Market Market Market

Market Quick Take - December 21, 2021

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Asian stocks and US equity futures rose overnight with omicron and vaccine news key sources of input to markets where liquidity is becoming scarce ahead of the holidays. President Biden may yet be able to revive his $1.75 trillion spending plan also added some support with treasury yields and the dollar trading steady while oil prices reversed higher following a two-day decline. Turkey and President Erdogan stayed in the news after initiatives to support the lira triggered a 40% rally, the biggest in forty years.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures bounced back after hitting the 100-day moving average yesterday trading around the 15,800 level this morning in early European trading hours. Liquidity is slowly coming down and we subscribe less value to the daily moves for the rest of the year. Most moves will just be noise. Despite the recent selloff S&P 500 futures are trading around 4,600 and comfortably close to the all-time high suggesting that the recent volatility is about repositioning of portfolios before they roll into the new year.

Turkish Lira (EURTRY) delivered another day for the history books on Monday. After hitting a record low at 20.75 against the euro, it surged by close to 40% to trade below 13 this Tuesday morning. The biggest rally in forty years came after President Erdogan’s government announced several measures including the introduction of a new program to protect savings from the lira’s fluctuations. The government will make up for losses incurred by holders of lira deposits should its declines against hard currencies exceed interest rates promised by banks, Erdogan said. It will take some time for the market to digest the longer-term impact of these measures, and until then the currency may continue its wild fluctuations.

Crude oil (OILUKFEB22 & OILUSFEB22) trades higher after declining almost 5% during the previous two sessions. With omicron-related demand worries the key driver of the recent weakness, some relief came after Moderna, just like other drug makers, said a third dose of its vaccine increased antibody levels against the omicron variant. For now, the relief bounce is unlikely to drive a major turnaround in sentiment with the Brent prompt spread signaling an oversupplied market. Some longer term support from a Rystad Energy report saying that global oil and gas discoveries are heading for the lowest level since 1946.

Gold (XAUUSD) trades back below its 200-day moving average after failing to gain a foothold above $1800 and after risk sentiment improved after Moderna said a third vaccine shot increased the body’s ability to fend of the omicron variant. We see limited prospects for a major move ahead of the new year with positioning, both long and short, having been trimmed after weeks of sideways trading.

Arabica Coffee (COFFEEUSMAR22) which recently hit a decade high at $2.52 tumbled to a four-week low after the USDA on Friday made a surprise upgrade to its world output estimate. However, with developments on the ground in Brazil still pointing to a challenging 2022 season, the weakness is likely driven by omicron worries driving a reduction in a speculative long, which had built strongly in recent months. Having broken below the 2014 high at $2.255, the market could make a push towards $2.20 followed by $2.12, but overall, the fundamental outlook points to renewed support but first a painful correction phase may force weak longs out of the market.  

 US Treasuries (SHY, IEF, TLT). This week it's all about personal consumption expenditures, the consumer confidence index, and the University of Michigan Survey. Although the long part of the yield curve is stuck by Covid and growth fears, the front part of the curve might resume soaring, contributing to its flattening trend. Yet, we believe that long-term yields have upward potential as the market will need to accept the Fed’s tightening agenda. Yesterday, Eurodollar futures priced in more than three rate hikes in 2023 contributing to a bear steepening of the yield curve. Today, the US Treasury is selling 20-year bonds.

European sovereigns (IS0L, BTP10). The focus will be on the E.U. consumer confidence released today and the producer price index coming out from Italy. For the month of November, Italian PPI spiked to 9.4%. A sustained number contributes to higher inflation in Italy as well as Europe. Yet, following last week’s ECB meeting, it’s likely rates will trade rangebound until the end of the year compressed by covid fears. In 2022 we see scope for steeper EUR curves as the central bank’s total net bond purchases will be less than half than this year. However, the steepening might not begin until January, as the customary large bond issuance at the beginning of the year.

What is going on?

President Biden’s ‘Build-back-better' spending plan that on Sunday was torpedoed by U.S. Senator Joe Manchin, a moderate Democrat, could still be revived after the two held talks. The Democrats are now looking to make enough changes to secure a ‘Yae’ from Manchin.

Nike reports better than expected earnings. Revenue at $11.4bn vs est. $11.3bn was impressive given the big miss on revenue in Greater China and the earnings beat was even more impressive as gross margins are improving beyond expected. Nike says revenue will grow mid-single digit in FY22 and gross margin will expand by 150 basis points with the CFO expressing confidence that production in Vietnam will normalize soon.

Micron shows computing demand is still high. The US-based memory chip maker reported better than expected results last night with EPS guidance for Q2 (ending 28 February) significantly above consensus estimate. Personal computing demand is high, but shipments will be flat due to supply constraints in other parts of the supply chain. Micron said its data center segment grew impressively 70% y/y in the quarter and the company is projecting CAPEX of $11-12bn in FY22 (ending September 2022) compared to $10bn in the previous fiscal year.

What are we watching next?

Equity weakness in December as liquidity dries up. Are we going to see a repeat of equity weakness like in 2018 where the post FOMC narrative was that of a policy mistake? This time around it does not smell of policy mistake as the Fed changed its outlook to match that of the market, but the Omicron and fiscal drag next year are both adding to growth concerns in the short-term and with liquidity drying up as trading books are closed, we could see more weakness. Omicron impact on economic activity is a key short-term risk to watch as Germany yesterday said that GDP growth could be negative in Q4 due to the rising Covid cases in Q4 that have restricted mobility.

Chinese housing crisis and monetary easing. The prime lending rate was lowered in China for the first time in 20 months and commercial banks have recently been instructed to lower loan rates to ease financial conditions. These steps coupled with recent liquidity injections are signs that China is moving in easing direction while the rest of the world is tightening. China is doing this of course to offset the weakness on demand coming from lower new home prices and Chinese real estate developers under pressure to reassure their financials. If China goes into more aggressive stimulus mode in early 2022 it could be major positive for emerging market assets as it will drive demand for commodities and could lower the value of the USD.

Earnings Watch – no earnings this week and will stay light until the Q4 earnings season starts in mid-January.

Economic calendar highlights for today (times GMT)

0030 – RBA Minutes of December Meeting

0700 – German Jan GfK Consumer Confidence

1330 – Canada Oct Retail Sales

2130 – API Weekly Petroleum Stock 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.