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Key near-term risks for risk-on. USD targets for the next week Risky assets saw modest losses on Friday amid the emergence of a new roadblock in the stimulus package negotiations - Republicans' proposals to restrict the Fed and the Treasury to use credit facilities created in response to the pandemic. In particular, this concerns the Main Street program (direct lending by the Federal Reserve to small and medium-sized enterprises), which expires at the end of this year. Democrats see this as an attempt to tie the hands of the Biden administration (in terms of ability to respond to possible economic shocks) and, of course, will not easily back down on this issue. Senate Republican leader McConnell said the talks could drag on over the weekend. It seems that politicians are trying to hold out until January's Senate run-off elections in Georgia where representatives from the two parties will compete for key seats that will determine whether the Republicans will receive a majority in the Senate. While the pandemic has lost some of its news coverage, data shows it continues to wreak havoc on key economies: At the end of November, the curve seemed to be drawing a peak, however, as we are now seeing, it was only a pause before new highs. And if the United States is trying to cope without lockdowns, then Europe is more conservative in this regard. The data shows that the path is open for greater social constraints. From the fundamental statistics, it is worth paying attention to the update on applications for unemployment benefits, which indicated that worrying trends in labor market gain momentum. Regarding to initial claims, consensus was + 800K but the indicator printed + 880K. Initial claims have sped up sharply in the past two weeks: As the US labor market began to show weakness in November, jobless claims have become more significant in understanding how quickly the recovery wanes and how much the economy needs new stimulus. Judging by the data, December promises to be very weak in terms of US employment growth and the NFP in January is likely to show a negative surprise. In my opinion, unless we get a breakthrough in fiscal negotiations over the weekend, next week will be a correction week for the dollar index in line with the technical idea I described on Wednesday. The target of bullish retracement is 90.50 mark. Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company. High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Explaining 10yr-2yr spread and Fed’s meeting baseline scenario. Near term USD outlook Decline of US Dollar accelerated on Wednesday before the Fed meeting as the consensus strengthened that the US Central Bank will float additional monetary easing measures today. On Monday we discussed the possible forms of this easing - an increase in the duration of the Treasury portfolio, or an outright increase in QE (which is less likely). QE is when the central bank tries to adjust basic risk-free market rates - government bond yields, through guaranteed monthly asset purchases of some volume. By adjusting risk-free rates, the Fed expects other interest rates (including lending rates) to adjust as well. An increase in portfolio duration is when the central bank decides to buy more long-term bonds than short-term bonds in order to lower the long-term borrowing costs. And here is the key argument why the Federal Reserve may need to increase duration of its bond purchases: This "somewhat forgotten" chart of the spread between 10-year and 2-year Treasury yields is a well-known "harbinger" of recessions and booms. Recall that from the summer of 2019 this chart was a popular “workhorse” for gloomy forecasts of some market doomsayers. When the spread is at its minimum, the market, roughly speaking, expects stagnation or recession, and vice versa, when the spread grows, it expects a rise. Surprisingly, the market was not wrong about the latest recession, despite its completely non-obvious and sudden origin. The chart now shows that the demand of long government bonds relatively bonds with shorter maturity is rapidly declining. In other words, the near-term outlook for a return on capital looks more promising than the long-term one. At least that's what the market thinks. Because of this, long-term rates rise as the market demands ever higher returns in order to invest in a “less promising”, long period of time. The Fed may intervene today if it considers that such an increase in long-term rates is not good for long-term borrowers and will slow down the economic recovery. An increase in QE for this purpose looks like overkill, therefore, changes in the composition of purchases within the current volume are more likely - which is what the US stock market and US Dollar are trying to price in. Short-term USD technical setup: As for the dollar index, several attempts to break the key 90.50 support ended with a breakout of the range (90.50-91.10), which, in my opinion, is a clear signal of resumption of downside pressure. At the same time, the downward movement today brought the price beyond the short-term descending channel, which sets the stage for a test of the channel's lower border on a higher timeframe (89.75) and only then a somewhat significant correction (to 90.50). Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company. High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Is there anything to stop stocks decline except fresh fiscal headlines? The ECB meeting had little chance to send Euro lower: recall that on November meeting, Lagarde warned investors that they should expect a major policy adjustment in December, but since then various ECB officials have been steering market expectations towards much less easing. Which, in fact, happened on Thursday - the bank just raised the limit of the pandemic asset purchase program by 500 billion euros (which in no way obliges the bank to ramp up asset purchases) and increased long-term cheap financing to banks (the so-called TLTRO program). The ECB did not increase the monthly QE purchases which of course was a major disappointment. We discussed such an outcome in our previous analyses and likely impact on the euro (mainly bullish). The second important point, which at the same time surprised and upset, is that EURUSD is already above 1.20, and the ECB did not even blink an eye. There was something like usual phrase "closely monitoring Euro exchange rate", which is of course not enough to contain Euro rise. Furthermore, the statement like equals acknowledging that exchange rate is fair and there is nothing super-speculative in it that needs to be suppressed. EURUSD uptick in response to the ECB meeting is completely justified and indicated that the ECB was definitely underdelivered to easing expectations. Of course, it is bullish sign for the common currency: Friday pullback is, in my opinion, a decent opportunity to consider medium-term long positions on the pair. Corrective pressure was caused by a decline in US futures and weakness in European markets (not the euro). As soon as this correction runs out of steam, we will probably see 1.22+ on the pair. Considering other European currencies, such as SEK, NOK, which are also sensitive to the ECB's policies, the outcome of yesterday's meeting will probably also add weight to them and purchases against major outsiders in major currencies such as USD are most justified. Regarding the stimulus in the US, there was yet another disappointment - the final decision on fiscal aid may not be made until Christmas. Speaker of the House of Representatives Pelosi hinted at this. The main catalyst of growth has been taken away from the stock markets and it’s clear that there is little to stop the decline except fresh clues about the fiscal deal. Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company. High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

US stocks dodge correction as new US stimulus plan seems to suit both parties US stock market once again dodged looming bearish pullback on Tuesday thanks to positive news on the stimulus package. Treasury Secretary Mnuchin presented a new stimulus plan on Tuesday that takes into account the priorities of both Democrats (funds for federal and local authorities) and Republicans (liability protection for businesses). The news immediately had an effect on the markets - the S&P interrupted the onset of a slump and swiftly climbed above the 3700 mark: European stocks and oil prices rose on positive news from the US on Wednesday emerging market and commodity currencies strengthened against the USD. The move is very common to risk-on environment, which so far is based only on positive expectations from fiscal aid and start of a new economic cycle in 2021. We hold our bearish view on USD and bullish on US stocks in December because US fiscal stimulus remains key theme that drives equity valuations and the potential from it is still untapped due to lack of conclusive information. On the bearish side, the US credit agency Fitch said on Tuesday that it’s not planning to upgrade credit rating of any advanced economy for 2021, despite positive vaccine developments and favorable economic outlook. Fitch's chief economist told Reuters that the first positive changes in economic growth are shifting to 2022 due to downbeat impact of the second wave of social curbs in developed economies. Also, mass vaccinations in emerging market economies will begin later than previously thought due to logistics problems, as well as modest volume of pre-orders of the vaccine. ZEW Expectations Index, the leading indicator of economic activity in Germany, significantly exceeded expectations in December. Key leading gauge of business conditions printed significantly higher, rising by 16 points to 55 points: In the Eurozone, the index of economic expectations made a huge jump by 21.6 points to 54.4. The uptick suggests that economic expectations in Germany almost fully recovered after a sharp decline in the previous month (against the background of lockdowns). It’s a very good sign for Eurozone that economic expectations responded to vaccine news as this suggests that everything is fine with forward-looking indicators, which include investment spending. If propensity of spending remains high, the only thing that Eurozone government needs to do to protect future recovery is to offset short-term transient impact from lockdowns on consumption. Robust expectations tell us that the investment component of Eurozone GDP will likely show quick recovery in the first quarter of 2021, as investment spending depends on perception of future economic conditions like level of uncertainty and consumer demand and is highly correlated with economic expectations. The index of current conditions remained in a deeply negative zone (-66 points) but markets mostly likely ignored it as near-term lockdown impact has been priced already before lockdowns were introduced. Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company. High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

