Summary: Equity markets sold off badly yesterday on renewed concerns linked to Russian troops on the Ukrainian border, as US sources issued another set of shrill warnings on troop build-ups and possible intent of an imminent invasion. Sentiment stabilized and bounced overnight on news the Russian Foreign Minister Lavrov will meet with US Secretary of State Blinken. The chief beneficiary across assets with this backdrop seems to be gold, which touched $1,900 per ounce for the first time since last June.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities posted an ugly session yesterday, seemingly on the additional shrill warnings from US sources on Russia’s possible intent to invade Ukraine (but possibly also on a widely discussed note from a very influential analyst noted below). Sentiment bounced overnight on news that Russia’s Foreign Minister Lavrov would meet with US Secretary of State Blinken next week in Europe. The S&P 500 index traded yesterday within half a percent of the important downside pivot level of 4,353 before bouncing overnight. Likewise, the Nasdaq 100 edged within a percent of a similar level. Failures of these levels could usher in a test of the January lows.
Hang Seng (HK50.I). Hong Kong and A shares market traded down modestly. Hang Seng was off by 0.48% and CSI 300 came down by 0.3%. Chinese property names rallied. COIL (00688.HK), CR Land (01109.HK) and Greentown China (3900.HK) were up 2.3% to 3.8%. Property name A-shares also outperformed. Banks in a lower-tier city in the Shandong province recently reduced down-payment requirement for first-time home buyers to 20%, down from the previous minimum 30%. NDRC’s decision to build 10 new national computing nexuses and 8 new national data centers boosted the share price of data center tech, cloud computing and big data related companies traded in the A share market.
EURUSD – the influential voice on the ECB Governing Council, chief economist Philip Lane, yesterday said it was unlikely that inflation will drop below the two percent level over the next two years, indicating a shift in his stance and likely raising the odds that the ECB will have to significantly changes its policy stance at the March ECB meeting, something that market has already largely anticipated with the big move off the sub-1.1150 lows. Currently the price action is bottle up between 1.1250 and 1.1500, with a close above 1.1450 needed to indicate upside break potential, and the geopolitical situation linked to Ukraine possibly holding EURUSD back from already challenging that key 1.1500 area.
AUDUSD – there doesn’t seem to be much of a US dollar angle to the bad market nerves of late, as the very weak risk sentiment yesterday failed to boost the traditional safe-haven US dollar as the Japanese yen seemed the safe haven of choice. That leaves the AUDUSD pair in limbo, but looking encouraging for the bulls given the rather firm bid despite volatility elsewhere. Still, the pair needs to break higher through the 0.7250-0.7300+ zone and perhaps even the 200-day moving average a bit higher, currently near 0.7350 to more firmly suggest the lows are in and a real up-trend is unfolding after a brush with the existential 0.7000 level in January. The market may be reluctant to commit to USD direction until the March FOMC meeting unless it receives a signal before then on the Fed’s intentions.
Bitcoin and Ethereum – Bitcoin is trading 7 % lower than 24h ago and Ethereum 6 % down - following the sentiment in the stock market. The crypto market in 2022 has been highly correlated with moves in the stock market - to a much larger degree than in 2021 (correlation coeff. of 0.6 in 2022 vs 0.3 in 2021 for daily Bitcoin returns vs S&P 500).
Crude oil (OILUSMAR22 & OILUKAPR22) oil prices generally ended lower and seem to show a bit of correlation with risk sentiment in recent sessions, with the next key support around the psychological 90 dollar level. The longer term concern that is likely to keep prices relatively elevated, barring a major economic slowdown, is whether sufficient supplies can come online to meet demand as more of the world emerges from the covid pandemic.
Gold (XAUUSD) bulled higher yesterday, testing the 1,900 level for the first time since. It is an impressive surge, given the relative lack of volatility in yields and the US dollar, although bulls will be concerned about the degree to which the current price is an expression of geopolitical concerns linked to the situation on Ukraine’s border, although the idea that the Fed would like to see more asset market volatility (discussed below and in links) rather than merely hiking the policy rate could provide a durable boost to the ultimate hard asset, gold.
US Treasuries (IEF, TLT). Yesterday 30-year US Treasury auction tailed steeply by 5bps as an hawkish Fed drains inflation protection demand. The bid-to-cover was 2.17x, the lowest since 2016 even thought the auction priced at 0.195% the highest yield since February 2020. On the other hand, nominal yields received safe-haven demand contributing to the yield curve shifting lower with 10-year yields dropping below 2%. Uncertainties concerning the Fed’s monetary policies are rising spurring volatility in rates market creating a complex environment for the credit market. That’s why we start to see CLO deals being pulled and a slowdown in junk bond issuance.
