With US markets closed for the Thanksgiving holiday, the focus is on today’s European session as markets continue to track this reflation/reopening trade to see whether it’s got further to run. We’ve seen the second-largest 3-week inflow into value on record - Dec 2019 was the biggest, but didn’t pan out too well. At the open, the main bourses lack any real direction and were treading water in the first hour. They may not offer much movement without the steer from Wall Street – usually Thanksgiving is a good excuse to hit the pub early for City traders. The FTSE 100 opened above 6,400 after yesterday’s weaker session but struggled to find buyers above this level and quickly turned lower. Ex-dividend factors account for 5.5pts. The FTSE 100 has massively underperformed global equities, and has the best 2021 expected dividend yield (4 per cent) of all major stock markets: it ought to be due to catch up if you buy into the reopening trade vis-à -vis energy, financials and value.
Yesterday, the Nasdaq rose, and the S&P 500 and small cap Russell 2000 fell as the rotation stalled. Tesla shares rose again to fresh record highs, climbing over 3 per cent to $574 and come close to the market cap of Berkshire Hathaway. US 10-year Treasury yields ticked higher to 0.886 per cent. The dollar is weaker with DXY under 92 and facing the key horizontal support at 91.70, the Sep low. Not a lot of support under that before the 2018 lows at 88. EURUSD is approaching the line in the sand at 1.20 as it trades at 1.1920 this morning. The worsening pandemic in the US - 16th consecutive day with fresh all-time high Covid hospitalisations show it’s far from under control – may result in relative economic underperformance vs peers, albeit we should note that the main reason for economic contraction is lockdown, not the virus per se. Chiefly dollar weakness can be attributed to an improved global trade outlook post-Trump, negative real rates in the US and an improving global economic outlook should be a recipe for dollar weakness. Rising oil prices should lift inflation (in addition to other factors previously discussed) next year, furthering pushing real US rates negative. However, the dollar always surprises as the global reserve currency and a short squeeze cannot be written off.
Crunch time for USD as Apr 2018 lows approach