Market Quick Take - January 25, 2022
Saxo Strategy Team
Summary: US equity futures trade lower following yesterday’s rollercoaster market which saw the Nasdaq at one point trade down more than 5% before recovering into the close. Sentiment remains weak amid concerns about tightening monetary policy, geopolitical tension and increased volatility, making it difficult to navigate the markets. The Cboe VIX index raced to a 15-month high at 39% before ending the day at 30%. Softer treasury yields and firmer gold both indicating safe haven buying while the dollar trades near a two-week high. Focus on Ukraine developments and the FOMC meeting which concludes Wednesday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures trade lower following a late rebound in yesterday’s session. At one point the VIX index hit a 15-month high at 39% with both equity indexes falling by more than 5%. A move that according to JP Morgan to some extent was driven by retail investors dumping more than $1.4 billion worth of stocks before lunchtime. The repricing of richly valued stocks to reflect a more subdued outlook into a rising interest rate environment may have further to go, and with the sentiment being as fragile as it is, investors need to trade cautiously.
Hang Seng (HK50.I) opened 1.64% lower and stayed down throughout the day while in China, the CSI 300 touched a six-month low. In Hong Kong, weakness was seen across-the-board with the education sector being particularly hard hit. Mainland real estate group, Shimao (0813.HK) rallied 7.5% on report about plans to sell over RMB 77 billion assets to improve its financial flexibility. For the rest of Q1, the Hong Kong stock market, may benefit from low valuation and pro-growth policies in mainland China, driving continued relative strength versus the U.S. markets and A-shares.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin went all the way down to the USD 33k level yesterday before bouncing back, and it is currently trading just below USD 36k. According to CoinShares' Digital Asset Fund Flows report published yesterday, crypto funds saw first week with net inflow in five weeks, indicating a positive sentiment from investors. Ethereum-based products are, however, still in net outflow, according to the report.
USDJPY and JPY crosses - the combination of cratering risk appetite last week with safe-haven sovereign bonds catching a bid and yields falling has seen a sharp recovery in the Japanese yen, taking USDJPY down to twice challenging the 113.50 pivot low from mid-month, a break of which could open up for the 112.50 area lows of last October. The major pivot lows are also coming back into view in other major JPY crosses, like EURJPY, where the prior break below 128.00 failed to stick. Lower long US yields after the FOMC meeting this Wednesday would likely be needed to support further JPY strength.
Crude oil (OILUSMAR22 & OILUKMAR22) followed US stocks higher into the close yesterday and so far, today we are seeing gains across the energy sector except for US natural gas (NATGASUSFEB22), trading lower in anticipation of warmer East Coast weather. Crude oil, just like several other commodities, is currently stuck between supporting internal fundamentals (tight supply struggling to meet rising demand) and the general deterioration in sentiment across other markets. An escalating situation in Ukraine potentially having widespread implications for energy and commodity markets in general. Brent has settled into an $85 to $90 range.
Gold (XAUUSD) trades higher, but still below key resistance, with rising stock market volatility potentially putting a lid on a further rise in bond yields for now. Continued weakness may trigger a rethink at the Fed regarding how hawkish a message it wants to send to the market following tomorrow’s FOMC meeting. Following the biggest ETF net inflow in 18 months on Friday, driven by demand for the GLD:arcx, total holdings rose again on Monday to near a four-month high. Semi-growth dependent metals, such as silver (XAGUSD) and platinum (XPTUSD) have reversed lower, thereby removing some of the support that last week helped push gold above resistance-turned-support at $1830. Resistance at $1850 followed by the November peak at $1877.
US Treasuries (IEF, TLT). Yesterday, a stellar 2-year US Treasury auction showed that the market is not convinced the Fed will hike four times this year. The auction stopped through by 1.2bps, the bid-to-cover was at 2.81x versus 2.5x the six auctions average, and indirect bidders were at 66% the highest since June 2009. The auction priced with a high yield of 0.99%, to drop to 0.91% in the aftermath of the auction. In the meanwhile, market’s rate hike expectations for 2022 dropped below four. We expect an economic slowdown and geopolitical tensions to keep yields compressed, particularly in the long part of the yield curve.
What is going on?
Australian Inflation rose far more than expected last month. The 3.5% yoy rise vs 3.2% expected was the fastest pace since 2008 and well above the RBA 2-3% target, thereby raising the prospect for the RBA raising rates sooner than planned. The jump was driven by a 32% YOY surge in fuel prices with this category jumping to a record. Australia’s benchmark 3-year bond yield jumped 0.9% to 1.44% and highest level since April 2019, while the Australian dollar rose before resuming its current downtrend. The ASX is now pricing in a 0.25% interest rates rise by May, with a total of four interest rate hikes in 2022.
