What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities were capped after trading briefly to new record highs for the cycle, with traders perhaps pressing pause ahead of a key FOMC meeting that seems inevitably set to bring a QE tapering announcement, though the bar may be low for a “hawkish” surprise from Powell and company tomorrow. The market is so extended to the upside, that there is plenty of room for consolidation here without reversing the strong rally wave – as the S&P trades some 125 points above its 21-day moving average (4,478) and the Nasdaq 100 trades a remarkable 600+ points above its 21-day moving average (15,250).
EURUSD – the EURUSD supermajor is churning after the huge sell-off on Friday yielded to a significant bounce yesterday that leaves the pair back mid-range as we await the FOMC’s impact on the US dollar on the one hand, and the sense to which the market will continue to price in existential strains for Europe on the other, as EU peripheral sovereign yield spreads have widened sharply (see more with Italian BTP comments below) and EURCHF dropping toward cycle lows also suggests something is amiss for the euro. On the other side of this week’s key event risks through the US jobs report Friday, the bulls need a close above 1.1700 and the bears a close south of 1.1525.
AUDUSD – the RBA meeting overnight certainly marked an important shift in the central bank’s policy versus the prior meeting, but the slow timeframe of potentially tapering assets (policy to be revisited in February – more below) and cautious outlook on inflation and wages were rather dovish relative to where the market was pricing the bank in the wake of it proving that the Bank was set to abandon its yield-curve-control policy. AUDNZD is perhaps a more pure expression of the potential for this dovishness to weigh on the Aussie, but we also watch AUDUSD, where the critical 0.7500-0.7600 zone held back the rally, and the recent highs right on the 200-day moving average near 0.7555 are the key resistance. Watching how the FOMC affects the USD after tomorrow now for further developments.
Crude oil futures rose yesterday with the market worried OPEC+ will not step up its monthly pace of production increases, currently at 400,000 barrels. The group meets on Thursday and in addition to agreeing production levels for December they must also consider what to do with Nigeria and Angola. Various production problems have seen output from these two African producers fall behind their allocated quotas by around 450,000 barrels per day. In addition, the market will also be watching Wednesday’s EIA stock report to see whether stock levels at Cushing have stabilised after slumping to a three-year low.
Industrial metals remain under pressure amid growth concerns in China and elevated inflation. In addition, energy-intensive industries, including aluminum smelting and steel producers have been required to curb production. Due to these curbs, growth worries and China’s housing sector under pressure from rules aimed at curbing leverage, China’s daily steel output dropped to the lowest since March 2020 last month, and as a result, iron ore the key ingredient in the production of steel has slumped again with iron ore futures in Singapore trading 7% lower overnight to $93.4/ton. Copper meanwhile trades near its lowest in three weeks after reversing sharply lower today in Asia. Having now retraced more than 61.8% of the early October surge, the short-term outlook once again looks somewhat challenged.
US treasuries (TLT, IEF, SHY). Powell is facing a difficult press conference tomorrow after the FOMC meeting. The market will focus on the possibility of multiple interest rate hikes next year and volatility might arise regardless of what the Fed Chair says. If the Fed looks open to earlier hikes, the front part of the yield curve might move higher. However, if the Fed pushes back on this notion, breakeven rates might resume to soar. Investors have to be cautious. Short interest on TLT hit a record high. Any surprise might provoke a short squeeze that could provoke a sudden drop in long-term yields. More flattening of the yield curve can be expected.
Italian BTPS (BTP10). The BTP-Bund spread continued to widen yesterday as investors fear the ECB is turning hawkish. The move might have been intensified by a quiet trading day as many Southern European countries were celebrating a public holiday yesterday. Although it is likely that the BTP-Bund spread continues to widen in the short term, we cannot forget that favorable financing conditions in the euro area are a key target for the ECB. Thus, if the selloff intensifies, we can expect the central bank to intervene. That might happen when the BTP-Bund spread hits 150bps. In the long-term, we are still constructive for the spread to tighten especially if a traffic light coalition will lead the next German government.
What is going on?
Australia’s RBA abandons yield curve control, introduces more flexible guidance. The Aussie traded a bit softer after its recent strong run on the back of the market correctly predicting that the RBA would have to climb down from its commitment to control the official yield at 0.10% all the way out to the April 2024 Australian Government bond. In last night’s extensive statement from the RBA, the bank did officially abandon this policy, merely keeping the cash rate at 0.1% and promising to revisit its current rate of QE purchases in February (some were perhaps expecting a tapering already now). The bank took pains to describe the conditions necessary for rate lift-off, which it still connects with wage rises more than realized inflation, and claimed that the latter would likely be lower than in other countries. The bank loosened up forward guidance, allowing that economic improvement may prove sufficiently robust to hike rates by late 2023. (The market is still pricing lift-off for around the middle of next year.) All in all, this was a dovish statement, certainly relative to the RBNZ.
