovered near a seven-week high, benefiting from a euro selloff overnight after coronavirus lockdowns choked consumer spending in Germany, and on short-covering in over-crowded dollar-selling positions. The Bloomberg dollar index slipped for the first time in three days while Treasuries extended declines as progress in U.S. coronavirus vaccine rollout bolstered risk appetite across markets. Reports of productive talks on additional U.S. stimulus also boosted sentiment. Against the U.S. dollar, the euro was trading at $1.2078, just above an early December low of $1.2056 hit in the previous session. The Australian dollar pared gains after the country’s central bank said it will extend its quantitative easing programme to buy an additional $100 billion of bonds. The Aussie last stood at $0.7627, nearly flat on the day.  Turkey’s lira firmed more than 1%, extending a rally after the central bank promised tight policy for an extended period last week.

In rates, Treasuries were under pressure led by long-end of the curve amid risk-asset rally in which S&P 500 futures exceeded Monday’s high. Yields cheaper by ~3bp across long-end of the curve, steepening 5s30s by as much as 1.7bp to widest level since November 2016; 10-year yields around 1.11% with gilts lagging by 0.5bp. Thirty-year yield came within 3bp of its YTD high; 5s30s within 2bp of its November 2016 high. Gilts lag following 2026 and 2071 bond sales, with U.S. set to make 1Q refunding announcement Wednesday.

In commodities, silver prices slipped 4.8% to $27.59 per ounce, as investors locked in profits after the precious metal touched a near eight-year peak in the previous session driven by retail investors. Spot gold fell 0.6% Tuesday to $1,847.51 per ounce.

Brent crude was up 1.1% at $56.95 a barrel. WTI gained 1.2% to $54.22 as falling inventories and rising fuel demand due to a massive snow storm in the Northeast United States propped up prices.

Looking ahead, investors will also be paying close attention to earnings, with Amazon.com Inc. and Google parent Alphabet Inc. among companies releasing results on Tuesday.  About 84% of the 186 S&P 500 firms that have reported so far have topped estimates for earnings, well above the 75.5% beat rate for the past four quarters, according to Refinitiv IBES data.

 

 

 

 

 

 

 

 

Market Snapshot

• S&P 500 futures up 0.8% to 3,797.00
• MXAP up 1.3% to 210.35
• MXAPJ up 1.5% to 711.19
• Nikkei up 1.0% to 28,362.17
• Topix up 0.9% to 1,847.02
• Hang Seng Index up 1.2% to 29,248.70
• Shanghai Composite up 0.8% to 3,533.69
• Sensex up 2.4% to 49,755.65
• Australia S&P/ASX 200 up 1.5% to 6,762.60
• Kospi up 1.3% to 3,096.81
• German 10Y yield rose 3.7 bps to 0.497%
• Euro little changed at $1.2070
• Italian 10Y yield fell 4.1 bps to -0.510%
• Spanish 10Y yield rose 12.6 bps to 0.107%
• Brent futures up 1.2% to $57.01/bbl
• Gold spot down 0.7% to $1,847.26
• U.S. Dollar Index little changed at 90.90

Top Overnight News

• China’s top diplomat warned the U.S. not to cross the country’s “red line,” in a pointed speech that pushed back against early moves by President Joe Biden to press Beijing on human rights
• U.K. Prime Minister Boris Johnson’s government is sticking to an election promise not to hike taxes on wages and sales next month, rejecting pressure to increase revenue to tackle the record deficit run-up during the coronavirus pandemic, according to a person familiar with the matter
• The euro areas GDP declined 0.7% in the fourth quarter, compared with estimates for a 0.9% drop. Germany and Spain both posted surprise economic expansions in reports last week. Italy reported a contraction of 2% earlier on Tuesday
• A fledgling format for selling bonds that ties margins to a borrower’s progress in doing business in ways that protect the planet is set to boom this year — but won’t work for everyone, according to a sustainable debt specialist at HSBC Holdings Plc. Companies trying to configure so-called sustainability-linked bonds can run into technical obstacles such as not being able to meet environmental targets before the debt matures
• After a surge in silver futures to the highest in almost eight years, traders are still trying to solve a mystery: Who penned the Reddit posts that ignited this staggering run-up in prices — and why were they taken down?

