Mixed messages ahead of stimulus deal

(Last newsletter of the year, Happy Holidays!)

Greetings, we are taking a two-week break from the newsletter, so this is the last edition until 5th January. We’ll still be on Twitter to post some of the most interesting charts: @macro_daily. Happy Holidays!

Chart of the Day

There were some mixed messages from markets at the end of the week. On the one hand, there were further signs that the equity rotation into more cyclical sectors is running out of steam, with the financials-to-S&P 500 ratio dropping back to its weakest since mid-November. On the other hand, the continued rise in the 10-year US breakeven bond yield, a measure of inflation compensation, implies bond investors are still raising their expectations for growth and inflation. With US politicians finally agreeing to a stimulus bill late Sunday, perhaps we shall see cyclical equity sectors perform better.

Macro

The German Ifo survey improved in December but still points to negative GDP growth.

Foreign direct investment into Brazil continued to sink in November, although the recent improvements in the EM currencies suggest this trend is probably starting to reverse.

In Canada, consumer confidence has picked up marginally in recent months but remains low by past standards - that hasn’t prevented very strong retail sales growth though.

In the US, the conference board leading indicator improved in November despite the further spread of Covid.

Markets

The CFTC Commitment of Traders report showed traders have decreased their net longs in safe-haven currencies ahead of year-end, potentially a sign that more are positioning for an improvement in economic conditions in 2021. They also trimmed their shorts in cyclical currencies like the CAD, RUB and BRL.

On the other hand, there were some signs traders think the rally in copper may be losing steam, as they reduced their net long position.

Positioning alone no longer seems to suggest that euro should rally much further.

It wasn’t just financials that underperformed last week, other key cyclical sectors also performed poorly, especially energy, although materials actually did relatively well.

Finally, implied exchange rate volatility remains elevated for many of the more cyclical currencies like NOK, BRL and MXN, a sign that traders are still concerned about further negative surprises.

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