Waiting Biden’s Stimulus Package
Any setbacks in the short term will be opportunities to get positioned for the longer term.
Now that work in getting the $1.9 Trillion stimulus proposal approved will be the focus of the market. Should Republican Senators voice strong objections, that could put a dent in the risk sentiment.
However, any setbacks in the short term will be opportunities to get positioned for the longer term. As any reduction in stimulus spending now will only reinforce Biden’s resolve to get more approved in the weeks ahead.
- Commodities : Silver — Supports for Silver are at 21.80–90 and at 24.70–80. Keep to the path, as money printing will eventually drive prices of finite assets higher.
Key risks: Higher US interest rates leading to a stronger USD is the key risk.
2. Equities : Keep long US Tech and China A50 Index Futures. Nasdaq continues its march higher. China A50 continues to trade better after the support at 18300–350 level held. Stay the course.
Key risks : Higher US interest rate. Republican objections to Biden’s US$1.9 Trillion stimulus plans, possibility of higher taxes and regulations on tech could pressure the market.
3. Currencies : Keep short USD and long NZD, CNH & TRY. USDCNH seems to be trading a tight range of 6.45–6.50 and is now back into the top end of the range. It’s the zone to scale into shorts for those not yet involved. USDTRY bounced a little off the lows, opportunities to reinstate shorts will appear once the momentum wanes.
WHAT HAPPENED YESTERDAY
- The U.S. Dollar Index increased 0.1% to 90.23. Although the USD Index was stuck in a tight range due to the major components, EUR and JPY, having a quiet day, commodity currencies such as CAD, AUD & NZD, weakened against the USD as commodity prices were on the backfoot after the recent rally. USDCNH is now back at the top end of this year’s trading range. If USD should trade well across the board, short term stops above 6.51–6.52 could be triggered but that will be an opportunity to add to strategic short USDCNH positions.
- The lacklustre U.S. stock market opening was attributed to news that EU leaders are considering tighter lockdown measures to curb the spread of the coronavirus, including a UK variant that could have a higher mortality rate, and reports of more Republican lawmakers pushing back against President Biden’s $1.9 trillion stimulus proposal.
- The Nasdaq Composite (+0.1%) eked out another closing record high on Friday, overcoming a negative start and capping off a strong week for the tech-sensitive index. The Russell 2000 rallied 1.3% and closed at a record high in a steady advance off opening lows, while the S&P 500 (-0.3%) and Dow Jones Industrial Average (-0.6%) closed lower.
- These headlines stirred lingering growth concerns, which were manifested in the underperformance of the S&P 500 financials (-0.7%), industrials (-0.5%), and energy (-0.5%) sectors. The 2-yr yield was unchanged at 0.13% while the growth-sensitive 10-yr Treasury note yield decreased two basis points to 1.10% amid an uptick in demand.
- Bitcoin, BTC, bounced off the lows after briefly breaking below the 29,000 level. It’s currently trading quietly around 32,500–33,000. Ethereum, ETH, on the other hand, rallied hard, more than 30% off the lows, and tested new all-time highs above 1470 earlier this morning. Expect higher levels in the days ahead.
Notable Snippet: Taiwan’s Ministry of Economic Affairs said on Sunday it has received requests through diplomatic channels to help ease a shortage of chips for the auto sector and that it has asked local tech firms to provide “full assistance”. The shortage has affected Ford Motor Co, Subaru Corp, Toyota Motor Corp, Volkswagen, Nissan Motor Co Ltd, Fiat Chrysler Automobiles and other car makers.
THEMATIC CONTEXT: “Banning SMIC is a key move in the U.S.-China tech war as semiconductor is the key ingredient which underpins technological progress. According to reports, China is 5 years behind the U.S. and Taiwan in semiconductor technology and they “cannot be allowed” to catch up. It will be crucial to keep track of semiconductor advancements and Taiwan’s Taiwan Semiconductor Manufacturing (TSM) manufacturing foundry is now a key strategic asset and of global importance.” — 3rd Dec 2020
“With the rise of AI and Data, chips are the new age commodities and this makes Taiwan a country of increasingly key geopolitical importance as its semiconductor industry manufactures (notably Taiwan Semiconductor Manufacturing) the bulk of the world’s chips (even Nvidia outsources chip production to them). For U.S. to effectively beat China in a Tech War, it has to prevent the technological know-how from being acquired by China, this is especially important since Intel (INTC) lost the race to Taiwan Semiconductor Manufacturing (TSM), anecdotally evidenced by the decoupling in stock prices between the two companies. U.S. relations with Taiwan now hinges on much more than just a proxy state to nudge China, but Taiwan holds the key to the U.S.-China tech war in which the winner becomes a global superpower.” — 11th Jan 2021
Notable Snippet: John Kerry, Biden’s special climate envoy, said a recent pledge by China, the world’s top greenhouse gas emitter, was “not good enough.” In September, Chinese President Xi Xingping set a goal for his country to become carbon neutral by 2060, 10 years after the 2050 time frame favored by most countries, while also pledging a more ambitious short-term goal on emissions. As secretary of state under former President Barack Obama in 2015, Kerry helped bring China to the table at the U.N. climate conference in Paris. Now, the Biden administration has begun to apply diplomatic pressure on countries to work harder on climate, said Kerry.