This broken link between banks and bond markets indicates Central Bank support is the only thing that matters for stocks Price action in European equities and US futures lack clear direction on Tuesday as markets wait for a "Christmas gift" in the form of a fiscal deal. In the absence of news headlines signaling about progress in stimulus talks, there is a chance for equity markets to stage a minor pullback (scenario that we discussed yesterday) and the signs of bearish pressure do persist. The greenback remained weak against other majors, trading below the key foothold at 91 points. While stocks markets trade near all-time highs, sustained by expectations and liquidity backstop from the Central Banks, signaling that the worst is over, the Bank of International Settlements issued a warning, saying that the crisis is moving from liquidity to default phase. In this regard, it is significant how the two major groups of lenders - banks and market investors (indirect and direct channel of financing) changed their lending attitude. If the former has been tightening their credit standards, the latter, on the contrary, has been lowering the credit risk bar: Bank and bond market assessment of credit risk usually move in sync, but now we a strong divergence which suggests there is a strong factor breaking the interplay. This factor is obviously “unlimited” credit facilities offered by Central Banks and it means that complacency in bond markets may hinge heavily on the Central Bank backstop. Anyway, current focus remains on the stimulus talks in the US. In addition to disagreements between parties, there is another obstacle on the way to a fiscal deal - a Christmas shutdown. The work of Congress is funded until December 11, so in order not to interrupt negotiations, legislators will first have to approve a bill that will finance another week of work and bring fiscal negotiations to their logical conclusion. Therefore, the focus of the markets is primarily on whether Congress will succeed in approving funding bill. The voting on the bill is due on Wednesday. Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company. High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. In its quarterly report released on Monday, the "bank of all central banks" said that while the recent rally in global equity markets was justified by compression of interest rates in bond markets and rotation of investors into risky assets, quick development of vaccine and thus foreseeable end of the pandemic, current market valuations may not fully reflect the risks of defaults. This is better reflected in dynamics of credit spreads in the US and Europe which rapid decline remains out of step with stalling recovery of firm revenues, key measure of quality of a firm as a borrower. It means that bond market valuations may underestimate risks of corporate defaults as well.

A case for a bearish pullback in S&P 500. What could go wrong? US job growth fell short of expectations in November, pointing to waning recovery momentum in the US economy. However, it didn’t stop the US equities from renewing all-time highs. SPX inched closer to 3700 points, DOW rose above 30,000 mark. On Monday, equity markets went into a mild retreat while US currency recovered some of the lost ground. The biggest question is the strength of this downside move. In my view, fundamental background and news flow expected this week suggest that the 3700 mark should remain a local resistance for SPX for a week or so and a retracement to 3650 (100-hour SMA support) is likely. The next target that we could then consider is a test of an intermediate trend line at 3620 points: Let’s look at the arguments. The NFP report was actually worse than the headline numbers suggested. Job growth calculated on the basis of firms' payrolls (so-called establishment survey) slowed to 245K (460K exp.). The same indicator, calculated through the household survey (more precise measure), was -78K. There is a backstory that indicated that we had to expect this kind of a surprise - November dynamics of initial claims for unemployment benefits (which I wrote about here). Unemployment rate decreased by 0.1% but it remains a highly biased indicator - if we look at employment rate (share of employed from working-age population), it is still significantly lower than it was in February: Over the weekend, the data showed that the US hit a fresh record for daily cases of Covid-19, hospitalizations, and ICU occupancy rate: In other words, the pressure for local government to tighten restrictions at least for some time, increased, which present a near-term risk for the markets. Certainty about the vaccine, unfortunately, does nothing to ease the short-term pressure from rising Covid-19 positivity rate. The latter has intensified thanks to lax rules during Thanksgiving and the start of shopping season which led to more crowded shopping places. Therefore, there is a risk that social restrictions in the US could be briefly tightened again, and with the economy losing momentum in November, December could be very weak in terms of employment and economic recovery. It is no coincidence that Congress stirred in December and is going to adopt a $ 900 billion stimulus package within a week or two. Basically, swift approval of the stimulus bill is a key obstacle for prolonged decline as positive headlines can quickly spur another leg of buying momentum making bearish pullback quickly losing integrity. Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company. High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Oil market appears to be slow to digest OPEC+ new trade-off The new OPEC+ deal appears to be a massive success both for oil producing nations and the market. Agreeing to boost production in January the group could convince market participants that surplus inventories will nevertheless decline. The deal was somewhere in the middle between the worst and the best possible outcome of the meeting. Oil-producing nations will start to increase output from January 2021, but great flexibility of the new plan was a key to soothe market concerns. This week was difficult for OPEC as due to disagreements the meeting scheduled for Tuesday had to be postponed to Thursday. The deal participants came to a new agreement, but initial market reaction to it was tepid. OPEC+ plans to increase production from the current