What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - it was turnaround Monday yesterday with weak equities in the beginning of the session before turning around ending higher than the previous close. Nasdaq 100 futures are trading slightly lower in early European trading hours but still up 2.9% from yesterday’s low. Technically the rebound could extend going into the Q4 earnings season if we close higher again today which we see as a critical criterion for US technology stocks and especially bubble stocks. Ideally, Nasdaq 100 futures would close today above the 100-day moving average which sits currently at around 15,690.
USDJPY and JPY crosses – the focus for JPY traders may have shifted as yesterday saw the JPY trading firmer across the board during the worst phase of a general sell-off in risk sentiment as the JPY seemingly ignored what has long been an important coincident indicator for its direction, long US treasury yields, with which it is often negatively correlated. The USDJPY pair opened this year with a sharp rally that took out the late 2021 (and pre-omicron variant) high near 115.50 and traded well north of 116.00 before consolidating as low as 115.05 yesterday. If the pair can’t maintain altitude above 115.00, a full reversal may be in the cards, with other JPY crosses in a similar technical state locally – for example EURJPY and AUDJPY. Interestingly, yesterday’s strong reversal in risk sentiment failed to offer much resistance for the JPY.
EURCHF – the EURCHF pair saw a sharp back-up yesterday, perhaps as the market continues to ratchet its expectations higher for ECB rate expectations next year and on the recent general rise in yields, but also after yesterday’s weekly report of the SNB’s “sight deposit” levels showed a strong gain of some 2 billion CHF for the week, suggesting that the SNB is intervening against further CHF strength. The rally has reached the important 1.0500 area, which was near a prior major low in 2020 that the market may have been surprised was not more robustly defended late last year. The next level of interest is the major low last summer near 1.0700.
Crude oil (OILUKMAR22 & OILUSFEB22) drifted lower yesterday before finding a small bid overnight with traders focusing on EIA’s short-term market outlook, Wednesday’s US stockpile and CPI reports and how China manages to contain the spread of omicron. On the supply side, production in Libya has returned to 1 million barrels a day after militias ended a three-week blockade, while the loss of oil during last week's unrest in Kazakhstan was around 70k barrels per day, a 3.7% reduction.
Gold (XAUUSD) continues to impress, trading higher following a small setback in real yields on Powell’s comments (see below). The yellow metal managed to hold its own during last week’s surge in US real yields, a stark contrast to its behavior last year when it often fell on rising yields and held steady when they corrected lower. With almost four rate hikes prices in with the first expected in March and US CPI for December (due Wednesday) expected to rise above 7%, traders have started to wonder how much worse, from a gold price perspective, data and expectations can get in the short term. Key support at $1783 and resistance at $1830. Silver (XAGUSD) is challenging resistance at $22.67, the 21-DMA and 50% retracement of last week’s selloff.
US Treasuries (SHY, IEF, TLT). Today Jerome Powell will appear in front of the Senate Banking Committee to be re-confirmed as Fed Chair, he will be asked about the economy and what his plans are to fight inflation. In an opening statement prepared for the occasion, Powell said that the Fed will “prevent higher inflation from becoming entrenched.” There is potential for Treasuries to continue to sell off if the Fed Chair sounds hawkish enough. The front end of the yield curve will be most vulnerable, while 10-year yields could test resistance again at 1.8%, a level they broke yesterday but did not manage to sustain. Today the US Treasury sells 3-year notes, and the selloff could continue until tomorrow’s 10-year auction, where we expect an increase of investor demand due to the high yield offered, the highest since January 2020.
German Bunds (IS0L). German Bunds remain negative, but close enough to 0% to make us think that they will break above this level soon. Tomorrow’s 30-year Bund auction might be a catalyst to another selloff as well as today’s Powell’s speech and tomorrow’s CPI readings. A lot will come down to where the 10-year US Treasuries are headed as the correlation between Treasuries and Bunds remain high close to 1.
What is going on?
