What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - a double whammy of increased worries over the Omicron variant and Powell’s clear intention to taper faster and hike rates to stem inflationary pressures that according to the Fed now is broader based and rooted. Not even strong ADP employment figures for November could offset the worries and US equities nose-dived in yesterday’s session accelerating into the close. US equity futures are bouncing back this morning in European trading with Nasdaq 100 futures trading around the 15,960 level. It is almost meaningless to talk about resistance and support as headline risks dominate short-term. Sentiment is weaker and Nasdaq 100 futures could go as low as the 100-day moving average at 15,388 over the coming week.
Stoxx 50 (EU50.I) - Stoxx 50 futures are trading in the middle of the trading range over the past four trading sessions around the 4,130 level with the 200-day moving average around 4,030 level being the key support level to watch. The Omicron variant is being found in more countries and the key risk going forward for European equities is the probability of renewed lockdowns or restriction curbing economic activity.
USDJPY and JPY crosses – the battle for supremacy between the USD and the JPY continues as the JPY showed signs of trying to break higher again during the fresh bout of deleveraging and risk-off yesterday in the US, only to reverse back above 113.00 this morning. US yields all along the yield curve would likely need to lift to put the pair back on the path to 115.00+, while the key downside pivot zone from 111.50-111.00 is the focus if risk sentiment turns ugly and safe haven seeking in US treasuries shows up as it did when the news of the omicron variant-of-concern broke.
AUDUSD – the pair is approaching a major chart crossroads if it drops towards the pivotal 0.7000 level, which was a massive area of contention as far back as 2015-16 and then again in 2018-2020. This, after the pivot low of 0.7106 was breached this week after the news of the omicron covid variant hit markets- an issue that is affecting Australia due to the country’s history of strict lockdown policies and cases of the omicron variant found there this week. While AUD is generally vulnerable to weakening risk sentiment as well, one major area of support has been a halt and reversal of the slide in iron ore prices over the last two weeks.
Crude oil (OILUKFEB22 & OILUSJAN21) remains fragile ahead of today’s OPEC+ meeting with the market looking for action to stem the recent slide which for Brent has resulted in a 22% top-to-bottom slide since October. Faced with a swing from tight to oversupplied market in early 2022, the group may need to pause further production increases while also sending a strong signal they stand ready to act should the omicron virus situation worsen the demand outlook. For now, Brent has retraced 38,2% of the surge from early November 2021 low when vaccination news kickstarted the rally, and for the sentiment to turn more friendly the 200-day moving average at $72.83 needs to be broken.
US Treasuries (IEF, TLT). Powell’s testimony in front of the senate put things in perspective: inflation is not transitory, and the Federal Reserve will use its tools to stop it. These words provoked a fast bear-flattening of the yield curve. The omicron variant pins down the long part of the yield curve, and when news hit the market about omicron cases found in California, long term yield began to tumble. Thirty-year yields dropped to 1.75% the lowest in 11 months to rise soon after to 1.77%. It’s safe to expect a bear-flattening of the yield curve to continue through winter. However, as soon as fears concerning the omicron variant ease, we expect the long part of the yield curve to resume its rise as yields will need to adjust to hawkish monetary policies and an improvement in economic growth causing a bear steepening of the yield curve.
US junk bonds (HYG, JNK). According to Bloomberg Barclays indexes, junk bonds’ OAS widened by 30bps to 330bps amid Friday’s selloff reflecting the lack of liquidity in markets. Despite negative real rates continuing to support corporate bond valuations, it’s safe to expect junk bond spreads to widen throughout the end of the year amid poor liquidity. If the volatility in rates remains sustained, the widening of spreads could accelerate, posing a threat also for stocks.
German Bunds (IS0L). Inflation accelerated more than expected in the Eurozone during the month of November setting the yearly figure to 4.9%. Inflation figures together with the new German government are catalysts for higher Bund yields. However, covid distortions are keeping yield in check. We exclude Bund yield to rise to test 0% until the new wave of covid eases. However, as soon as the worries concerning covid ease, they will resume their rise.
What is going on?
