Summary: Markets closed on a hopeful note last week in the US, despite the hottest inflation data for the for the cycle last week and a preliminary US November University of Michigan sentiment survey showing sentiment at its worst for the cycle. This week kicks off with a Xi-Biden summit as we also await the news of who President Biden will appoint for the next term as Fed Chair.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures had a strong finish to last week closing recapping the losses from Wednesday’s risk-off session. This morning equity futures are continuing their positive momentum with Nasdaq 100 futures trading around 16,220 in early European trading hours. There are few macro releases and earnings releases to move the market, so we expect the direction in US bonds to set the tone for US equities.
EURUSD – with a new wave of Covid hanging over Europe and gas and power prices weakening real growth prospects for the European economy, while hot inflation has the market repricing the Fed policy trajectory higher, the EURUSD pair stumbled below the psychologically important 1.1500 level last week and could be set for a test of the 61.8% Fibo retracement of the entire rally wave from the 2020 post-pandemic outbreak lows to the 1.2349 high at the start of this year.
EM Currencies – interesting to note last week’s significant volatility in many EM currencies, which don’t appreciate the recent surge in the US dollar and US treasury yields, but where a geopolitical discount has crept into exchange rates in places as well, particularly in the Russian ruble, where the USDRUB rate spiked on Friday. Weak oil prices late last week were a factor, but the more important factor weakening the ruble were the stand-off at the Poland-Belarus border and the US saying that the situation has been orchestrated by Russian president Putin, as well as US official warnings about Russian troops at the Ukraine border. The Turkish lira stumbled badly last week as well, in part on geopolitical concerns as it may move against Kurdish forces in Syria and ahead of a central bank meeting this Thursday (more below).
Crude oil trades near the lower end of the current range as pressure on President Biden to tap into Strategic Reservers (SPR) continue to grow, and as the risk of new Covid lockdowns loom. Surging gasoline prices and last week's white hot CPI print, together with bad polling numbers have raised calls within the democratic party to act. Apart from the risk of US action, potentially triggering a kneejerk downward reaction, the market will also be looking out for IEA’s monthly Oil Market Report on Tuesday and EIA’s weekly stock report on Wednesday. Speculators meanwhile sold Brent for a fifth straight week to November 9 with the net long slumping to a one-year low at 240k.
Gold (XAUUSD) trades above key support in the $1830-35 area for a third day with the risk of another day of sideways action raising some concerns about the market's short-term ability to push higher. Silver trades down 1% but has so far managed to stay above resistance-turned-support at $24.85. Focus on energy prices, both oil and gas, given their inflationary impact and whether US real yields can stay near record negative level, thereby supporting precious metal prices. Resistance around $1870, an area that has been rejected four days in a row.
US Treasuries (IEF, TLT). Tomorrow’s retail sales and Wednesday’s 20 year auction will be in focus this week. Last week’s selloff in Treasuries clarified to markets that if inflationary pressures continue to rise, it’s inevitable for the whole yield curve to shift higher. Investors demanded higher yields during last week’s 10-year and 30-year auction, causing a selloff that pushed 10-year yields to rise as high as 1.58% after dropping to 1.41% the day before. There is the chance to see a catastrophic 20-year auction this week driving yields higher in the long part of the yield curve, as it is a far less popular tenor than last week’s 10 and 30-years. If 10-year yields break above 1.60% they will be entering a fast area which could see them either rising quickly to test resistance at 1.70% or to drop again below 1.60% We expect 10-year yields to continue to rise toward 20% till the end of the year, driven by high inflationary pressure, and recovering job numbers.
UK Gilts (IGLT). It may be another volatile week for UK Gilts. The central bank indicated that it needs more information on the strength of the UK labor market before hiking rates, hence tomorrow’s jobs data will come handy to understand the Bank of England’s next move. To complete the picture, inflation numbers will be out on Wednesday, while sales figures will be out on Friday. The market is still expecting the BOE to be more aggressive than peers next year, pricing four interest rate hikes for 2022. If job data disappoints there is room for Gilts to rally on Tuesday as investors will need to adjust their expectations, but high inflationary data on Wednesday could push yields upward. Ten-year Gilt yields are trending higher, looking to stabilize around 1.04%. On the other hand, dovish sentiment could cause them to drop to 0.81%.