THEMATIC CONTEXT: “We believe rare earths will be in a supercycle in the years ahead as it is essential to the “Green Narrative” that underpins most ESG (ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities) investment mandates that are being adopted by institutions globally. Additionally, in the context of deglobalization, rare earth miners and supply chains outside of China will only become more valuable over the next decade. One particular company we are monitoring is Lynas Corp. (ticker : LYC) which is really the only company actually producing meaningful amounts of REs outside of China.” — 1st Oct 2020
To view specific stocks that we are invested in (such as Lynas Corp), subscribe to the TrackRecord Community Membership to access our Model Portfolio.
Notable Snippet: A U.S. aircraft carrier group led by the USS Theodore Roosevelt has entered the South China Sea to promote “freedom of the seas”, the U.S. military said on Sunday, at a time when tensions between China and Taiwan have raised concerns in Washington.
“After sailing through these waters throughout my 30-year career, it’s great to be in the South China Sea again, conducting routine operations, promoting freedom of the seas, and reassuring allies and partners,” Rear Adm. Doug Verissimo, commander of the strike group, was quoted as saying. “With two-thirds of the world’s trade travelling through this very important region, it is vital that we maintain our presence and continue to promote the rules-based order which has allowed us all to prosper,” Verissimo said in the statement.
THEMATIC CONTEXT: “China knows the path to dual-hegemony is access and ownership to vast commodity resources and critical logistic infrastructures and the South China Sea provides both. It is a key piece of geographical body that is pivotal to China’s de-dollarization ambitions and eventual push for a Sino-Centric Economic faction.” — 8th July 2020
“This is a key and strategic move by the U.S., using Taiwan to set up a geopolitical and political tripwire to further antagonize and stifle Chinese ambitions In East Asia. The fact that Washington is bound by law to rise to Taiwan’s defence is hugely unsettling for China and this will lead to more widespread repercussions. We are deeply entrenched in the Sino-American Thucydides Trap, understanding how to live and invest in a multi-polar world is increasingly important as new economic factions will emerge from this.” — 12th Aug 2020
With Biden now in office, markets will be on alert for any remarks from US Republican Senators about whether they’d support the massive stimulus bill he proposed. A tough negotiating battle could see the final proposal being watered down. The Federal Reserve will meet as well. No policy changes are on the menu, so Chairman Powell is likely to reaffirm that it’s too early to discuss tapering. There’s also a blitz of economic data, including fourth-quarter GDP from America and Germany, while some key stocks of the tech complex will report earnings.
The bloc has long sought to promote greater use of the Euro, for example in commodity contracts, to bolster its financial and economic autonomy. Specific steps set out in the paper include using a planned review of EU regulation of financial benchmarks to encourage them to be denominated in Euros. Most are based on Dollars.
Policymakers want to find energy alternatives to crude oil, where the main benchmarks such as Brent and WTI are tied to the Dollar. The paper cited gas, where a Euro-based contract traded in Amsterdam is fast emerging, and hydrogen as markets where the Euro’s role should be developed.
Brussels believes a stronger global role for the Euro would “shield the economy from foreign exchange shocks and reduce reliance on other currencies”.
“It would also help achieve globally shared goals such as the resilience of the international monetary system, a more stable and diversified global currency system, and a broader choice for market operators, all making the global economy less vulnerable,” the paper says.
The so-called “currency wars” (which are really “energy pricing wars”) appear to be heating up, as the EU appears to be accelerating their moves in the direction we have long been discussing — towards multi-currency energy, where the EU, China, & the US (and possibly Japan & the UK) can all pay for oil and gas in their own currency, instead of requiring USDs. This is ultimately bad for the USD and good for currencies such as CNH which we like in the long run.
Phan Vee Leung
CIO & Founder, TrackRecord