A quick look at global markets courtesy of Newsquawk:

 

Top Asian News

• Hong Kong Retail Sales Plummet After New Virus Restrictions
• Turkey Arrests Dozens of Students Protesting Erdogan’s Pick

European stocks see another session of gains (Euro Stoxx 50 +1.8%) as the optimism seen in APAC hours echoes into Europe, with the regional sentiment also underpinned amid less severe-than-feared EZ Flash GDP figures; following better than expected releases out of France, Germany etc. This has lead to a mild outperformance in the EZ relative to the US – where futures trade with broad-based gains of around 1% – whilst the UK’s FTSE (+0.8%) and Switzerland’s SMI (+0.9%) tail their Euro-peers. Sticking with the FTSE 100, the index is capped by somewhat unfavourable Sterling dynamics whilst bearing the brunt of losses in heavyweight BP (-3.2%) post-earnings, who missed on adj. net expectations but noted that organic capex last year was in-line with guidance. For reference, BP has around a 3% weighting in the FTSE 100. The downside in the crude giant is also reflected in the Energy sector which underperforms; but, with peers underpinned on the performance of crude itself. Broader sectors are all in positive territory and portray a risk-on bias as cyclicals (ex-oil) outpace defensives – with Auto names leading the gains, closely followed by Travel & Leisure and financial services. Basic resources reside among the laggards as base metal prices pull back before the Chinese Spring Festival and as precious metals unwind a lion’s share of yesterday’s gains. In terms of individual movers, Airbus (+6%) shares soar following an upgrade at Morgan Stanley. On the flip side, Fresenius Medical Care (-13.9%) plumbs the depths as the group anticipates a significant negative impact on 2021 net income from accelerated COVID-19 related mortality of dialysis patients. Fresenius SE (-6%) moves lower in sympathy as it owns some 32% of Fresenius Healthcare – with both companies accounting for around 3% of the DAX (+1.25%).

Top European News

• Euro-Area Economy Shrank Less Than Forecast at End of 2020
• Insider-Trading Suspects Can Stay Silent, EU Top Court Rules
• Italian Economy Shrank at End of 2020, Underperforming Peers

In FX, bullish risk sentiment and hefty 1.4 bn option expiry interest at the 0.7600 strike appear to have rescued the Aussie from a steeper decline in wake of an unexpectedly dovish RBA policy meeting where QE was extended pre-emptively beyond April by another Aud 100 bn and guidance on rates indicated no tightening until 2024 at the earliest. However, 1.0600 in Aud/Nzd may not be impenetrable as the Kiwi rebounds from 0.7150 vs the Greenback on the aforementioned positive market tone ahead of NZ jobs data that could rubber stamp the recent removal of NIRP expectations for the RBNZ or rekindle forecasts for further easing this year. Conversely, more hawkish commentary from the CBRT, including the potential for extra front-loaded and decisive tightening if needed to get inflation back on track, gave the Lira sufficient impetus to extend its recovery through 7.2000 and 7.1500 before waning just above 7.1000 awaiting any backlash from Turkish President Erdogan who has reverted to his anti-rate hike standpoint, and as the Dollar rebounds broadly.

• USD – As noted above, the recovery in high beta rivals and positive market tone sapped some momentum from the Buck that might otherwise have gleaned traction from the relatively pronounced and ongoing loss of attraction in Silver and its fellow precious metals, as Xag/Usd dips under Usd 27.50/oz vs a fraction over Usd 30 at one point yesterday. Nevertheless, the DXY has derived fresh impetus from renewed weakness in the Euro to surpass 91.100 vs 90.805 at one stage and the index has now been up to 91.123 compared to 91.063 late on Monday and an early EU session best of is now hovering midway between peak and 90.805 trough.
• CAD/GBP – Not quite all change, but the Loonie and Pound have pared a chunk of losses against their US counterpart from sub-1.2850 and circa 1.3660 to reclaim the 1.2700 handle and retest 1.3700 respectively, with the former receiving some support from firmer crude prices and latter via improving pandemic and vaccine developments. Moreover, Sterling seems to have survived spill-over RHS demand in Eur/Gbp, albeit with relative Euro underperformance as the cross reverts to type and eyes 0.8800 to the downside.
• CHF/EUR/JPY – All choppy vs the Buck, as the Franc hovers within a 0.8979-48 range mindful of latest verbal intervention from SNB chair Jordan, but Euro fails to keep its head above 1.2050 following another hiccup in efforts to form a new Italian Government coalition or get respite from better than feared EZ GDP data and another rise in inflation expectations via the favoured 5 year/5 year long term metric. Meanwhile, the Yen is struggling regroup after the loss of technical support and slip below 105.00 in advance of Japan’s services PMI and an announcement from the PM about COVID-19 restrictions that is anticipated to extend the state of emergency.
• SCANDI/EM – More Nok outperformance on chart and oil grounds, while the Sek mulls latest dovish Riksbank inferences and EMs beyond the Try are benefiting from the general appetite for risk, with the Czk also acknowledging Czech Q4 GDP defying lowly expectations to a degree.