Decoupling Europe? Germany January flash PMI surprised on the upside. It was out at a 4-month high at 54.3 (versus prior 49.9). Growth was mostly led by a stronger performance from the manufacturing sector (PMI at 60.5) as supply bottlenecks showed further signs of easing. This seems to indicate the German economy has rebounded in January. France’s PMI went in the opposite direction. It was out at a 9-month low of 52.7 in January. The services sector saw a marked slowdown due to weaker demand and staff shortages. The eurozone PMI was slightly lower at 51.2 versus prior 53.1 in December too (see our full report).
Meta announces the world’s fastest supercomputer by end of 2022. The company’s new AI Research SuperCluster (RSC) is expected to become the fastest computer in the world this year consisting of 16,000 Nvidia A100 GPUs. The new computer is essential for the company’s vision of the metaverse. In addition to Nvidia as a partner, it has chosen Pure Storage as its storage partner which will make it possible to learn from trillions of data points.
Earnings recap. IBM reported better than expected Q4 revenue showing the best sales growth in 10 years on its cloud business driving shares 3% higher in extended trading. Ericsson has reported Q4 revenue and operating profit figures ahead of consensus raising dividends which we expect investors will reward in today’s session. The Ericsson CEO says that the company has so far been able to mitigate inflation and supply constraints will continue into 2023.
Very weak U.S. January flash PMI. The manufacturing PMI dropped from 57.7 to 55.0 (expected 56.8) and the services PMI collapsed from 57.6 to 50.9 (expected 55.0). This is the lowest print since July 2020 and since October 2020, respectively. Markit notes that most of the drag was caused by the spread of the Omicron variant. If this is true, the downturn might be temporary.
The U.S. put as many as 8,500 troops on heightened alert for deployment to Europe, while NATO said it would shore up its defenses in eastern Europe in a bid to deter a new Russian invasion in Ukraine. "It's very clear that the Russians have no intention right now of de-escalating," U.S. Defense Department spokesman John Kirby said. President Biden said there was "total unanimity" during an 80-minute call with European leaders including Emmanuel Macron and Olaf Scholz. (From Bloomberg Daybreak)
What are we watching next?
Wednesday’s FOMC meeting is going to be pivotal across assets. The market is pricing four interest rate hikes in 2022 with one coming into play already in March. It will be key to understanding whether the Fed is going to match market expectations or if it is leaning towards implementing rate hikes with balance sheet policies to tighten the economy. That could have an impact on the shape of the yield curve as well as the market’s risk appetite.
Portugal legislative elections on 30 January – In December 2021, President Marcelo Rebelo da Sousa called for snap elections after the incumbent Socialist government under Antonio Costa failed to get its 2022 budget proposals approved by the Parliament. Opinion polls suggest that the Socialist Party, who has been in power since 2015 with support from the far-left, is likely to win the election. The far-right Chega (meaning ‘Enough’), which entered parliament in 2019, could perform quite well. A Pitagorica survey released on 22 January shows it could be the third party in parliament (support is stable at 6.5%).
French presidential election update – The ‘Popular Primary’, a left primary organized by a group of civil society activists, will take place from 27 to 30 January. The aim is to pick a single official left candidate for the presidential election. Already 467,000 citizens have registered (for comparison, there were around 122,000 registered voters to the Green primary of September 2021). But this primary will be a failure. All the lead candidates refuse to participate, except for the former Hollande minister, Christine Taubira. In our view, the Left will not play a major role in the 2022 presidential election, no matter what the outcome.
Earnings Watch. Earnings are down 2% q/q in S&P 500 and 1% q/q in MSCI World highlighting those earnings are under pressure due to rising input costs. This week is important for sentiment given we have many mega caps reporting earnings starting today with Microsoft, Johnson & Johnson, and American Express.
- Today: Coloplast, Atlas Copco, Ericsson, Microsoft, Johnson & Johnson, NextEra Energy, Texas Instruments, American Express, General Electric, 3M, Moderna
- Wednesday: Christian Dior, Nidec, FANUC, Lonza Group, Tesla, Abbott Laboratories, Intel, Boeing, Freeport-McMoRan, Southern Copper
- Thursday: LVMH, STMicroelectronics, Sartorius, SAP, Deutsche Bank, Unicredit, Diageo, Apple, Visa, Mastercard, McDonald’s
- Friday: Volvo, H&M, Givaudan, Chevron, Caterpillar, Colgate-Palmolive
Economic calendar highlights for today (times GMT)
- 0800 – Spain Dec PPI
- 0900 – Ger Jan IFO Business Climate
- 1100 – UK Jan CBI Business Optimism
- 1300 – Hungary Rate Decision
- 1500 – US Jan Consumer Confidence
- IMF Launches the World Economic Outlook Update
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