US October ISM Manufacturing shows strong reading - the October ISM reading was out at 60.8 vs. 60.5 expected and 61.1 in September, still showing strong expansion, but the new orders component backed down to a still-strong 59.8 versus a blistering 66.7 in September. The internals are also clearly showing severe supply-constrained conditions, as manufacturers complained of parts shortages, transportation delays, difficulty finding workers and other problems hampering production. The Prices Index was out at 85.7, a three-month high.
What are we watching next?
Governor’s election in US state of Virginia - the election in Virginia is seen as a close contest between Democratic former governor Terry McAuliffe and a political novice Republican businessman Glenn Youngkin. The race is very close, with polls suggesting strong momentum for Youngkin and a possible win for the Republican in a state that was one by Biden by 10 points in the 2020 election just a year ago. This suggests that the Republicans could see a strong surge in the 2022 election and that the time of full Democratic control of both houses of Congress is running short.
Key week ahead for USD on FOMC meeting and US data. The US dollar made a steep recovery on Friday as markets have rushed to reprice central banks’ rate hike intentions significantly higher, suggesting that forward guidance from central banks is not working so well anymore. With the Fed seen as badly behind the curve in unwinding its QE and providing an appropriate time frame for eventually hiking rates, it will be interesting to see how far they are willing to make that admission at the meeting on Wednesday, and even if so, whether the market will front-run or second guess their attempt at forward guidance anyway, much as market pricing has made a mockery of ECB and RBA forward guidance last week. On top of that, we have important economic data all week from the US, starting with the October ISM Manufacturing survey today, the October ISM Services survey on Wednesday and the latest jobs report on Friday, with perhaps extra focus on whether earnings are starting to rise more rapidly, feeding anticipation of a wage-price spiral.
The UN Food-price index, already at a decade high, will be updated on Thursday, and the latest print may point to more pain with wheat futures nearing a record due to strong export demand from key buyers in North Africa, Middle East and China. Palm oils at an all-time high as labour shortages curb Malaysian production while corn has moved higher recently on strong ethanol demand and soaring fertilizer and diesel bills for farmers. Skyrocketing fertilizer prices due to soaring natural gas forcing some EU producers to halt or curtail production have raised concerns farmers may cut demand, thereby reduce yields, or shift acres into less nutrient intensive crops.
Earnings Watch – This week is another busy week on earnings with almost 400 earnings releases among the global universe of companies we track during the earnings season. While last week was about technology stocks this week is more diversified, with some of the largest companies in the green transformation space reporting earnings, such as Orsted, Vestas, and Siemens Gamesa.
Tuesday: Thomson Reuters, Maersk, HelloFresh, Z Holdings, BP, DSM, Pfizer, T-Mobile US, Amgen, Estee Lauder, ConocoPhillips, Mondelez, KKR, Activision Blizzard, Vertex Pharmaceuticals, Global Payments
Wednesday: Novo Nordisk, Orsted, Vestas Wind Systems, BMW, Zalando, Intesa Sanpaolo, Qualcomm, CVS Health, Booking, Marriott International, Roku, Electronic Arts, Etsy, HubSpot
Thursday: Verbund, Barrick Gold, Societe Generale, Siemens Healthineers, Deutsche Post, Vonovia, Enel, Toyota, SoftBank, Nintendo, ING Groep, Credit Suisse, Moderna, Square, Airbnb, Zoetis, Uber Technologies, MercadoLibre, Illumina, Cloudflare, Datadog, Carvana, Pinterest, Peloton Interactive
Friday: Enbridge, TC Energy, Honda Motor, Amadeus IT Group, Siemens Gamesa, DBS Group, Alibaba, EOG Resources, DraftKings
Saturday: Berkshire Hathaway
Economic calendar highlights for today (times GMT)
0730 – Switzerland Oct. CPI
0815-0900 – Euro Zone Oct. Final Manufacturing PMI
1120 – ECB's Elderson to speak
1155 – ECB's de Cos to speak
1230 – Canada Sep. Building Permits
2000 – New Zealand RBNZ to publish Financial Stability Report
2030 – API weekly report on U.S. oil inventories
2145 – New Zealand Q3 Average Hourly Earnings
2145 – New Zealand Q3 Employment Change/Unemployment Rate
0030 – Australia Sep. Building Approvals
0145 – China Oct. Caixin Services PMI
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