What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities rallied sharply yesterday on the apparent signs of a de-escalation of the Russia-Ukraine situation (more below) with price action continuing to triangulate in the major US indices. The Nasdaq 100 is almost perfectly mid-range between the key upside resistance at the 200-day moving average just above 15,000 and the downside support in the 14,000 area. Likewise, the S&P 500 trades mid-range nearly half-way between the key upside resistance just below 4,600 and the downside pivot zone between 4,300 and 4,250.
EURUSD and other USD pairs – the EURUSD super-major is a decent proxy for the broad US dollar strength after the pair consolidated the sharp gains from the sub-1.1150 lows all the way to nearly 1.1500. This week’s low below 1.1300 - during the height of the recent risk-off move and Ukraine-linked market impacts - is the tactical support for now, with the Russia-Ukraine worries as an ongoing headline risk. To the upside, the resistance just below 1.1500 is now very clearly etched on the chart and is the key resistance for opening up the chart range toward 1.1700. The ECB’s Villeroy, often a rather dovish voice on the ECB Governing Council, said yesterday that the ECB’s QE programme could be wound down by the end of Q3 (without indicating an imminent hike, it should be noted).
Crude oil (OILUSMAR22 & OILUKAPR22) crude oil corrected sharply lower yesterday, at the greatest extent well over four dollars/barrel off the Monday highs, as the market reacted to developments in Russia’s posture toward Ukraine. This erased the majority of the prior two days’ gains, even if crude trades well north of the $90/barrel level in both Brent and WTI. Today sees the release of the latest weekly US official crude oil and product inventories, with oil at Cushing close to their lowest since 2018.
Gold (XAUUSD) had been showing signs of going from strength to strength before the sharp market reaction to the supposed de-escalation of Russia-Ukraine tensions revealed that gold is highly sensitive to headlines linked to that issue, as the price corrected from new highs above the late 2021 pivot area near 1,877 all the way back to 1,844 before finding support and trading this morning near 1,855. There is a veritable forest of resistance levels between here and the 2020 high of 2,075, the most important of which is likely the 1,920-25 area, which was a prominent early 2021 high and near the 61.8% Fibo retracement off the early 2021 lows.
US Treasuries (TLT, IEF). As tensions in Ukraine eased, the US yield curve bear-steepened slightly with 10-year yields breaking again above 2%. Today the focus is going to be on FOMC minutes and the 20-year auction. Investors will be looking for elements that would indicate the Fed might hike by 50bps by March and information about a possible balance sheet runoff. We have several Fed’s speakers on Thursday and Friday, the majority of which are voting members this year.
UK Gilts (IGLT). Jobs figures, inflation data, and retail sales numbers are all released this week. The focus is whether they can increase the aggressiveness of the BOE. Yesterday’s jobs data showed a tight labor market in the U.K., which combined with higher-than-expected inflation today create the perfect backdrop for the BOE to be more aggressive. As markets adjust to more hawkish BOE policies, Gilts yields will resume their rise. The yield curve is likely to continue to bear-flatten, with the 2s10s spread, now at 4bps, likely to invert.
European sovereigns (VGEA). Core European sovereigns ended the day softer after Belgium initiated a 30-year bond sales through syndication. The question continues to be whether the ECB will hike rates this year or not. In the meantime, the BTPS-Bund spread continues to widen adding worries that the ECB will not be able to stand hawkish for long.
What is going on?
Measure of bond market volatility, the MOVE index at highest since pandemic outbreak months, as markets eye new highs for the cycle at the longer end of the yield curve and the rise in yields at the shorter end and belly of the US yields curve have been very sharp. For perspective, the current level of volatility is higher than any episode prior to the pandemic outbreak since the “taper tantrum” episode in 2013.
The German ZEW economic sentiment index improved to 54.3 in February. However, this is lower than the economist consensus (55.0). The sub-component about the current situation came in at -8.1 this month versus prior -10.2. The fact the Omicron variant is under control and that supply chain disruptions are easing are partially explaining the improvement. In other news, the second estimate of the eurozone Q4 GDP came in at 0.3 % QoQ, as expected. Over the same period, the eurozone employment change was out at 0.5 % QoQ – much lower than in Q3 (0.9 %).
January U.S. PPI is a new wake-up call for the transitory camp. PPI for final demand increased 1.0 % in January versus prior 0.4 %. On a year-over-year basis, the PPI increased 9.7 % after a surge of 9.8% in December. Inflation is broad-based and strong in all sectors: +0.7 % month-over-month in services, +2.5 % in energy and +1.6 % in food. Pipeline inflationary pressures remain high. Inflation for processed goods rose 1.7 % month-over-month and inflation for services used as inputs to production moved up 0.3% month-over-month. This is the third consecutive increase. Inflation is structural, in our view. All of this is consistent with an aggressive move from the U.S. Federal Reserve in March.
