Market Market Market

Market Quick Take - December 14, 2021

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Risk sentiment soured yesterday, with some attributing the market nervousness to uncertainty on how hawkish a pivot the Fed is set to make at the FOMC tomorrow, although Fed rate expectations for next year as expressed in the most liquid futures have eased from recent highs. That meeting is the most significant major macro event risk for the 2021 calendar year, although important ECB and BoE meetings are set for Thursday.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - yesterday was a very disappointing session for US technology stocks with Nasdaq 100 futures looking to push higher early during the session but ended on the lowest close in four trading sessions. Nasdaq 100 futures are trading around the 16,110 level this morning with the 50-day average around the 15,810 level as the key support level to watch on the downside should risk-off continue.

EURUSD – the EURUSD supermajor continues to coil in a tight range ahead of the FOMC meeting tomorrow and ECB meeting on Thursday, both of which are set to bring refreshed forecasts for the economy and policy. The FOMC meeting is likely to carry more weight in terms of the market reaction, especially if the Fed waxes more hawkish than expected (more below) and takes Fed rate expectations for next year to new highs for the cycle. The lines in the sand on the chart include the 1.1186 lows of November, while the recent pivot highs of 1.1355 and 1.1384 bar the upside, with 1.1500 a more structural resistance/pivot zone.

AUDUSD – watching the US dollar closely over the next couple of sessions, particularly in the wake of tomorrow’s FOMC meeting and what it brings in the way of a crystallization of the Fed’s hawkish shift (more below) and in the market reaction. If the meeting brings a spike in market volatility, traditionally risk-correlated currencies like the Aussie could show high beta to swings in the US dollar in either direction (I.e., if the Fed waxes more hawkish than expected and this triggers risk-off and a stronger USD). AUDUSD recently broke down through the prior 2021 lows near 0.7100 and tested the huge 0.7000 level before staging a sharp bounce. That 0.7000 level could serve as a kind of “bull-bear” line from here.

Crude oil (OILUKFEB22 & OILUSJAN22) has settled into a relatively narrow range with Brent finding resistance at $76, the 21-day moving average while support remains the 200-day moving average at $73.15. OPEC in its monthly oil market report maintained their 4.2 million barrels per day demand growth outlook for 2022 with current omicron-related weakness being offset by a strong recovery during Q1. The Saudi energy minister said the energy transition will cause an oil-price spike later this decade while also warning traders against shorting the market at a time where large speculators have reduced their Brent crude oil long to a 13-month low. On tap today we have IEA’s Monthly Oil Market Report.

Gold (XAUUSD) remains stuck just below its 200-day moving average at $1794 with focus on what 20 central bank meetings this week will deliver in terms of inflation fighting measures at a time where the omicron variant continues to cloud the economic outlook. With US inflation rising at the fastest pace since the 1980’s, Wednesday’s FOMC meeting remains the top event. The market is currently pricing in three rate hikes next year with the first one due around June. The other semi-investment metals of silver (XAGUSD) and platinum (XPTUSD) both struggling with the latter’s 850-dollar discount to gold, near a one year high, potentially deserving some attention.

US Treasuries (TLH, TLT). The US yield curve bulled flatten yesterday with 10-year yields falling by 7bps to test support at 1.41%. To contribute to this move was news of the first omicron death in the UK, and the winding done of short US Treasury positions before the end of the year. Price action will remain volatile ahead of the Federal Reserve meeting, where Powell is expected to announce an acceleration of the pace of tapering. The focus is going to be also on the Dot plot, where longer term projections might be moved higher, pushing up the long part of the yield curve. However, long-term yields can move higher only that much, as omicron distortions will continue to keep them compressed. It looks likely that 10-year yields will continue to trade rangebound between 1.40% and 1.70% until the end of the year.

European sovereign bonds (IS0L, BTP10). The Bund yield curve bull flattened yesterday led by safe-haven buying amid concerns over omicron. Italian BTPS gained the most as the market pushes back on interest rate hikes in 2022. The focus, however, continues to be on the ECB meeting on Thursday. An announcement of the end of the PEPP program in March 2022 is widely anticipated. What’s not clear is whether it will be announced that bond purchases will be compensated by another scheme, such as the APP. It is likely that the ECB will stall as members are torn between inflation and a new wave of Covid infections. If investors feel the support of the central bank is fading, European yields might resume their rise with the periphery and Italian BTPS leading the way. Yet, the move will be contained as yields will remain compressed by covid concerns.

UK Gilts (IGLT, IGLS). The BOE might not deliver on a 10bps interest rate hike this week as members are divided concerning Covid restrictions. Michael Saunders, one of the most hawkish MPC members, said that he will need to think about it twice before voting for a rate hike. As expectations for interest rate hikes in the UK are the most aggressive among developed economies. It is possible that if the central bank does not hike, the Gilt yield curve will be steeping with short-term Gilts gaining the most as the market pushes back on next year’s rate expectations.

What is going on?

China reports first omicron variant case of covid - bringing fears of supply chain disruptions due to the country’s zero tolerance policy on virus cases that can mean profound shutdowns in response to outbreaks.

Chinese property developers under new pressure, with the focus this time on Shimao Group Holdings, whose Hong-Kong listing is down over 75% this year and down over 30% over the last week on concerns that a deal between the company’s business units is a sign of financial stress for the company. The company’s 2030 USD-denominated bonds lost almost 13% overnight as the yield rose above 10%. Other Chinese property developer shares were also under pressure overnight.

Tesla shares down 5% as growth stocks are under pressure. Tesla shares pushed below $1,000 yesterday adding further pressure to related assets in the Ark Innovation ETF and Bitcoin is also seen lower this morning. Elon Musk sold $907mn worth of shares yesterday according to a filing overnight in order to pay taxes on another round stock options that were exercised.

Toyota finally pushes into EV. Japan’s largest carmaker wants to compete with Tesla and Volkswagen announcing $35bn of investments into battery electric vehicles showing the first sign that Toyota is acknowledging that this is the future of the industry. Toyota has so far pursued hybrids on the ground of being more economical, but this push into BEV with 30 new models validates BEVs once and for all, even though Toyota is still saying that it does not know which technology will win.

US Harley-Davidson set to spin-off EV motorcycle unit – the plan to spin off Harley’s EV business via a SPAC saw Harley-Davidson shares spike 19% before surrendering most of the gains. Harley’s LiveWire EV business unit will combine with SPAC AEA-Bridges Impact to form a new publicly traded company. The move is meant to take advantage of the premium the market is willing to pay for pure-play EV companies.

EU diplomats suggest time running out on Iran nuclear deal - as Iran is progressing rapidly toward enriching uranium for potential use in nuclear weapons. The diplomats worry that without a breakthrough soon, the original 2015 agreement “will very soon become an empty shell.”

What are we watching next?

The Wednesday FOMC as the year’s final major macro event risk. The FOMC meeting tomorrow is set to bring a very different monetary policy statement from the prior statement after the Fed’s clear pivot to inflation fighting mode. As well, the meeting will see an update of economic forecasts and interest rate policy forecasts (the “dot plot” in which 19 Fed members forecast where the Fed funds rate will likely be in 2022-24 and in the longer term). Most interesting will be the degree to which Fed members have raised their policy rate forecasts relative to what the market is predicting, which is for just under three rate hikes through the end of next year. Prior forecasts have generally come in lower than market expectations. The baseline expectation for the pace of QE “tapering”, or slowing of purchases, is that the Fed will double the pace of tapering, which would mean the Fed’s balance sheet is set to stop growing by the end of March. Anything that suggests a faster pace of tapering than this doubling (for example, a promise to wind down before March) and that hints that a hike at the March FOMC meeting is possible would be a hawkish surprise.

The European Council meets on Thursday, and apart from having to deal with Covid-19 and the Russian threat on its eastern borders, the council is also set to decide whether investments in gas and nuclear energy should be labelled climate friendly. The design of the EU green investment classification system is closely watched by investors worldwide and could potentially attract billions of euros in private finance to help the green transition, especially given the need to reduce the usage of coal, the biggest polluter.

Earnings Watch – the earnings calendar is getting very thin this week and no major earnings expected today.

Wednesday: Inditex, Toro, Lennar, Heico, Trip.com, Nordson

Thursday: FedEx, Adobe, Accenture

Economic calendar highlights for today (times GMT)

0830 – Sweden Nov. CPI

1000 – Euro Zone Oct. Industrial Production

1100 – US Nov. NFIB Small Business Optimism

1300 – Hungary Central Bank Rate Decision

1330 – US Nov. PPI

1900 – New Zealand RBNZ Governor Orr before parliament committee

2130 – API Weekly Report on US Oil and Fuel Inventories

2330 – Australia Dec. Westpac Consumer Confidence

0200 – China Nov. Retail Sales

0200 – China Nov. Industrial Production

During the day: IEA’s Monthly Oil Market Report

 

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.