What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - yesterday’s higher than expected inflation figures in the US caused long-term interest rates to go up dragging down equities with Nasdaq 100 futures leading the declines. Overnight in China, Evergrande was said to have paid due payments on three USD bonds, which has been confirmed by investors, lifting sentiment in global equities again. Nasdaq 100 futures are bouncing higher this morning in early European trading around the 23.6% retracement level at 16,028, with the next resistance level sitting around 16,107.
EURUSD – the hot US CPI number took the US dollar stronger across the board and finally sent EURUSD down through 1.1525 area lows and the psychological 1.1500 level for the first time since July of last year. The next level of note to the downside is the 1.1290 level, the 61.8% retracement of the entire rally sequence from the post-pandemic outbreak lows last spring, with the 1.1500-1.1525 zone as the tactical resistance.
USDJPY – with US yields rising steeply yesterday in the wake of the US CPI data and after two weak auctions for longer term treasuries this week, USDJPY rose sharply back into the range capped by the 114.70 top last month. New highs and a sustained attack on 115.00+ will likely require that US long yields post new highs for the cycle above 1.75% for the 10-year treasury benchmark.
Crude oil traded sharply lower yesterday after once again finding resistance near the recent highs, and both WTI and Brent increasingly look like they are settling into a wide range. The latest weakness being driven by Biden’s statement that reversing inflation has become a top priority, especially in energy. Measures that could be introduced include the release of Strategic Petroleum Reserves and even banning exports. Adding to this lower gas prices in Europe - as Russia finally increases supply – which is likely to reduce gas-to-oil demand. Brent will once again be looking for support at $80 and WTI a couple of bucks lower. On tap today the monthly Oil Market Report from OPEC.
Gold (XAUUSD) smashed through $1835 yesterday after US October CPI reached the highest level in over 30 years (see below). Supported by US 10-year real yields falling to a record low at minus 1.25 percent, it reached a high of $1868, before paring back some of the gains as the dollar jumped with traders raising US rate hike expectations for 2022 and following a badly received 30-year bond auction. However, gold’s ability to withstand the rising dollar has lifted XAUEUR to a one-year high at €1615/oz. Silver (XAGUSD) meanwhile trades above the previous double top at $24.86. With the US bond market closed for Veteran’s Day, the market will be focusing on whether gold can build on the break or return to test resistance-turned-support at $1835. Also, ETF holdings will now be in focus to see if the break will trigger renewed interest following months of redemptions.
US treasuries (TLT, IEF, SHY). Yesterday’s strong CPI numbers provoked a bear flattening of the yield curve with the belly rising by 5bps and the long part of the yield curve remaining stable. Things changed quickly with the disastrous 30-year US Treasury auction, which saw yield tailing by 5.2bps the biggest on record for this tenor. Indirect bidders fell to 59%, the lowest since November 2019. Consequently, long term yields began to soar with the 30-year yields spiking as much as 13.5bps hitting 1.99% in yields and 10-year yields rising to 1.58% before reversing some of the moves. It shows that investors are reluctant to add on duration at current yield levels as inflation soars and the Fed is tapering. Next week the US Treasury is selling 20-year notes, a much less popular tenor than this week’s benchmark 10-year and 30-year tenors, promising more volatility.
German Bunds (IS0L). European sovereigns were not immune to the volatility in US rates. However, while in the US the yield curve was bear-flattening, in Europe the Bund yield curve has bear-steepened by 4bps. The reason for this divergence lays in the fact that interest rate hikes expectations in Europe come much later than in the US, moving long-term yields. Ten-year Bunds are now trading well above their 200 days MA in an ascending trend above –0.25%.
UK Gilts (IGLT). Gilt yields followed the move of rates in the US and in Europe following the strong US CPI numbers. However, this morning Q3 GDP and output numbers disappointed, paving the way for the rally in Gilts today. The market is still pricing four interest rate hikes in 2022, giving investors plenty of room to scale back further on rate hikes expectations.
What is going on?
US October CPI rises to highest in 30 years. Both the core and headline CPI readings rose to their highest level since the early 1990’s, with the headline CPI rate rising +0.9% month-on-month and 6.2% year-on-year, versus +0.6%/+5.9% expected, respectively and the “ex Food and Energy” rising +0.6% month-on-month and +4.6% year-on-year vs. +0.4%/+4.3% expected, respectively. While the narrative had developed in the wake of the FOMC meeting last week that the Fed would look through high inflation numbers, preferring to focus mostly on the labor market, these numbers were sufficiently hot to jolt the market, raising Fed rate hike expectations for next year.