Global inflation benchmark, the Chinese January PPI released overnight. China’s measure of producer prices rose 9.1% year-on-year in January, slightly lower than the 9.5% expected and the peak measurement in October of 13.5%. The January CPI came in at +0.9% year-on-year, lower than the 1.0% expected and 1.5% in December.
UK Jan. CPI out this morning slightly higher than expected. The month-on-month headline was –0.1% vs. -0.2% expected and year-on-year at 5.5% vs. 5.4% expected and 5.4% in December. The year-on-year core inflation rose to a cycle high of 4.4% vs. 4.3% expected and 4.2% in December.
Fortescue Metals (FMG), the world’s fourth biggest iron ore exporter reported results in line with expectations, declaring a $0.86 interim dividend, while its profit fell 32% from a year earlier to US$2.77 billion (slightly ahead of expectations). Fortescue Metals says it is facing growing cost pressures and increased investor scrutiny of its management of environmental, social and governance issues. Fortescue set aside 10% of annual profit for investment in green energy projects via its Fortescue Future Industries division, expecting to fork out $400-$600 million.
Block, formerly known as Square (and which took over the ASX tech giant, Afterpay) has seen its shares slide since debuting on the ASX. SQ2 shares started to set higher-highs and have now rallied off their all-time low and above the 30-day moving average for the first time, finding support at $158.85. It comes as firstly Bitcoin rebounded above the $44,000 level (this is important, as 48% of Square’s revenue is from Bitcoin). Meanwhile Block’s business seems to be increasingly adopted.
What are we watching next?
Russia-Ukraine headlines – continued de-escalation? The follow-on direction of the developments in Ukraine will prove important after the strong market reaction to signs of a more diplomatic stance from Russia yesterday and apparent troop movements, partially away from the border according to some reports, but with Russian military posturing near the border increasing again according to other reports. German Chancellor Olaf Scholz met with Russian President Vladimir Putin yesterday and pleaded for more diplomacy and said Ukraine’s sovereignty was non-negotiable.
Watching next signals from the Fed, with FOMC minutes up tonight. Fed expectations for coming rate moves this year have traded sideways over the last few sessions as the market waits for firmer signs on the Fed’s plans leading up to the March 16 FOMC meeting, with the window for an emergency inter-meeting rate hike (and early exit from QE which is scheduled to wind down by mid-March) likely closing by this weekend if the Fed has not moved by then. Today’s FOMC minutes of the January 26 meeting will be scrutinized for any rhetoric indicating a lean for hiking or not hiking in large increments than 25 basis points (the Fed has not hiked by more than 25 basis points since 2000, when the Greenspan took the policy rate from 6 to 6.5% - a rather different interest rate environment relative to the current rate of 0-0.25%. The market has priced in just over 40 basis points of hiking through that March FOMC minutes
Earnings Watch. Earnings season rolls on this week, with a couple of interesting commodity and tech names on the docket for today, including Australian iron ore giant Fortescue (already out overnight) and US’ Albemarle, which received an enormous boost to its stock in 2020 due to its association with lithium production. In the tech space, Applied Materials is interesting to watch as a provider of chip fab equipment during the ongoing chip shortage, and former high-flyer Nvidia is up later as well after its significant tumble from late 2021 highs.
- Today: CSL, Fortescue Metals, Shopify, Nutrien, Barrick Gold, Genmab, Air Liquide, Heineken, Nvidia, Cisco, Applied Materials, AIG, Hilton Worldwide, Trade Desk, DoorDash, Albemarle
- Thursday: Wesfarmers, Telstra, Airbus, Schneider Electric, Kering, Eni, Reckitt Benckiser, Repsol, Nestle, Walmart, Southern, Baidu, Palantir Technologies, Roku
- Friday: Hermes International, EDF, Allianz, Sika, Deere
Economic calendar highlights for today (times GMT)
- 0845 – RBA’s Debelle/Bullock to testify
- 1000 – Euro zone Dec. Industrial Production
- 1330 – US Jan. Retail Sales
- 1330 – Canada Jan. CPI
- 1415 – US Jan. Industrial Production / Capacity Utilization
- 1530 – US Weekly DoE Crude Oil and Product Inventories
- 1600 – US Fed’s Kashkari (non-voter) to speak
- 1830 – Canada Bank of Canada Deputy Governor Lane to speak
- 1900 – US FOMC Minutes
- 0030 – Australia Jan. Employment Data
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: