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  1. #11
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    There is too much tax uncertainty for US big tech right now. Time for shorts?



    In my Monday post we discussed why it may be appropriate to short US Dollar in the first half of January. Yesterday we’ve got the first signal of development of this our scenario. USD index (DXY) fell from 90 points to 89.20 on Wednesday, while EURUSD rose above 1.23, GBPUSD tested a new multi-year high at 1.37 while Gold sticks to its plan to climb above $ 2000, and I think it will succeed. Recall that the key chart I recommended to keep an eye on is the odds of Democratic win in Georgia run-off elections: 



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    Betting odds of Senate elections outcome in Georgia



    The likelihood that both Democratic candidates will win the hearts of voters in Georgia rose to 98.04%, up from about 50% on Monday. At the same time, as we can see, the dollar index really sank noticeably. The point is that if the Senate comes under the control of Democrats, the markets will get two medium-term themes for trading:



    - The prospect of Democrats pushing through a new large stimulus package;



    -The prospect of Democrats raising taxes for corporations and the rich.



    The first point implies that the US government will be forced to ramp up borrowing (to fund a new stimulus bill). If holders of US government bonds really expect new bonds to flood the market, they should be inclined to sell them now expecting price declines. As bond yield and prices are inversely related, we should see increase in bond yields as a market reaction. And we do observe it: 



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    Additional stimulus package combined with the Fed's ultra-dovish forward guidance (keep interest rates at zero until 2023) is an almost guaranteed increase in inflation expectations (and then inflation). Then gold, which hedges inflation risk, should also increase in price what we currently observe as well:



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    On Wednesday, Nasdaq futures breached to the downside (-1.78% at the time of writing of this post):







    If you remember what Biden's tax proposals included, then it becomes clear that if Democrats gain control over Senate, their plans for income redistribution will hit corporate America. According to BofA calculations, S&P 500 companies will see their profits decline 9.2%, with tech sector suffering the most if Democrats pursue their tax reforms. For big tech companies, potential drop in percentage profit is double digit. Hence the early negative reaction in the futures market, which I believe is far from over. In my view, rising uncertainty about corporate tax policy in the US, stemming from the rising odds of Senate Control by democrats, lends powerful bearish impetus to shares of Apple, Microsoft, Facebook, Amazon, Alphabet, at least in the near term.

      Disclaimer:  The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

    High Risk Warning:  CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

  2. #12
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    Inflation expectations rise in the US. What does it mean for a new fiscal stimulus?



    Judging by the recent developments in the US money and Treasury markets investors start to expect that the Federal Reserve will start to normalize policy sooner than expected earlier. If a month ago a first interest rate hike was expected no earlier than the second half of 2023, this month expectations have sharply shifting closer to present time, pricing in a rate hike at the start of 2023. While consumer inflation in the US is dormant, inflation premium in bond yields is rising very quickly, making it more expensive for the US government to use debt markets to finance new stimulus programs. For example, the interest rate on 10-year Treasuries has risen from 0.92% to 1.15% in just a week since the beginning of the new year:





    Investors are demanding higher compensation in bond yields primarily due to rising inflation expectations. If future inflation is expected to rise, then purchasing power of future stream of payments is expected to decline more. Expected average inflation for the next 5 years as measured via 5y5y inflation swap climbed above 2.0%, but Core PCE (the Fed's preferred inflation metric) is still at 1.4%. The market is running ahead as usual, therefore, if the inflation data for December-January show an acceleration, the market will be hardly surprised as the rise should be priced in:





    Although due to discrepancy in expectations and actual inflation, bond markets may express more sensitivity to negative surprises in inflation in the coming months, since in this case the market's error in assessing inflation will be revealed. If consumer inflation slows, Treasury yields may also quickly adjust downward, while extend its trend upwards.


    Inflationary expectations are likely to maintain an upward trend, so discussions in the US Congress of new support measures will certainly imply the participation of the Fed in the form of an increase in QE. Otherwise, borrowing another $ 1 trillion (the estimated amount of fiscal impulse that the Democrats will approve) will be problematic, as future debt service costs will increase significantly. The dovish rhetoric of the Fed is known to be a negative signal for the dollar.


    Disclaimer:  The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

    High Risk Warning:  CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

  3. #13
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    USDJPY and Biden fiscal plans


    There was only a brief pause of stocks in terms of bullish headlines from the US government: starting from the last week, we observe development of the store with a new aid package from the Democrats who have finally grasped full power. The size of the expected support is being revised very quickly: last week Goldman estimated the amount of stimulus at $750 billion (of which $ 300 billion will be distributed in the form of stimulus payments), then there were estimates at $1 trillion, $1.3 trillion, and before Biden's today's address to the Americans, the markets are already talking about $2 trillion. Of course, this story roots out any possibility for USD to strengthen and puts pressure on Treasury prices as the market expects a huge portion of the fresh bond supply.


    Inflation in the US accelerated in December from 1.3% to 1.4% on an annualized basis, however, as we discussed earlier, the market is not surprised by this acceleration. The acceleration of inflation in the coming months is already reflected in the market inflation premium in bond yields. Comparing the yields of inflation-protected and inflation-unprotected 10-year Treasuries, it is clear that the market expects nothing in terms of interest rates, but expects in terms of inflation:





    TIPS yield has changed marginally since October 2020 however 10-year bond yield has more than doubled, from 0.5% to 1.15%.


    Weak inflation dynamics would have added weight to the dollar, however, the report played against it.


    It was interesting to see the data on the Japanese economy for November and December. As it turned out, the economy was better at weathering through the pandemic crisis in the fourth quarter than previously thought. In general, Japanese assets and the yen look undervalued now, because in general, Japan has grown poorly in the past decade, forcing the Bank of Japan to manipulate rates (not very successfully by the way). Due to the long history of stagnation, investors could be biased about Japanese assets. In terms of data, the key for Japan industrial sector showed good activity in December - industrial orders grew by 1.5% against the forecast of -6.2%. Manufacturing inflation also accelerated - up to 0.5%, ahead of the forecast of 0.2%. If the Biden administration manages to push through the Congress new fiscal stimulus (most likely), one of the main foreign beneficiaries of this event will be Japan, which usually outperforms, but only in the early stages of global reflation. This was the case after the 2008 crisis, when the strengthening reached 80 yen per dollar.


    Speaking of USDJPY, from a technical point of view, we are approaching the upper border of medium-term downward channel. Based on the bet that the pair will remain the channel (on the basis of fiscal spending outlook for the US), potential reversal zone could be located in the range 104.50-104.70:






    Disclaimer:  The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

    High Risk Warning:  CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

  4. #14
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    What to expect from December US retail sales report?

    In his Thursday address president-elect Biden announced $1.9 trillion economic recovery plan, but surprisingly, markets were not particularly excited about this. On the contrary, there was some doldrums. American indices closed in the red on Thursday, and the correctional motive has fed into to other markets today. Losses in European markets at the time of writing remain capped at 1 percent, oil quotes are noticeably lower. The dollar has recouped losses. Anticipated fiscal expansion in the US is pushing gold price up despite broad-based strengthening of greenback on Friday.

    Jerome Powell said yesterday that it is premature to discuss when the Fed will begin to taper QE. This statement was expected since the Fed has no choice. If the government starts borrowing on the market again, the Central Bank will have to “collect” new debt on its balance sheet to maintain investors' appetite on the Treasury market. A side effect of this will be an increase in the money supply which is reflected in rising inflation expectations in the US and signs of a bond rout in Treasury market since the beginning on new year.

    Powell warned that inflation will start to rise in the second quarter, so if inflation reports show positive aberrations from the forecasts, we still won’t be able to expect a switch to hawkish rhetoric from the Fed.

    Claims for unemployment benefits for the previous week showed that the labor market is losing shape rather quickly: the number of initial claims increased from 787 to 965K. This is the highest value since August 2020. The number of continuing claims has also increased - by 141K.



    It is no coincidence that Biden said that the repair of economy will start from the labor market - we see that the need for support grows quickly there.

    Today the market is expected to be sensitive to the December US retail sales print. Weak NFP prompted investors to expect slowing of consumption in December and hence negative surprise in retail sales. If it turns out that the weakening of the US labor market could not break the consumer potential in the US and the growth of retail sales turns out to be higher than the expected 0%, greenback will likely fall under pressure from revival of risk-on and risky assets will get out of the corrective spiral. The negative deviation of retail sales is likely to be discounted.

    Together with the report on retail sales, we expect the report of U. of Michigan to shed light on consumer spending picture in the US. The report will provide estimates of consumer optimism and inflation expectations for December. In November, the consumer confidence index dropped significantly (80.7 points) and is expected to continue to decline in December (80 points). As in the case of retail sales, the negative surprise should have been priced in, but a positive deviation will likely spur demand for risk today, as it will allow revising the effect of the labor market slack in December on the US economy.

    Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

    High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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