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After weeks of low volatility, last week saw a volatility expansion especially in risk assets as the short squeeze in GME and AMC sent retail traders on a hunt for heavily shorted stocks – and hedge funds are more cautious. Beyond that, traders continue to wonder how far we are from the end of the coronavirus pandemic, and whether US President Biden will be able to pass his $1.9 Trl package.
This week markets will focus on US NFP, vaccine developments and PMIs for the US and China. The RBA and BOE will meet, and the BOE will also release a report on negative rates. Employment reports from Canada and New Zealand will also be released.
Themes for the Week
- Short Squeeze: the favoured play in retail space is currently the “short squeeze”, and has forced hedge funds to bail from short positions and to liquidate profitable holdings to cover losses. This may continue into this week.
- NFP: consensus is for +58K vs -140k prior, but there is scope for improvement (jobless claims little changed since Dec) but the ISM employment conditions will provide more solid evidence.
- PMIs: the US ISM manuf is expected to post a decent print, while the service sector likely remains subdued on coronavirus restrictions.
- Central Banks: no changes are expected from RBA and BOE this week, but the report on negative rates from the BOE will be closely watched.
Data in the Week Ahead:
- Caixin PMI (Mon)
- ISM Manufacturing PMI (Mon) à Could show strength as Philly Fed but slight weakness in Empire State.
- RBA Decision (Tue)
- NZ Employment Change (Tue) à Job market rebounded in Q4.
- RBA’s Lowe speech (Wed)
- ISM Services PMI (Wed)
- BOE Decision (Thur)
- RBA’s Lowe speech (Thur)
- RBA MPS (Fri)
- CAD Employment Change (Fri)
- US NFP (Fri)
- BOE’s Bailey Speech (Fri)
Correlation Report:
Comment: Movements in risk assets are dominating the scene currently, with USD dynamics runner-up.
On the Radar:
Volatility finally showed a slight uptick last week, so we would expect the risk off/USD strength to extend this week. As such, we don’t see much scope for the JPY weakness to continue, and signs of exhaustion on the leaders (such as the bearish 4h divergence on GBPJPY) would confirm this view.
On the crosses, NZD appears to be gaining strength while AUD is weakening.