Summary: Yesterday, US treasury yields stole the limelight as longer yields rose by the most in weeks and to the highest level in more than a month. This helped USDJPY rise above 115.00 for the first time since prior to the omicron variant outbreak. Equities were mixed in thin trading, with Europe set for its last trading day of the year, while US markets will be open tomorrow. Brent touched $80 per barrel in response to a bullish EIA stock report before ending lower on profit taking.
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities traded mostly sideways in a thin session as the year winds down, with the more yield-sensitive megacaps seeing slightly more weakness than the broader market as longer yields rose to 1-month highs. Those longer yields will bear close watching in the New Year if the high for the cycle near 1.75% for the US 10-year treasury yield benchmark comes into view.
USDJPY - the quarter-end pattern we have seen with every quarterly roll-over this year is repeating itself once again with USDJPY (in which an end of the quarter steep rally is followed by a sharp consolidation near or just after quarter-end), although specifically yesterday we saw a supportive rise in long US treasury yields as the 10-year treasury benchmark yield rose through local range highs around 1.50% and all the way to 1.54%. If US treasury yields at the long end of the curve continue to rise next week, the quarterly pattern is less likely to repeat.
USDTRY – few understand how Turkish president Erdogan’s “deposit protection” scheme is meant to work and note the country has burned through significant reserves in its latest efforts to stabilize the currency. The yield on 10-year Turkish lira-denominated sovereign bonds rose to a record 24.9% yesterday, a sign that few believe the government’s intention to lower inflation to 5% will succeed. The lira has been on a roller coaster ride, with USDTRY falling from a spike high above 18.00 to below 11 on the announcement of the new scheme, but rising back above 13.00 since then. USDTRY traded below 9 as recently as October. Reuters reports that Erdogan may be considering snap elections, which could result in a TRY recovery if the market believes a new president will win and enact the traditional currency-supportive policies.
Crude oil reached a one-month high on Wednesday after the US EIA reported a fifth straight weekly drop in crude stockpiles of 3.6 million barrels. The drop occurring despite another injection from strategic reserves of 1.4 million barrels and net imports rising by 0.5 million barrels per day. Brent briefly touched $80 before turning lower as profit taking emerged, potentially in response to a rise in US production to 11.8 million barrels/day, the highest since May 2020. The market maintains the view the omicron virus, despite spreading at a record pace, will not derail robust global demand, but some short-term caution may be warranted, especially with regards to developments in some of the world’s top consuming nations.
Gold (XAUUSD) trades lower in response to higher US yields after a poor seven-year auction (see below). The risk of rising yields, as the Fed steps up its efforts to combat inflation, remains one of the biggest challenges for gold in 2022, and one that has led to several analysts downgrading their price forecasts. Another reason why gold trades down on the year, despite the highest inflation in decades, is the continued rally in stocks which has reduced demand from real money managers. A development that is visible in the ETFs where total holdings have seen a steady decline all year to the lowest since May 2020. Gold needs to retake 1,850+ (the major pivot high from mid-November is just above 1,875) to impress and attract fresh investor demand.
US Treasuries (IEF, TLT). The yield curve bear-steepened following the final coupon auction of the year. The US Treasury sold $56 billions of 7-year notes at 1.48%. It tailed by 2.3 bps, the most since March. The bid-to-cover was 2.21x, the lowest since February when the 7-year auction caused a deep selloff in markets. Low volume trading amid the festive season is one of the causes of volatility in rates. Ten-year yields are back above 1.50%, yet well below key resistance at 1.70%.
What is going on?
U.S. pending home sales unexpectedly tumble in November. They fell 2.2 % MoM versus expected +0.8 % and prior +7.5 %. Although it’s a big miss, it is not that worrying considering the very strong jump in October. Preliminary data for December indicate that demand remains strong. In other news, the U.S. trade deficit reached a new record in November. The advance goods trade balance was out at minus $97.8B versus prior minus $83.2B.
Strong performance for US stocks in 2021, but what about the forward prospects? At current levels, the S&P 500 index performance this year will nearly match the very strong 2019 and the three-year performance of over 90% is the strongest since the incredible late-1990's runs. Historically, such wild performance gains and current valuations levels will temper the longer-term potential performance for coming years. The S&P 500 index, for example, did not close at a new year high after 1999 until 2013.
Biden and Putin to talk today as tensions over Ukraine continue, and the US, UK France and Germany have all warned Russia on any further posturing against the country.
Cryptocurrencies suffering notable weakness into year-end, suggesting, all other things being equal that speculative liquidity is poor. The Ethereum price closed at its lowest daily close since October yesterday near 3,700, well below the pivotal 4,000 level. The Bitcoin price remains in the range, but not far from the clearly etched 45,500 range lows from December.
What are we watching next?
Expect retailers to increase their prices in early 2022. The trend is already underway. The UK branch of the multinational conglomerate IKEA announced on Twitter price increases « due to higher costs across the supply chain, including raw materials, transport and logistics ». Most companies cannot absorb the costs anymore and will pass them on to consumers. In the case of the United Kingdom, the situation is even worse due to post-Brexit supply chain disruptions. In these circumstances, it is unlikely that inflation will significantly move downward in the short term, at least. The London-based think tank the Resolution Foundation estimates that UK households will face a £1,200 hit to their budget on average in 2022 due to higher inflation, soaring energy prices and big tax rise to come in April. Supply chain disruptions will also remain. The president of the UK Food and Drink Federation, Ian Wright, indicated that it is likely UK consumers will not find the great variety of products they used to in supermarkets in the post-Brexit era.
Key elections to watch in 2022:
· Italian presidential election (The complicated election process will start on Jan. 4)
· Portuguese legislative elections (Jan. 30)
· Hungarian parliamentary election (April – exact date to be confirmed)
· French presidential election (Apr. 10)
· French legislative elections (Jun. 12)
· Japan house of councilors election (July 25)
· Brazil general elections (Oct. 2)
· U.S. midterm election (Nov. 8)
Earnings Watch – no major earnings releases this week and the earnings calendar will stay light until the Q4 earnings season starts in mid-January.
Economic calendar highlights for today (times GMT)
0830 – Hungary One-week Deposit Rate Announcement
1330 – US Weekly Initial Jobless Claims and Continuing Claims
1445 – US Dec. Chicago PMI
1530 – EIA's Natural Gas Storage Change
2300 – South Korea Dec. CPI
0100 – China Dec. Manufacturing and Non-manufacturing PMI
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2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
