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  • The S&P 500 has dropped more than 100 points from all-time intra-day highs set shortly after the open.
  • Markets are taking risk off the table ahead of risk events later in the week.

Following another record open for the S&P 500, which saw the index hit all-time intra-day highs at 3770, the S&P 500 has seen a sharp retracement. The index now trades close to 3670, nearly 100 points below its early highs and more than 2.0% lower on the day.

Similar retracements have been seen in other major US bourses; the Nasdaq 100, Dow Jones Industrial Average and Russell 2000 are all also down more than 2%. All sectors are bearing the brunt of this recent bout of risk aversion.

Bright spots on Monday include Tesla (ticker TSLA), who are up more than 2% after strong car production and delivery numbers for 2020 were released (the electric car maker delivered 499,550 vehicles, slightly under its 500K target, but produced 509,737) and after Deutsche Bank increased its profit target for the Co. to $705 from $500, and amongst gold and copper miners (given higher precious and industrial metal prices).

Markets take risk off the table ahead of key events this week

Markets are seeing some position adjustment (taking some risk off the table, hence why stocks, crude and riskier FX are mostly lower) ahead of key events later in the week. Also weighing on risk appetite on Monday is likely to be some concern about tightening of Covid-19 lockdowns in Europe (UK PM Boris Johnson is expected to announce a national lockdown at 20:00GMT and tighter restrictions are being mulled in Germany, Ireland and elsewhere in the EU).

What to look out for…

1) US Data – Risks appear tilted to the downside for the USD with regards to how markets might interpret this week’s important ISM (released on Tuesday and Thursday) and official labour market data (released on Friday) for December. Market commentators have argued that good data might reinforce the risk on feel of the market, which has been a USD negative, while bad data might pump expectations for more monetary easing from the Fed, also a USD negative.

2) Georgia Runoff election – The two Senate seats up for grabs in Georgia will decide who gets control over the Senate (the Republicans or Democrats). While the election takes place on Tuesday, the outcome is likely to remain unknown for some time as mail-in ballots are counted. A similar reaction to the 3 November election is likely; Republicans are likely to have an early lead given stronger in-person voter turnout which will be counted faster, then the Democrats will catch up as the mail-in ballots are counted.

The Democrats need to win both seats to get a majority in Congress. The largest market reaction would be to an outcome where the Democrats manage to pull this off. In this case, expect significant further US fiscal stimulus in 2021 and higher nominal yields as a result. What happens to real yields and, as a result, other asset classes like stocks and precious metals would depend on how the Fed responded to more debt issuance under a Democrat-controlled Congress (the more they monetise the debt with QE, the lower real yields will stay).

3) FOMC Minutes of the 15-16 December meeting – The Fed made a mild tweak to the forward guidance of its asset purchase programme, enough to reinforce expectations that it will continue to buy bonds at the current pace (or faster) until substantial progress has been made towards it inflation and unemployment mandates. The minutes ought also to reinforce market expectations that easy Fed monetary policy is going to stick around for a long time.