Fed Chair Powell says he won’t allow inflation to become entrenched in prepared remarks released before his testimony today in renomination hearings. “We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.” Powell also said that the current recovery could look different from prior ones: “We can begin to see that the post-pandemic economy is likely to be different in some respects. The pursuit of our goals will need to take these differences into account. To that end, monetary policy must take a broad and forward-looking view, keeping pace with an ever-evolving economy.”
Talks between the US and Russia positioned as optimistic by both sides, with the US Deputy Secretary of State Wendy Sherman leading the US side calling the all-day talks in Geneva “frank and forthright” but saying that a further progress could take weeks or more. The Russian side led by Deputy Foreign Minister Sergei Rybakov expressed the belief that the US side had agreed to consider Moscow’s position “very seriously”. More talks are to follow between Russia and NATO representatives tomorrow, with OSCE joining on Thursday. The Russian ruble firmed slightly.
Delivery Hero says food delivery to break even in 2H. The pressure is mounting on high growth companies to get faster to break-even levels and beyond as higher interest rates and inflation changes the valuation dynamics for investors. However, many things can go wrong for Delivery Hero as the guidance is for Q4 and most likely a self-made number like adjusted EBITDA. The fact is that Delivery Hero lost €680mn in the previous 12 months from operations and the trend was negative as of first half of 2021, so we believe it will be very difficult for the company to deliver on its promises.
European natural gas (TTFMG2) has settled into a €80 to €100/GWh range and remains near the lower end despite revised figures from Gas Infrastructure Europe showing storage sites across Europe were only 51.6% filled as of Sunday, with the 2% downgrade due to missing data from Italy’s Snam. Gas withdrawals slowed over the holiday period due to milder weather and industries curbing demand, but the latest update puts inventories on a renewed downward trajectory, with gas in storage being the lowest in more than decade. Weather, LNG arrivals, Russian supplies and industrial demand remains the four major drivers that will determine the short-term direction of gas prices.
What are we watching next?
Will yesterday’s bullish sentiment reversal stick? Yesterday saw the major US indices, particularly the Nasdaq 100 index, cutting deeply through important support levels before a full reversal of the downside action set in. Some claim that the development might represent traders front-running a phenomenon known as “turnaround Tuesday”. As well, the reversal in the major indices came on the same day as Bitcoin tested and survived the critical 40,000 level, Ethereum did the same around the 3,000 level and the rise in US yields even reversed intraday from new post-pandemic outbreak highs to close lower. This establishes an important local line in the sand if sentiment is to stabilize in the face of the recently more hawkish Fed and concerns that inflation risks could bring more Fed hawkishness and impact the outlook for companies as earnings season gets underway in earnest over the coming week.
Earnings Watch – the Q4 earnings season starts officially this week with the most important earnings releases on Friday from large US commercial and investment banks such as Wells Fargo, JPMorgan Chase, and Citigroup. Today earnings from Yaskawa Electric will give clues about demand and economic activity in China and Acciona Energias is the first renewable energy company to report earnings and given the recent weakness in this part of the market this earnings release is important to watch.
Tuesday: Yaskawa Electric, Acciona Energias Renovables, Albertsons, TD Synnex
Wednesday: Aeon, Abiomed, Jefferies, Shaw Communications
Thursday: Fast Retailing, IHS Markit, Delta Air Lines, Seven & I, Chr Hansen
Friday: Wells Fargo, BlackRock, First Republic Bank, JPMorgan Chase, Citigroup
Economic calendar highlights for today (times GMT)
1100 – US Dec. NFIB Small Business Optimism
1300 – ECB's Kazaks to speak
1412 – US Fed’s Mester (voter) to speak on Bloomberg TV
1430 – US Fed’s George (voter) to speak on economy and policy outlook
1500 – US Fed Chair Powell renomination hearing
1700 – EIA's Short-Term Energy Outlook
2130 – API's Weekly Oil and Fuel Storage Update
0130 – China Dec. PPI
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: