Market Quick Take - December 27, 2021
Saxo Strategy Team
Summary: Equity markets in Europe and the US finished last week with a strong flourish in thin holiday trading, with the US S&P 500 index trading near the record highs, while the megacap-heavy Nasdaq 100 index lags slightly. The final sprint into year-end lies ahead in the coming days as investors ponder the ongoing impact of spiking omicron cases and a dramatic improvement in EU power prices as a flotilla of North American LNG cargoes makes its way to Europe.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities ended on a new all-time high on 23 December with S&P 500 futures closing at 4,715.75 up almost 27% for the year. This morning US equity futures continue higher despite a hot PCE inflation report before the holiday showing inflation persists in the US economy. US equities are responding positively as the bond market remains muted with the US 10-year yield below 1.5% and flat for the recent period. Liquidity will remain low until after New Year and equity investors are generally preparing for the Q4 earnings season which starts in mid-January and will crucial for understanding whether profit margins continue to go lower due to higher input costs.
Oil and Natural Gas (OIL:xmil) - both Brent and WTI futures have recovered back to important resistance – the lows that were posted prior to the enormous slide generated by the news of the omicron covid variant back at the end of December. The approximate resistance levels are 75 for WTI and 77/bbl for Brent Crude. Elsewhere, Natural Gas and power prices tumbled in Europe late last week as a flotilla of US LNG cargoes is en route to Europe and as milder weather is forecast for most of Europe for the weeks ahead.
USDJPY - the USDJPY pair is over-achieving slightly relative to long US treasury yields, which are higher from recent lows, but where the 10-year US treasury yield has yet to break above 1.50%, much less the cycle high near 1.7% from October. Still, there is little in the way of resistance ahead of the 115.00+ top from November that was harshly rejected on the news of the omicron covid variant. Can USDJPY push to new highs without more support from higher US yields? Critical to note that end-of-year effects may also be in play here for the US dollar.
Gold (XAUUSD) - gold is making a bid to keep our attention in rising above the 1,800 and the 200-day moving average again last week, but heavy lifting required into 1,850+ to impress technically on the chart, together likely with further signs that the market is taking the risk of more durable inflation seriously.
USDTRY – the lira weakened slightly to start this week after its recent wild ride on Turkish president Erdogan’s dramatic intervention and unconventional approach to dealing with the crisis with promises to reimburse lira holders for any losses. Many news sources point to a dramatic drop in reserves as a sign that traditional intervention accompanied the recent measures, to the tune of $5-6 billion. Erdogan has vowed that Turkey will not fight inflation with higher policy rates as recently as Friday.
What is going on?
US Nov. PCE inflation data recap: core inflation remains hot. The US Nov. PCE Inflation data released last Thursday showed this measure of inflation running at +0.6% month-on-month and +5.7% year-on-year, both as expected, while the core inflation reading was +0.5% month-on-month and +4.% year-on-year, versus +0.4%/+4.5% expected, respectively. The Final Dec. University of Michigan survey of inflation expectations saw the 5-10 year median expectation drop back to 2.9% versus the initial 3.0% reading for the month.
Norway Wealth Fund CEO is worried. Nicolai Tangen says in a big interview during the holiday period that the fund is prepared for a decade of lower returns and the biggest threat is inflation, which he sees as not being understood and accepted by the market. He says in the interview that inflation is propping up everywhere and now also in wages and “We have nowhere to hide from inflation”.
EU-Poland tensions increase further. The European Commission (EC) launched an infringement procedure against Poland over a constitutional court ruling. It considers that Poland’s courts are not independent from political influence. Poland now has two months to reply to the letter of formal notice sent by the European Commission. If the Commission is not satisfied with Warsaw’s reply, it can send Poland a reasoned opinion by requesting it to comply with EU law, again with a two-month reply period. The current clash has delayed the release of billions of euros from the EU recovery fund to Poland.
India will overtake France as the sixth largest economic power in the world in 2022, according to the London-based think tank Center for Economics and Business Research, (Access the full report).
India will start vaccinating children between the ages of 15 to 18 from January 3 next year. The country officially recorded 6,987 new daily Covid cases on 25 December. 60.7% of the population have received at least one dose of the vaccine and 41.8% of the population have received two doses.
What are we watching next?
UK has yet to announce new covid restrictions as cases soar - the huge increase in the case count began December 15 and is now running more than twice the prior rate over the last few days, as the rate of hospitalization bears close watching in coming days as a barometer of the risk of new restrictions.
Authorities in France are holding an emergency health defense council today in the afternoon. There are more than 100,000 new daily Covid cases. The incidence rate is at its highest level since the outbreak, at 700. The French National Authority for Health expects Omicron to become the dominant variant in the coming days. New restrictions to contain the pandemic could be announced as soon as today. This could include the reintroduction of gauges in restaurants and cafés, the extension of the closure of night clubs beyond 7 January and the extension of remote work to 3 or 4 days per week, whenever possible. At the moment, the French government does not plan to increase support measures to distressed sectors. Prior to the new wave, France announced a new extension of its employment support scheme while most other European countries have already closed it.
The weekly U.S. initial jobless claims for the week ended 25 December is the main economic release this week. It will be published on 30 December at 1330 GMT. The consensus expects jobless claims to remain unchanged at a seasonally adjusted 205,000.
China’s national legislature, the country's top political advisory body, will convene its annual session on March 5. This is one of the most important macroeconomic and political events in 2022, in our view.
Earnings Watch – no major earnings reports this week and will stay light until the Q4 earnings season starts in mid-January.
Economic calendar highlights for today (times GMT)
1100 – France Nov. Unemployment Rate
1530 – US Dec. Dallas Fed Manufacturing Index
2330 – Japan Nov. Unemployment Rate
2350 – Japan Nov. Industrial Production
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