In commodities, WTI and Brent front month futures trade firmer as the complex tracks gains seen across the stock markets as sentiment remains constructive following the EZ flash GDP figures and heading into the US entrance. The broader environment remains unchanged as participants weigh COVID variants’ impacts against vaccines and OPEC+ supply balancing. On that note, the JTC meeting will take place today ahead of tomorrow’s JMMC confab, with no change expected to current policy given that the producers came to an accord for Q1 in January, whilst fundamentals also remain largely the same since the prior meeting. In terms of commentary, BP expects oil demand to recover this year, but the speed and degree will depend on government policies and individual activity as vaccines are rolled out, “From the oil supply side, limited growth from non-OPEC+ countries coupled with active market management from OPEC+ means that for 2021 we anticipate a normalization of the currently high inventory levels.”, the energy giant says. Looking ahead to today, the weekly Private Inventories after the US close may induce price action ahead of tomorrow’s EIA release – until then, sentiment will likely drive price action barring any major crude catalysts. WTI resides just above USD 54/bbl (vs low USD 54.50/bbl) while its Brent counterpart probes USD 57/bbl (vs low USD 56.20/bbl). Elsewhere, previous metals reverse a bulk of yesterday’s gains, with spot silver losing its shine as it declined from yesterday’s USD 30/oz+ best levels to sub-28/oz in early European trade, with some citing a margin hike by the CME as one of the catalysts. Spot gold meanwhile is slightly more composed on an intraday basis around USD 1850/oz (vs high USD 1862/oz). Base metals meanwhile are trending lower with LME copper eyeing USD 7,750/t to the downside heading into anticipated holiday-induced demand drops as China heads into the Spring Festival.

US Event Calendar

• Jan. Wards Total Vehicle Sales, est. 16.2m, prior 16.3m
• 1pm: Fed’s Kaplan Discusses Economy
• 2pm: Fed’s Mester to Give Remarks on Labor Market

DB’s Jim Reid concludes the overnight wrap

It had to happen. Given its now February, and given I’m not going into the concrete jungle that is London at the moment, my hay fever was always just round the corner. Last night I had a bad sneezing fit and very itchy eyes. Since I moved out of London over a decade ago I now get bad hay fever anytime from mid January to early February. It is the strangest thing when it’s so cold outside. It’s been a little delayed this year as I’ve hardly been outside. However those little pollen bits have penetrated my cocoon. Time for the antihistamine.

Whatever medicine the market took over the weekend it worked as after experiencing their worst week since October, global equity markets got February off to a strong start as concerns eased over the broader market impact of retail investors. Indeed by the end of yesterday’s session the S&P 500 gained +1.61%, recovering almost all of Friday’s losses, as tech stocks led the advance with the NASDAQ up +2.55% ahead of earnings releases from Amazon and Alphabet after the US close today. The rally was broad-based with roughly 80% of the S&P 500 gaining on the day and all but two of the 24 S&P industry groups gaining. It was the best day for the S&P since late November and the best day for the tech-concentrated NASDAQ since early January. With the risk-on tone, equity volatility subsided and the VIX index fell -2.85pts to 30.24. The volatility index has now been above 30 for the past 4 sessions though, for the first time since the run up to the US elections.

It was much the same story in Europe too, where the STOXX 600 (+1.24%), the DAX (+1.41%) and the CAC 40 (+1.16%) all moved higher, while other risk assets like Brent crude (+0.84%) and WTI (+2.59%) oil prices also benefited. A reminder though that a weak January for equities does have omens for the rest of the year if 150 years of US equities returns are to be believed. See here for the CoTD on this from yesterday.

Amidst the broader equity rally, many of the Reddit-fuelled trades from last week lost ground yesterday, with GameStop falling -30.77% as investor interest moved elsewhere. Other darlings of the message board managed to battle back as Nokia (+7.24%) and Blackberry (+3.76%) rose after whipsawing between losses and gains. However more of the focus of the WallStreetBets forum was on silver after starting on this trade in the middle of last week. The metal rose +7.65% in its best day since August, having at one point been on track for its best daily performance (+11.4% at the intra-day highs) since 2008. The surge sent the ratio of gold to silver prices down to its lowest level since 2014. Silver miners like Hecla (+28.30%), First Majestic Silver Corp (+22.08%) and Silver One Resources (+30.43%) saw major gains on the back of the move, with traders again targeting heavily shorted names. Overnight silver is down -1.96% after the CME Group hiked trading margins by c.+17.9% on silver futures contracts. The exchange said that the decision was based on “the normal review of market volatility to ensure adequate collateral coverage.” It’s fair to say it’s going to be easier to move the mining stocks than the underlying metal given the relative deepness of the securities.