Fed Beige Book sees “widespread” price rises, firms able to hike prices “with little pushback”. The Fed’s survey of the economy noted that “prices rose at a moderate to robust pace, with price hikes widespread across sectors of the economy.” Labor costs were also seen rising at a “robust” pace in most districts. Supply chain constraints were noted, although some industries saw more availability of inputs.
Hawkish Fed noises continue as Cleveland Fed’s Mester (a voter next year) said she was “very open” to a faster pace of tapering purchases and Fed Chair Powell’s testimony yesterday before a House panel was similar in nature to the prior day’s testimony before the Senate. Powell said yesterday in one exchange that he was “not at all sure” inflation will ease in the second half of next year.
Apple is hit by both supply and demand issues. The past year Apple biggest problem was the semiconductor crunch that has impacted so many industries, but according to key suppliers Apple is now indicating that demand is slowing ahead of the important holiday season. Some of Apple’s key suppliers in Asia were down 4-11% during today’s session in Asia.
Ark Innovation ETF is down 38% from the peak. Cathie Wood’s famous fund which is being seen as the poster child for the growth trade in equities over the past five years is suffering its second-worst drawdown since inception only eclipsed by the brutal drawdown in early 2020 during the beginning of the pandemic. The steep selloff in Ark Innovation ETF underscores the weakness in “bubble stocks” and generally richly valued equities.
Square is changing name to Block in recognition of crypto efforts. The CEO Jack Dorsey just stepped down from Twitter to concentrate on Square which has recently brought Australia-based AfterPay and doubled down on cryptocurrencies both on its own balance sheets and in its products.
US earnings recap. Snowflake delivered positive surprises on both Q3 revenue and earnings despite steep expectations, and the Q4 guidance was also ahead of market expectations sending shares up 16% in extended trading.
Turkey’s Finance Minister resigns, replaced by an Erdogan-allied figure Nureddin Nebati. In recent days, Turkish president Erdogan’s belligerent language on domestic actors buying foreign currencies has accompanied fresh volatility in the Turkish lira, which fell to new lows on Tuesday, rose sharply at one point yesterday by more than 10% on news of official intervention before weakening again. The USDTRY volatility in the month of November was some 40%
What are we watching next?
US November Nonfarm Payrolls Change and Average Hourly Earnings on Friday. With the US economy operating at full capacity according to estimates from CBO, continued strong job gains will add fuel to the “inflation fire”. Yesterday’s 534k increase in the November ADP private payroll number suggests that the job market growth remains healthy in the US as we await the official nonfarm payrolls numbers on Friday (expected to show 500k+ jobs added), where strong upward revisions to prior months’ data has been a notable trend due to trouble collecting data. As well, Average Hourly earnings numbers will be closely watched for any budding signs of a wage-price spiral, as a constrained supply of labor could see companies bidding up wages and October showed a strong rise in earnings at a faster pace than at any time from the start of the survey in 2007 to the outbreak of the covid pandemic. The October Average Hourly Earnings number rose to 4.9% year-on-year, and 5.0% is expected for November.
The UN FAO will publish its monthly World Food Price Index Today, and another strong read is expected, although the year-on-year increase look set to ease from 31.3%. November was up until the omicron news hit major futures markets another strong month for the grains sector led by wheat while coffee reached a fresh ten-year high. Before Friday’s carnage across markets the Bloomberg Agriculture Spot index had reached a 5 ½-year high after rallying by 40% during the past year.
Earnings Watch – growth investors will focus on DocuSign and Asana earnings in today’s session which are both scheduled to report after the market close. DocuSign is expected to show a meaningful improvement in operating earnings having hovered around break-even for many quarters.
Thursday: Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, Cooper Cos, Marvell Technology, DocuSign, Ulta Beauty, Asana, Dollar General, Kroger
Friday: Bank of Montreal
Economic calendar highlights for today (times GMT)
0830 – Hungary Rate Announcement
0900 - UN FAO’s Monthly World Food Price Index
1000 – Euro Zone Oct. PPI
1330 – US Weekly Initial Jobless claims
1330 – US Fed’s Bostic (Voter) to discuss high housing costs
1530 – US Weekly Natural Gas Storage Change
1630 – US Fed’s Bostic, Daly and Barkin all speaking at event
0145 – China Nov. Caixin Services PMI
During the day: OPEC+ decision on January production levels
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: