06 January 2021

10 min read

The Opening Belle - Democrats Lead Runoffs, 10Y Yield Hits 1%

Opening Belle

The Georgia picture as we start the day;

It looks likely that the U.S senate will be democrat controlled for the next two years.

What could this mean for markets?

As CNBC report;

Many believe a Democrat-controlled Senate could make it easier for lawmakers to push through a bigger stimulus. More government spending could lead to higher inflation, which would drive yields higher.

“It’s almost like the market is just relieved we are getting to a conclusion and yields are forming a higher range. Investors are betting more deficits, more spending and more Treasury issuance if Democrats gain control of Senate,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities. “Now that the 10-year broke 1%, we are going to spend some time in the 1% to 1.20% range.”

Earlier this week, the breakeven rate for 10-year inflation expectations touched 2% for the first time in more than two years.

Tom Essaye, founder of Sevens Report, said the breakout in yields shouldn’t put pressure on risk assets in the short term.

“That wouldn’t be a direct headwind on stocks, but it would reinforce that rising yields is a theme that we need to watch closely in 2021, Essaye said Tuesday.

Final results are expected later today, around the same time that congress will debate alleged election irregularities in certain states, and subsequently certify the November election results.

Asian indices have struggled to gain with the elections in focus; ASX is down by ~1.1%, Nikkei slipping into the red, and China's tech indices are slightly lower too.

S&P 500 and Nasdaq futures had both reversed yesterday's gains, although positivity seems to be returning as European trade opens.

The smallcap Russell 2000 is well in the green, up by 1.6% so far.

Oil is consolidating at higher price levels after yesterday's Saudi/OPEC output agreement.

Bitcoin is through $35,000, Ether above $1,100.

U.S-China relations/reactions have been back in the headlines of late.

Dozens of HK democracy activists arrested as crackdown intensifies

Hong Kong police arrested dozens of democracy activists on Wednesday on suspicion of violating a new security law by planning to “paralyse” and “overthrow” the city government, Secretary for Security John Lee said.

The arrests represent the biggest crackdown on the opposition camp since Beijing imposed the law security law in the former British colony last year.

Lee told reporters the group planned to cause “serious damage” to society and that authorities would not tolerate any subversive acts.

The dawn swoop on many of the most prominent pro-democracy advocates in Hong Kong was linked to an unofficial, independently organised vote last July to select opposition candidates for a since-postponed legislative election.

Police also searched the offices of a pollster and a law firm and went to the offices of media outlets Apple Daily, Stand News, and Inmediahk, according to media.

The arrests, confirmed by the Democratic Party and individual social media accounts of dozens of other activists and politicians arrested, will further raise alarm that Hong Kong has taken a swift authoritarian turn.

Biden’s pick for secretary of state, Antony Blinken, said on Twitter the arrests were “an assault on those bravely advocating for universal rights”.

“The Biden-Harris administration will stand with the people of Hong Kong and against Beijing’s crackdown on democracy,” he said.

An American lawyer was arrested by Hong Kong police during a raid of a law firm linked to a national security crackdown launched on Wednesday, RTHK reported on Wednesday.

John Clancey, chairman of the Asian Human Rights Commission and a member of a group linked to pro-democracy protesters in the city, was arrested during the raid of law firm Ho, Tse, Wai & Partners, RTHK said, citing comments from one of the law firm’s partners.

The law firm and police did not immediately respond to a Reuters request for comment.

This is happening as the outgoing Trump administration continues to crack down on China.

Trump bars U.S. transactions with eight Chinese apps including Alipay

U.S. President Donald Trump on Tuesday signed an executive order banning transactions with eight Chinese software applications, including Ant Group’s Alipay mobile payment app, the White House said, escalating tensions with Beijing two weeks before President-elect Joe Biden takes office.

The move, is aimed at curbing the threat to Americans posed by Chinese software applications, which have large user bases and access to sensitive data, a senior administration official told Reuters.

The order argues that the United States must take “aggressive action” against developers of Chinese software applications to protect national security.

It tasks the Commerce Department with defining which transactions will be banned under the directive within 45 days and targets Tencent Holdings Ltd’s QQ Wallet and WeChat Pay as well.

The order also names CamScanner, SHAREit, Tencent QQ, VMate which is published by Alibaba Group subsidiary UCWeb, and Beijing Kingsoft Office Software’s WPS Office.

Despite the 45-day time line laid out by the order, the Commerce Department plans to act before Jan. 20 to identify prohibited transactions, another U.S. official told Reuters.

The directive mirrors Trump executive orders signed in August directing Commerce to block some U.S. transactions with WeChat and the Chinese-owned video app TikTok.

Had those orders gone into effect, they would have effectively banned the Chinese apps’ use in the United States and barred Apple Inc and Alphabet Inc’s app stores from offering them for download for new users.

The restrictions, however, were blocked by courts mainly on freedom of speech grounds. The White House is confident the new restrictions will stand up to judicial scrutiny, since applications like Alipay would struggle to bring a First Amendment case, the senior administration official told Reuters.

NYSE’s Second-Guessing on China Delistings Sows Market Confusion

Almost two months after President Donald Trump said he’s cutting off U.S. investment in companies tied to China’s military, confusion reigns on Wall Street over how to interpret his order.

The New York Stock Exchange is considering reversing course a second time to delist three major Chinese telecommunications firms after conferring further with senior authorities on how to interpret an executive order Trump issued Nov. 12, according to people familiar with the matter. Lawyers said the drama, whipsawing markets in recent days, is exposing the ambiguities of the government’s instructions.

