What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - with Nasdaq 100 futures firmly above the lows from last week trading just above the first retracement level (23.6% at 14,428), the next natural pivot point for this index is the 15,000 level, which is where the 200-day moving average sits. The move higher in the US 10-year yield seems to have stopped for now and with that some improved sentiment in US equities, but risk-off in US equities this week will come from any attempt to break higher in long-term US yields, so this is key focus for equity traders. It is also another week with many key earnings releases which will influence equities.
Hang Seng (HK50.I) rebounded more than 1% in half-day trading ahead of the long holiday while the Hang Seng Tech Index was up 2.4%. Mainland China markets will be closed all week for Lunar New Year Holiday. China released in line with expectation manufacturing and non-manufacturing PMIs for January over the weekend, both hovering slightly above the expansion/contraction 50 mark at 50.1 (vs 50.3 in December) and 51.1 (vs 52.7 in December) respectively. Caixin Manufacturing PMI fell to 49.1 (from 50.9 in December), weaker than the consensus expectation. Under these headline numbers, there was a broad-based weakness across sub-indices, including new orders and employment.
EURUSD - the EURUSD supermajor plunged last week to new lows for the cycle, south of the 1.1186 low-point for 2021 posted in late November. Most of the move was on the market’s hawkish read of Powell comments at the FOMC press conference. It would likely take an unanticipated change of tone at this Thursday’s ECB meeting, where the key ECB leadership maintains a dovish policy outlook and refuses to signal any guidance on rate lift-off, for the EURUSD to find significant support. The move lower last week now opens up the next major round level of 1.1000 and possibly more to the downside.
AUDUSD – The Aussie is in focus tonight over the RBA meeting, at which the RBA is finally set to end QE and may guide on the timing of interest rate policy lift-off (see more in RBA preview below). The meeting comes after a week that saw the AUDUSD pair interacting with the major range lows just south of 0.7000 on a hawkish read of the FOMC meeting. With the galloping hawkishness of the Powell Fed of late, the 2-year yield spread between Australia and the US has plunged to near the post-pandemic outbreak lows below –25 basis points. The RBA may need to loosen up its forward guidance to allow for the possibility that inflationary risks are mounting, and a weak currency is an additional risk on the inflation front, but will Governor Lowe make that move? He will also be out speaking on Wednesday.
Crude oil (OILUSMAR22 & OILUKMAR22) trades near last week’s cycle high in Asia with tight conditions pointing to a growing imbalance between strong demand and supply struggling to keep up. Continued tensions over Ukraine still attracting some attention as well while OPEC+ meets on Wednesday to assess the market and agree on production targets for March. Instead of the expected 400k barrels per day increase, the market is more interested in finding out how much the group can deliver after more than half of its members struggled in recent months, thereby supporting a continued rally.
Gold (XAUUSD) traders will be watching gold’s behavior around the $1880 as a gauge for the underlying strength and sentiment. This following last week's hawkish Fed driven dump which occurred just after speculators had bought a significant amount of gold, both via futures and ETFs (see below). The market was spooked by the risk of a rate hike at every meeting driving the dollar and yields higher, and for the sentiment to turn more favorable gold as a minimum need to break resistance in the $1802-08 area. Silver (XAGUSD), the worst performer of all commodities in January needs to hold $22 with a break sending the metal lower towards the double bottom at $21.45.
Iron ore futures (SCOH2) marked the start of the Chinese New Year holiday by slumping 7% after soaring to a near five-month high at $147 on Friday. Reduced activity over the coming period together, lower manufacturing activity in January and the Chinese authorities vowing to crack down on speculation by strengthen the oversight of prices. Iron ore has surged this January on expectations that China will boost infrastructure spending and further ease monetary policies to support a slowing economy.
US Treasuries (IEF, TLT). After last week’s FOMC meeting, more bear-flattening of the yield curve is to be expected as interest rate hikes expectations advance. The Federal Reserve is looking to use interest rate hikes as primary tool to tighten the economy. It means that the front part of the yield curve will continue to rise as the Fed becomes more aggressive while long-term rates will remain compressed due to growth fears. This week there is no major auction, however we have several Fed’s officials speaking today and on Thursday. The yield curve looks close to invert between seven and ten years, while the 2s10s spread tightened by 20bps last week hitting 60bps for the first time since October 2020.
Italian BTPS (BTP10). Sergio Mattarella has been elected president of the republic for a second mandate, leading to a status quo that appeals foreign investors. Therefore, we can expect the BTP-Bund spread to tighten this week to reflect a decrease in the country’s political risk. Ten-year BTPS yields could fall to test support at 1.2%. However, as volatility will continue to remain high in the rates market, we can expect the BTP-bund spread to resume its widening soon in the future. The ECB meeting this week could be pivotal to renew volatility in European sovereigns as the market wonders what the central bank’s position is going to be on the face of high inflation.
Gilts (IGLT). The market is expecting a 25bps interest rate hike this week from the BOE, which could lead to the beginning of QT in March. Therefore, we could see the yield curve shifting higher across maturity on the back of the monetary meeting.
What is going on?
US Fed’s Bostic says 50 basis point hikes a possibility if needed. Raphael Bostic, president of the Atlanta Fed, which does not vote in FOMC meetings in 2022, said in an interview with FT that his baseline prediction is for three quarter-percent rate hikes this year, but said that “every option is on the table for every meeting” and “If the data say that things have evolved in a way that a 50-basis point move is required or appropriate, then I’m going to lean into that.” The market has priced almost five rate hikes into forward expectations for the Fed through the December FOMC meeting.
U.S. inflation is uncomfortably high. U.S. core PCE (the Fed’s preferred measure of inflation) reached 4.9 % in December 2021. The last time it was at 5 % was in September 1983. The increase over the past three months is even higher, at 5.8 % (annualized). In addition, the employment cost index was up 1 % in Q4 2021 and 4 % year-over-year. This is high. But less worse than feared. Overall, our assessment is that pricing pressures are still accelerating.
China Jan. Caixin Manufacturing PMI slips into contraction, with a reading of 49.1 versus 50.0 expected and 50.9 in December. The official Jan. Manufacturing PMI was also out at the weekend showing reading of 50.1 vs. 50.0 expected and 50.3 in December. The Non-manufacturing PMI was 51.1 vs. 51.0 expected and 52.7 in December.
Ryanair sees bigger losses than expected. Europe’s biggest low-cost carrier saw Q3 (ending 31 Jan) net income loss of €96mn vs est. €21mn due to the Omicron related impact on travel activities. The company says it will prioritize filling up planes instead of focusing on prices, and the company has chosen to hedge fuel 15 months out.
France economic growth bounces back relative to EU peers. France’s GDP was out at 0.7 % in Q4 2021. After -8 % in 2020, France’s GDP growth reaches 7 % in 2021. The carry over for 2022, which is closely monitored by economists, is very strong at 2.4 %. Strong private consumption coupled with smart and efficient economic policies introduced to mitigate the impact of the pandemic explains this historic rebound. France’s “whatever it takes” worked well. In the rest of Europe, Germany’s GDP contracted in the fourth quarter last year (-0.7 %), as expected by the economist consensus. In Spain, GDP growth was solid in Q4 2021 (2.0%). The inflation headache remains, however. But there are early positive signals. Germany’s import prices fell slightly in December, at 24 % year-over-year versus prior 24.7 % and expected 26.4 %. In France, producer prices fell too, at 1% in December month-over-month (prior 3.9 %). This is mainly explained by the drop in energy prices observed in December. Finally, Italy’s consumer confidence disappointed in January. It fell to 114.2 from 117.7 in December but remains above its long-term average.
The Commitment of Traders report covering the week to January 25, the day before the FOMC meeting, saw dollar selling extend to a second week during which time the length was reduced by 40%. The reduction being primarily driven by euro and yen buying which helps explain the aggressive nature with which both currencies sold off following the hawkish FOMC meeting. Speculators were also wrongfooted in gold where a pre-FOMC rally helped drive a 39% increase in the net long.
What are we watching next?
Australia’s central bank, the RBA holds its interest rate meeting tonight (Asia’s Tuesday session), with traders expecting the RBA to finally end its QE purchase and will watch for guidance on rate hikes for the balance of this year. Market expectations are for the RBA to raise official interest rates four times this year, with the first hike expected in May or June. It follows Australia recording its hottest inflation in 14 years in Q4, with CPI rising 3.5% year on year. That’s far above the RBA target of 2-3% inflation year on year. The biggest contributor to rising prices has been fuel prices, which surged 32% YOY to a record high CPI fuel price reading. The RBA has declared that it is focused on wage inflation as the primary risk for a rising price spiral and despite a rapidly tightening labor market, the most recent readings on wages remain subdued.
Hearings for three Fed nominees for the Board of Governors on Thursday – these include Lisa Cook and Philip Jefferson, two economists thought to hold dovish views on policy and Sarah Bloom Raskin, who is nominated for the role of Vice Chair of supervision at the Fed. The US Chamber of commerce recently sent an article to the Senate warning of Raskin’s views on oil and gas as she has called for cutting off access to support for the oil and gas industry from the federal governments. This was an unprecedented move.
On Monday Jan 31, markets are closed in China, Hong Kong, South Korea, Taiwan and Vietnam for Chinese Luna New Year Holiday. China’s market closed all week.
Earnings Watch. This is the most important earnings week during the Q4 earnings season with large important companies reporting across both the US and Europe, and across many key industries. For the main US equity indices earnings from Amazon, Alphabet, and Meta are the key ones to watch, and in Europe the main earnings this week are Novo Nordisk, Roche, Novartis, UniCredit, and Shell.
- Today: Ryanair, Komatsu, NXP Semiconductors
- Tuesday: Novozymes, Keyence, UBS Group, Exxon Mobil, PayPal, UPS, AMD, Starbucks, Gilead Sciences, GM, Electronic Arts
- Wednesday: Novo Nordisk, Orsted, Kone, Sony, Mitsubishi UFJ Financial, Denso, Prudential, Telenor, Banco Santander, Hexagon, Swedbank, Novartis, Alphabet, Meta Platforms (Facebook), Alibaba, AbbVie, Qualcomm, Thermo Fisher Scientific, Ferrari, Spotify Technology, DR Horton
- Thursday: Suncor Energy, Danske Bank, Nokia, Dassault Systemes, Siemens Healthineers, Infineon Technologies, Merck KGaA, Enel, Nintendo, SoftBank, Mitsubishi, Takeda, Shell, ING Groep, BBVA, Siemens Gamesa Renewable Energy, Nordea, Roche, ABB, Amazon, Eli Lilly, Merck & Co, Honeywell, ConocoPhillips, Estee Lauder, Ford Motor, Fortinet,
- Friday: Carlsberg, Sanofi, Vinci, UniCredit, Intesa Sanpaolo, Assa Abloy, Bristol-Myers, Regeneron Pharmaceuticals
Economic calendar highlights for today (times GMT)
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- 0800 – Spain Jan. Flash CPI
- 1000 – Euro Zone Q4 GDP Estimate
- 1300 – Germany Jan. Flash CPI
- 1445 – US Jan. Chicago PMI
- 1530 – US Jan. Dallas Fed Manufacturing Activity
- 1630 – US Fed’s Daly (Non-voter) to speak
- 0030 – Australia Q4 Retail Sales
- 0330 – Australia RBA Meeting