European Sovereigns (VGEA). European government bond yields are on their way to the biggest weekly decline since November due to safe-haven demand. At the same time, Lane warned against overacting to high near-term inflation and de Cos said that the central bank should be careful to tighten the economy prematurely in order not to hit demand. The attention of bond market is falling on next week European inflation release.
UK Gilts (IGLT). Money markets pare back on interest hikes expectations in the U.K. declining to 144bps within December even though recent economic data show rising inflation and a tight labour market. The yield curve remains flat, bringing the attention to today’s UK retail sales numbers.
What is going on?
Markets nervous on shelling in eastern Ukraine breakaway regions and fresh warnings from US on Russian troop build-ups and posturing on Ukrainian border. Russia’s Lavrov and US’ Blinken to meet next week in Europe. The news of a meeting of the Russian Foreign Minister and US Secretary of State, if the meeting takes place, would seem to indicate that Russia will hold off from any further major escalation at least until the meeting takes place and the headline of this planned meeting overnight triggered a significant rebound in markets after a very ugly US session yesterday, which was marred by an additional set of shrill US warnings that the Russian presence on Ukraine’s borders is growing and an invasion could be imminent, together with reports of shelling in the eastern Ukrainian breakaway regions in which both sides assessing blame to the other side.
Influential Zoltan Pozsar calls for Fed to bring uncertainty and more volatility to asset markets – In a widely discussed piece yesterday, Pozsar argued that the Fed can’t simply hike the Feds Fund rate brutally and trigger a recession, as this would eventually see it harming the maximum employment side of its mandate. Rather, he called for a “Volcker moment” referring to the respected Fed Chairman Paul Volcker, who was willing to surprise the market with bold moves. In the current context, such a moment would be anything that triggers significant market volatility to improve labor market supply as people currently assuming they can permanently stay out of the work force due to endless strong asset markets in housing and equities would be scared back into the labor force. A brief bio: Pozsar was an expert who helped the US Federal Reserve and Treasury Department to understand the intricacies of the global financial system and craft policy to respond to the global financial crisis back in a period when current Fed Chair Powell was on the Board of Governors.
Iron ore (SCOH20) slipped 1.3% to $129.90. Iron ore shipments from Australia fell from 17 million tones in a week, to 15 million tones (for the week to February 4), somewhat in line with our expectations as the Beijing winter Olympics are underway. As we reported last and this week, we also anticipate the iron ore price to pull back further to about $120, before resuming its long term rebound and uptrend.
BHP (BHP:xasx) shares had a volatile day of trade In Australia today, before ending the week 2% lower despite reporting better than expected profits. BHP is set to pay a record dividend next month US$1.50 per share, far exceeding expectations. Although BHP shares are volatile in the short term, in line with the iron ore price, BHP shares look like they’ll resume the rally up over the long-term term, supported by China’s real estate sector improving. BHP’s CEO Mike Henry also thinks as China moves into its next-five year plan this year, more infrastructure spending will come (which necessitates China buying more commodities).
Walmart (WNT:xnys) reported strong earnings and outlook, ups buyback. Walmart’s shares surged nearly 4% despite a downbeat day elsewhere as the company reported slightly stronger than expected earnings, a more optimistic growth outlook than expected and on the announcement of a $10 billion buyback of its shares
Palantir Technologies (PLTR:xnas) plunged over 15% after reporting earnings yesterday and have lost around 50% over the last year. After a long period of sky-high expectations for the company, it has failed to report positive EBITDA and is still valued at nearly fifteen times sales.
What are we watching next?
Russia-Ukraine headlines or Pozsar comments/next Fed steps– what is the driver here? If the timeline for a meeting next week between Russia’s Lavrov and US’ Blinken (more above) is correct, the market may avoid further weakness if no further worrisome headlines or US warnings or reports of shelling hit the markets today, but traders must also consider that the Pozsar piece that was very widely discussed yesterday could have increased uncertainty on what the Fed may do next, i.e., whether the Powell Fed may take Pozsar’s advice and get a bit more creative in triggering volatility and tightening financial conditions in other ways than merely hiking the policy rate, the anticipation of which has so far mostly just viciously flattened the US yield curve, usually a harbinger of recession. This could take the form of communicating less with the market (Pozsar suggests dropping press conferences) or for example eliminating the Fed policy forecasts, the so-called “dot plot” as soon as at the March meeting, or merely indicating such a shift in posture. More thoughts on Pozsar’s piece in yesterday’s FX Update: Could the Fed change its tightening approach, and from Bloomberg.
Earnings Watch. Earnings season is beginning to wind down and today offers few reports, including the French electricity utility that has been forced to eat some of the losses of the huge spike in power prices this winter by the French government. German insurance giant Allianz and the interesting US agricultural equipment maker Deere are also in focus, the latter after one of the largest surges in grain prices in years.
Economic calendar highlights for today (times GMT)
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