Overnight in Asia markets have continued to move higher with the Nikkei (+0.85%), Hang Seng (+1.54%), Shanghai Comp (+0.47%) and Kospi (+1.12%) all up. Futures on the S&P 500 are also up +0.53%. Elsewhere, Brent crude oil prices are up +1.03%.

US 10yr yields are +0.7bps overnight following a +1.4bps increase yesterday as President Biden met with 10 Republicans senators about their $618bn stimulus offer, one that is substantially smaller than Biden’s proposal. The President and Senate Republicans agreed to continue talks, though it was unclear whether either side was ready to budge. The ranking Democrat on the Senate Finance Committee, Mr Wyden, called the Republican plan a ‘non-starter’, indicating that it does not do enough. These comments were echoed by Senate Majority leader Schumer, who again said that Democrats would use budget reconciliation if needed. In case the White House and Senate Republicans cannot find a quick resolution to their differences, House Democrats yesterday moved forward with plans to prepare their own relief legislation. This would be a bill that could pass through both chambers of Congress without Republican support, but would be missing some of the original staples of President Biden’s proposal – most notable the $15 minimum wage and repealing a cap on state and local tax deductions.

Back to fixed income and we did see the 5s30s yield curve climb to its steepest level in nearly 5 years, and the dollar index strengthen +0.44% to a 7-week high. Meanwhile in Europe Italian BTPs were the outperformer, with yields down -2.2bps as investors remained unconcerned by the continued government formation process. In terms of the latest, the lower house speaker, Roberto Fico, has until today to report back to President Mattarella following his consultations with the political parties, but things appear to be moving towards a resolution, with the risk of early elections remaining low. Other government bonds such as German 10yr bunds (+0.2bps), French OATs (+0.1bps) and UK gilts (-0.6bps) were little changed on the day.

In the UK, cases of the South African variant were found amongst those who didn’t have any travel links, leading to residents in a number of areas being asked to take tests, irrespective of whether they’re displaying symptoms. In better news however, the number of new daily cases in the country fell below 20,000 for the first time in over 6 weeks, which comes after 4 weeks of lockdown and a month of excellent vaccine rollouts. Yesterday German Chancellor Merkel promised all Germans would be offered a vaccine by the end of the September even if no new vaccines were approved. Meanwhile in the US, a snowstorm in New York City has led to the cancellation of all vaccination appointments both yesterday and today. The 7-day rolling count of new cases in the US fell to its lowest level since mid-November, as the holiday travel bump subsides and various mobility restrictions show their effect. Also yesterday the US announced that more Americans have now received at least one dose of vaccine (26.5mn) than the total number of residents who have tested positive for the virus over the past year (26.3mn). This comes as the country is now averaging just over one million doses per day.

The main data highlight yesterday were the manufacturing PMIs, albeit there weren’t that many surprises given we’d already had the flash readings from the major economies. In terms of the main numbers, both the Euro Area (54.8) and the US (59.2) manufacturing PMIs were revised up a tenth from the flash readings, while the ISM manufacturing reading fell more than expected to 58.7 (vs. 60.0 expected). One notable thing in that release was the prices paid index, which rose to 82.1 in January (vs. 76.0 expected), which is the highest since April 2011. Elsewhere, German retail sales fell by a larger-than-expected -9.6% (vs. -2.0% expected) in December.

To the day ahead now, and data releases include the Q4 GDP figures for the Euro Area and Italy, along with preliminary January CPI from France. Central bank speakers include the ECB’s Hernandez de Cos, as well as the Fed’s Kaplan and Mester. And earnings releases include Amazon, Alphabet, Pfizer, Exxon Mobil, Amgen, UPS and Alibaba.

Summary:

• US new cases lowest since Nov.
• England, Wales see second-highest deaths
• Israeli cases rise despite vaccinations, lockdowns
• Japan extends state of emergency
• Merkel promises a dose for every German by September
• Italy begins unwinding lockdown
• Moderna proposes filling vials with 15 doses instead of 10
• China reports 30 new cases, lowest in a month

* * *

The US reached a new COVID milestone yesterday, as the number of Americans who have received the first dose of the vaccine surpassed the number confirmed positive with the virus. Still, the US is just coming off the deadliest month since the beginning of the crisis, and cases and hospitalizations are only just starting to fall.

The US reported fewer than 120K new cases yesterday, its lowest daily level since November, while hospitalizations continued to retreat toward 90k, the lowest number since the fall.

Hospitalizations are falling in virtually every state.

The big question for the US is the same as for Europe: will the hyper-infectious “mutant” strains cause a reversal in the trend, or break through the vaccines to cause yet another wave of COVID, leaving vaccinemakers constantly racing to update their product? Patterns in the EU largely mirror the US.

But with deaths so close to the peak, and Italy kicking off its post-holiday reopening Tuesday, mutant strains are still causing concern.

Moving on from the US, the battle over AstraZeneca doses in Europe appeared to die down, as Chancellor Angela Merkel promised all Germans a first vaccine dose by the end of September, (provided the drugmaker sticks to its delivery commitments). Dubai has become the latest country in the Middle East to authorize the vaccine.

In the UK, virus-linked deaths in England and Wales reached their second-highest level since the start of the pandemic, highlighting the severity of the latest wave.

Despite boasting the highest vaccination rate in the land, Israel is finding the virus stubbornly hard to defeat as new cases bounce back. Indeed, cases might even be rising despite the number of vaccinations, and a nationwide lockdown that continues. While the vast majority of those over 80 have been vaccinated, the nation’s campaign is stalling.

While 83% of the 60-plus age group has been inoculated, the vaccination program among that part of the population has mostly stalled, the center said. Israel is aiming for 95% vaccination rate among that age group,

In Asia, Japanese Prime Minister Yoshihide Suga extended the state of emergency in 10 prefectures on Tuesday, including Tokyo, will be extended by a month to March 7. However, the extension will not cover Tochigi Prefecture, where the number of new infections is judged to have dropped sufficiently. Suga added that while the number of infections has fallen in some places, it is too soon to lift restrictions: “It is obvious that the number of new cases has decreased in Tokyo and elsewhere since the declaration of the state of emergency. Focusing on restaurants to ask for cooperation has been effective,” Suga said. “We want to ensure that the current measures are thoroughly implemented so that the declaration can be promptly lifted.”

Japanese cases have declined in recent weeks…

…while deaths have risen.

Here’s a roundup of more COVID news from overnight and Tuesday morning:

• Johnson & Johnson will ship some Covid-19 vaccines ordered by the European Union to the U.S. for the last stage of production, raising concern among some member states (Source: Bloomberg).
• Russia’s Sputnik received approval for emergency use in Pakistan with local partner AGP (Source: Bloomberg).
• Moderna says it has proposed filling vials with additional doses of its vaccine, raising the volume to 15 doses from 10 to ease a production crunch (Source: Nikkei).
• New York reported 8.5K new COVID-19 cases on Monday, the first time new infections have been below 10K since late December, Gov. Andrew Cuomo said in a tweet. The state also reported 141 new COVID-19 deaths.

* * *

China reports 30 cases, the fewest in a month, as Beijing tries to convince the world that its latest outbreak in Hebei Province, surrounding Beijing, has finally passed.

Authored by Paul Joseph Watson via Summit News,

Police in the UK arrested a man for handing out free soup in a park, claiming that he had violated COVID-19 restrictions.

Nick Smith had been giving out free soup to people in his village for 17 weeks before Sussex Police intervened, claiming he had violated COVID rules by encouraging people to gather.

However, Smith cited exemptions under the rules for volunteering, which allows for up to 15 people to gather either indoors or outdoors.

Smith said he found the whole experience “very shocking” and insisted he was only trying to help people struggling with mental health issues as a result of the lockdown.

“Showing up every week and being a feature they can rely on is what I wanted to do. They just come because they don’t see anybody they don’t talk to anybody and they’re going crazy,” he said.

Sussex Police said people “providing a takeaway service are required to complete a risk assessment and adhere to Government guidance including social distancing and hygiene measures.”

Smith was handcuffed and given a court summons, but he has vowed to continue supporting his community.

“If not now when, people are going hungry, people are going crazy. If not now when,” he said.

My friend Nick Smith is a kind man and a humanitarian.

Yesterday he was arrested for an act of kindness, serving organic soup to anyone who was hungry. Hungry for food or simple human contact.

Please share to show people what this world has come to… pic.twitter.com/I92V29cQ44

— Ann Clark (@bankiegirl) January 27, 2021

As we previously highlighted, a plethora of videos have surfaced recently of police in the UK enforcing lockdown rules in an increasingly draconian manner, including one incident where a man was interrogated and arrested for refusing to provide his name.

Another man who insisted that he only lowered his mask to clean his glasses, which had steamed up, was also hauled out of a shop by cops after letting his face covering slip.

Another recent video showed police in London entering a home to break up a baby shower party after a neighbor snitched on the family.

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