The trio of companies -- China Mobile Ltd., China Telecom Corp. and China Unicom Hong Kong Ltd. -- lost more than $30 billion in market value in the final weeks of 2020 as investors pulled back following Trump’s order. They shed as much as $12 billion more as their American depositary receipts tumbled Monday on the NYSE’s decision to delist them. Prices climbed Tuesday after the NYSE canceled the delisting, and then they softened anew after Bloomberg broke the news that the exchange may proceed after all.

The NYSE’s latest potential pivot follows a whirlwind 18 hours. The decision to keep the listings came as a surprise and sparked confusion among officials at the U.S. Treasury and State departments, and the National Security Council, and triggered exasperation that reached the highest levels of the Trump administration, according to people familiar with the matter, who asked not to be identified because the conversations were confidential.

Treasury Secretary Steven Mnuchin entered the fray Tuesday, calling NYSE Group Inc. President Stacey Cunningham to express his displeasure with the exchange’s decision to let the three companies keep trading on the Big Board, said the people. Also involved in the administration’s response were Chief of Staff Mark Meadows, National Security Adviser Robert O’Brien and National Economic Council Director Larry Kudlow.

S&P Dow Jones to no longer remove ADRs of Chinese telecom companies

S&P Dow Jones Indices said on Wednesday it will no longer remove ADRs of three Chinese telecom giants from its benchmarks after the New York Stock Exchange said this week it no longer plans to delist them.

The NYSE said late Monday it reversed a decision announced just last week to delist China Mobile Ltd, China Telecom Corporation Ltd and China Unicom (Hong Kong) Ltd after consulting with regulatory authorities.

However, the bourse is reconsidering and could reverse its decision yet again amid confusion over rules set by the Trump administration and tension within Washington on China policy.

Bitcoin Tops $35,000 to Set Another Record as Wild Swings Resume

The world’s largest cryptocurrency advanced as much as 6% to $35,842, surpassing the previous high of $34,792 set on Jan. 3. It plunged as much as 17% on Monday. The digital coin quadrupled in 2020.

A range of factors have been cited for Bitcoin’s ascent, showing how hard it is to pinpoint the proximate cause for the latest bout of volatility. Some traders pointed to a JPMorgan Chase & Co. long-term price forecast of as much as $146,000, while others cited the overall risk-on mood in global financial markets.

“The chase higher is back on based on the notion that bigger main street investors are interested in building longer-term positions,” said Stephen Innes, chief global market strategist with Axi. “This is all about the new age embrace of blockchain technology to which Bitcoin is so uniquely intertwined.”

While some argue that the cryptocurrency offers a hedge against dollar weakness and inflation risk in a world awash with fiscal and monetary stimulus, others say retail investors and trend-following quant funds are pumping up an unsustainable bubble.

“Bitcoin is better at being gold than gold is at being gold,” Anthony Scaramucci, founder and managing partner of SkyBridge Capital, said in an interview Tuesday. The firm is the latest to get on the Bitcoin bandwagon, launching a crypto-centric fund this week.

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Saudis Take Charge of Oil Market With Surprise Production Cut

Saudi Arabia surprised the oil market with a large reduction in its output for February and March, carrying a greater burden of OPEC+ cuts while other producers hold steady or make small increases. The kingdom will make an extra cut of 1 million barrels a day, said Saudi Energy Minister PrinceAbdulaziz bin Salman. That more than offsets the combined 75,000 barrel-a-day increase Russia and Kazakhstan will be allowed to make in each of those months. The rest of the group will hold output steady.

The move papered over cracks in the OPEC+ coalition and was a U-turn from some recent Saudi oil-policy priorities, but those things paled in comparison next to the global impact of the decision. Crude prices jumped to a 10-month high and shares of energy giants in London and shale drillers in Texas surged.

“We are the guardian of this industry,” Saudi Energy Minister Prince Abdulaziz bin Salman said as he gleefully announced the cut on Tuesday. “This gesture of goodwill made by our leadership, in the name of His Royal Highness the Crown Prince Mohammad bin Salman.”

Russia and Kazakhstan were permitted to add a combined 75,000 barrels a day of supply in each of those months, a token increase that Iranian Oil Minister Bijan Namdar Zanganeh said would barely register on the market.

The deal also highlighted the different priorities of the two de-facto leaders of OPEC+. Saudi Arabia prefers to sacrifice sales volume in exchange for higher prices, while Moscow wants to boost production before U.S. shale producers can fill the gap.

Russian Deputy Prime Minister Alexander Novak publicly welcomed Saudi Arabia’s move, telling reporters that “it’s a great New Year present for the whole oil industry.” But behind closed doors, he had asked the Saudi minister not to go ahead with the move.

“From Russia’s perspective, if OPEC+ is not willing to lift production by just half a million barrels a day in a $50 market, then, by the time the group is willing to boost output, it may well have already lost market share,” said Amrita Sen, co-founder of consultant Energy Aspects Ltd.

U.S. shale drillers surged on the Saudi announcement, and their bonds moved abruptly. Exxon Mobil Corp. shares rose almost 8% while EOG Resources Inc., the largest American shale company by market value, jumped as much as 11%.

The kingdom “is not only offering a soft pillow to the oil market, but also a full set of blankets, bed covers and most likely the bed itself,” said Bjornar Tonhaugen of consultant Rystad Energy A/S.

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