What is going on?
Friday’s US data: workers quitting jobs at a record pace, sentiment in the dumps. The September JOLTS survey of job openings and labor turnover showed that the number of available positions remains near recent records, still above 10.4 million, while the turnover portion of the survey showed a record number of workers quitting jobs, suggesting that they may be headed for other jobs with higher pay, a development that bears watching for the risk that a wage-price spiral is developing in the US. The preliminary University of Michigan sentiment survey, meanwhile, saw an ugly decline to a new low for the cycle at 66.8, the lowest since 2011 and a large drop relative to 71.7 in September. The chief economist of the survey said: “Consumer sentiment fell in early November to its lowest level in a decade due to an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.”
EU gas prices have settled into a wide €60 to €80 range ($20-$27/MMBtu) with a small pickup in Russian supplies last week not moving the needle much after Norwegian flows slumped to the lowest in two months due to an unplanned outage. Key this week, apart from short-term weather forecasts, will be today’s auctions where Gazprom will book transit capacity through Ukraine and Poland for December. The result should send a clear signal to the market, and with gas stocks in Europe still low, a ramp up is needed to send prices lower to more manageable levels. No matter the outcome, we can expect increased volatility during the day.
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 medium-longer term implications for monetary policy, and the Fed is likely to get a prominent new regulatory role either way (under Brainard or someone else if she is nominated to replace Powell).
Xi-Biden Summit late today – will offer the latest test of the relationship between the two superpowers as the US side is reportedly hoping to avoid a worsening of relations, with some hope based on recent joint announcements on climate goals. Hot button issues include the degree to which China is living up to the trade agreement signed with the Trump administration, origins of Covid-19, human rights, Hong Kong and Taiwan.
Turkish interest rate decision on Thursday – the lira is tumbling lower again on the firmer US dollar and as the Turkish central bank, seen swayed by Turkish president Erdogan’s interference, has cut rates even as inflation soars, leading to lack of domestic trust in the country’s currency. The market is expecting another cut this Thursday from the Central Bank of Turkey, even as USDTRY has soared above 10.00 at one point today to start the week after trading below 7.00 in February of this year, a remarkable devaluation of the lira.
Earnings Watch – after the two first quarters, the MSCI World lost out in Q3 to the S&P 500 in terms of EPS growth since Q3 2019, underscoring that the US equity market is still the strongest in the world. This week several major Chinese companies in the entertainment and e-commerce industries are reporting crucial earnings that can impact the direction of Chinese equities. The outstanding question remains to what degree Chinese regulation is impacting company earnings on top of the slowing housing market.
Monday: Meituan, Recruit Holdings, Sonova, Lucid Group
Tuesday: Vodafone, Walmart, Home Depot, Sea Ltd, NetEase
Wednesday: Experian, Nibe Industrier, Nvidia, Cisco, Lowe’s, Target, TJX, Baidu, Copart, Bilibili
Thursday: National Grid, Alibaba, Intuit, Applied Materials, JD.com, Workday, Palo Alto Networks, Ross Stores, Farfetch
Economic calendar highlights for today (times GMT)
0830 – Sweden Oct. CPI
0930 – UK Bank of England’s Haskel to speak
1000 – Euro Zone Sep. Trade Balance
1000 – ECB President Lagarde to speak
1100 - Monthly EU gas pipeline capacity auction (Gazprom signal)
1330 – Canada Sep. Manufacturing Sales
1330 – US Nov. Empire Manufacturing
1430 – UK Bank of England Governor Bailey, Pill and others to testify to Parliament
2030 – Commitments of Traders Report (Delayed from Friday)
0030 – Australia RBA Minutes
0230 – Australia RBA Governor Lowe to speak
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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