level by 500K bpd starting from January 2021, which is less than in the worst-case scenario (1.9 million bpd). In doing so, the organization will monthly assess market conditions in order to better adjust the supply. The deal also included the condition that the members cannot increase output by more than 500K bpd per month. The best outcome for prices would be to extend current output cuts for another three additional months, however, judging by the market reaction, the market liked the OPEC+ flexible output plan. At first, the market reacted with a small upward leap, but on Friday spot prices increased by another 1%. A barrel of WTI was trading above $ 46 a barrel, the highest level since early March while Brent was trading above $49 a barrel. An important point was the very fact of the deal - recall that in March prices collapsed due to the fact that among the main producers a short-term situation arose where "everyone produces as much as they want." The parameters of the deal were determined in such a way that implementing it OPEC+ should keep the market in a deficit, thus drawing down inventories and pushing prices up. As a new coronavirus shock becomes less likely to happen, there are no major obstacles for a recovery in demand, so prices have a room to rise. In December, Brent will probably be able to touch $51 per barrel, but it is preferable to wait for a pullback, if we want to bet on this outcome: However, next year, after Biden moves to the White House, Iran's return to the market could become a serious threat to the market. In other words, the risk of successful negotiations between the United States and Iran on the nuclear program. If sanctions on Iran are lifted, the market will face a challenge in the form of a potential 1-2 million barrels of additional supply from Iran. However, this risk is not traced on the horizon of 3-4 months. Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company. High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

OPEC decision is likely to have short-term impact as focus turns to demand side Positive update on oil inventories in the US pulled WTI above the key level of $ 45, however, prices have been moving in a narrow box as OPEC is dragging its feet on key output decision: EIA data unexpectedly indicated US crude oil inventories declined by 679 thousand barrels. Stocks at Cushing decreased by 317 thousand. Drawdown in inventories was an unexpected outcome which produced some upside in the market as it came against the backdrop of an increase in oil imports and a decrease in refinery utilization rate, indicating that increased oil exports in the reporting week made up for this decline. The data showed that oil exports from the US surged by 625 thousand bpd to 3.5 million bpd, which indirectly indicates a rapid recovery in demand from foreign refineries. OPEC is making an important decision today about output cuts. Initially, the decision was supposed to be made on December 1, but disagreements arose among the participants and it was decided to postpone the meeting. The market is leaning in favor of a positive outcome of the meeting, but in my opinion, OPEC will opt for balanced solution because recent economic data around the world indicates brisk recovery and oil producing nations may be reluctant to miss this demand opportunity. Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company. High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

EURUSD: Unlikely that the ECB will bring out big guns in December The risk of contested elections has been pushed further into the background as Trump basically admitted defeat on Thursday saying that he will leave the White House if the Electoral college votes for Biden (which will almost certainly happen). US stocks remain in consolidation mode near all-time highs waiting for more news on the fiscal negotiations, OPEC decision on output quotas as well timeline for mass vaccination in developed economies. On Thursday we had crucial for the Euro speech by the ECB Chief Economist Lane and release of minutes of the November ECB policy meeting. Both events shed some light on the scale of monetary easing in December and had short-term implications for the Euro exchange rate. According to Lane, there are signs that the cost of credit funds for end borrowers are rising, as indicated by several surveys which assess availability of credit and investment activity. Since European debt markets are generally in good shapes while credit spreads are low, European Central Bank has little need to tweak asset purchases. Instead, the ECB is likely to expand the TLTRO lending program for banks. Euro will likely discount this measure as it usually responds to something more profound, such as a change in the deposit rate or bond purchases. The chances that FX markets will generally discount December meeting rose as expectations that the ECB will bring out the big guns in December became less relevant. Thanks to this, the EURUSD rate bounced up today. Adding to this the market received a number of economic updates on Friday, which showed that November lockdown in the EU has less than expected impact on consumer sentiment, business sentiments in the non-manufacturing, in particular the industrial sector: The readings indicated that the worst has been averted and that the blow to the economy was in line with expectations. At the same time, the index of business climate in the non-manufacturing sector fell more than expected from -11.8 to -17.3 points, against -15.5 points forecast. Next week, the upward trend in EURUSD is likely to resume, however, an important component for this will be a positive OPEC decision (extension of the current output cuts). Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company. High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.