There is no clear winner of the first TV debate of the centre-right primaries for the 2022 French presidential election. There are five candidates: the deputy Eric Ciotti, the former EU Brexit negotiator Michel Barnier, the former Sarkozy ministers Valérie Pécresse and Xavier Bertrand and the doctor and former European deputy Philippe Juvin. In 2016, the primaries revealed shark divisions between frontrunners. It did not happen this time. It was a very polite discussion about the future of France. Deep divisions appeared about the use of wind power. Pécresse and Ciotti tried to seduce former François Fillon’s voters with fiscal conservatism. Ciotti proposed the introduction of a flat tax at 15% and the end of inheritance tax. Barnier defended his idea of a moratorium on immigration. Criticisms were concentrated against Macron who is still miles ahead of the pack in all recent polls. The first round of the primaries will be on 1 and 2 December and the second round on 3 and 4 December.
Evergrande pays overdue interest on three bonds. Chinese equities are up 2% today on the news that the battled real estate developer Evergrande managed to pay overdue interest on three bonds worth $148mn.
Elon Musk has sold $5bn worth of Tesla shares. The selling of shares was part of paying for taxes related to Musk exercising 2.15mn options with an exercise price at $6.24. Tesla’s share price has recovered from the last couple of ugly trading sessions closing at 1,067.95 yesterday.
Australia’s Unemployment Rate spiked higher in October – coming in at 5.2% vs. 4.8% expected and 4.6% in September. The rise is mostly down to workers that were not able to work during the pandemic streaming to re-enter the workforce as lockdowns have ended, which is likely a transitory phenomenon. Australian yields at the short end of the curve were stable after a rise yesterday, suggesting the market is taking the data in stride.
Tencent sees lowest revenue growth since 2004. The technology crackdown in China, in for example gaming, is now finally showing investors what it means, with Tencent revenue growth at 14% y/y in Q3, the lowest rate in 17 years. As we expect regulation to continue until the Party Congress in October next year, investors are still in the darkness about where longer-term growth rates will settle.
European stocks to watch this morning. Siemens is reporting better than expected Q4 (30 September) revenue but missing on adjusted EBITDA in its industrial businesses, making the result a mixed bag. But most importantly, Siemens is guiding higher margins for next year and the company is saying that it expects to pass on all input costs. ArcelorMittal reports Q3 revenue and EBITDA a bit lower than estimated saying that China’s housing slump is negatively impacting steel demand. Finally, Delivery Hero is out lifting its revenue guidance following a strong Q3 on revenue and gross merchandise value, but on the negative side the company is not lifting its margin expectations.
US earnings recap. Disney shares were down 4% yesterday on Disney+ subscriber numbers disappointing while revenue was in line with expectations. The entertainment company remains optimistic that subscriber growth will remain strong over the next fiscal year. The women-focused dating app Bumble smashed estimates and raised its guidance for FY21, but investors were focusing on the paying user number missing estimates sending shares lower. Beyond Meat shares were down 12% on Q3 figures missing estimates and Q4 guidance on revenue coming in way lower than consensus.
What are we watching next?
Who will US President Biden nominate to head the Fed next February? We have written on this extensively before, we will merely keep this short notice as a placeholder reminder that this could generate significate short term volatility on the choice of the nominally more dovish Lael Brainard over current Fed Chair Powell, though we see little difference in the implications for monetary policy, and the Fed is likely to get a stronger new regulatory position either way.
Earnings Watch – today our earnings focus in the US is Coupang, the South Korean e-commerce giant, that recently IPO’ed and is backed by SoftBank Group. Coupang is doing an internationalization which will be key for the company’s long-term growth so the company’s progress outside South Korea will be key to watch.
Thursday: Brookfield Asset Management, Siemens, Merck KGaA, Deutsche Telekom, Hapag-Lloyd, Semiconductor Manufacturing, Generali, Nexi, ArcelorMittal, Coupang
Friday: KBC Group, AstraZeneca, Richemont, Pinduoduo, Li Auto
Economic calendar highlights for today (times GMT)
1215 – ECB Chief Economist Lane to speak
1600 – ECB's Schnabel to speak
1900 – Mexico Central Bank Rate Announcement
During the day: OPEC’s Monthly Oil Market Report
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