Summary: Just as the market was preparing for weak price action over the holiday during thin liquidity conditions good news on the Omicron variant the market followed up overnight with initial indications in China that an 'all-out effort' is being planned to kickstart growth in its real estate sector. The positive sentiment is supporting equities, extending the USD momentum, weakening gold, and lifting interest rates. Meanwhile, Europe's energy crisis is a timebomb of risks waiting to explode at any time.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - yesterday’s 2.3% gain in Nasdaq 100 futures lifted equities back into the trading range for December with Nasdaq 100 futures trading around the 15,960 level in early European trading hours. This level is just above the 50-day moving average and if the market continues to discount improving news on the Omicron variant (less hospitalizations) then the rebound in growth stocks could continue today. Yesterday’s positive sentiment also came following remarks from Joe Biden that he sees a deal to be made with US Senator Joe Manchin on his Build Back Better plan.
Europe’s energy crisis (OIL:xmil) - is now a given for this winter. Yesterday France turned importer of electricity and the Netherland TFF Natural Gas price ended at 180.68 - the highest ever. UK utilities now announcing that by April energy bills could be up 50% or more than 2,000 GBP per household. SaxoStrats sees the coming energy shock as key impulse into Q1 as it will simultaneously curb spending and increase inflationary pressures even without the Omicron supply chain issues. WTI continues to stay above its 200-day moving average, and we expect higher prices as oil substitution from natural gas should keep it bid despite global demand outlook weaning.
USDJPY - the risk-on across several markets yesterday also spilled over into the USDJPY cross sprinting higher towards the local highs at 114.26, which is the natural resistance level on the upside. If equities sustain their momentum today, the USDJPY is likely going to break above this local resistance level and initially test the 114.38 level before potentially attempting a fight for the 114.81 level before New Year.
Stoxx 50 (EU50.I) - while the European equity benchmark is lifted from the strong momentum in US equities, we see clear risks to European equities due to the worsening energy crisis, that almost daily is pushing electricity prices higher increasing input costs for households and industries. The current weather predictions are guiding freezing weather over Europe in the coming weeks suggesting even more pressure on natural gas storage.
Gold (XAUUSD) - the latest move higher in the long end of the US yield curve (and stronger USD) and better news out on Omicron have extended gold’s decline pushing it below its 200-day moving average with the 1,784 level as the key inflection point intraday, and should gold break below then the 1,777 could quickly come into play.
US Treasuries (SHY, IEF, TLT). The US yield curve bear steepened yesterday following the trend of EU curves. However, long-term Treasuries reverted some losses following a solid 20-year US Treasury auction, which saw the highest bid-to-cover since June 2020 and where primary dealers were left with a record low of 14.3%. Today, the personal consumption expenditures and the consumer confidence index are released. Strong figures might contribute to more upward pressure for yields.
European sovereigns (IS0L, BTP10, IGLT). European yield curves bear steepened yesterday with Gilts leading the way. Ten-year Gilt yields rose by 9bs to 0.871% as a BOE rate hike was brought forward pricing 21bps of tightening already in February. To contribute to the bear flattening trend was also the expectation that following another rate hike the BOE will start to wind down its balance sheet. Ten-year Bund yields rose 6.3bpps to -0.31% while Italian BTPS led losses in continental Europe with 10-year yields rising 8bps to 1.01%.
USDTRY – the cross has stabilized around 12.50 following a couple of intense sessions with the Turkish Lira initial in freefall from its interest rate cuts amid galloping inflationary pressure, before gaining massively in the past two trading sessions on remarks from the Turkish government to secure TRY deposits against currency swings.
What is going on?
President Biden’s ‘Build-back-better' spending plan was initially put in doubt as the US Democrat Senator Joe Manchin rejected the economic plan on worries over debt and inflation. But yesterday the Biden sent signals that it believes it can strike a deal with Manchin on its $2trn economic plan. This back-and-forth negotiation can add volatility to equities over the holiday period and encourage investors to downplay headlines.
Chinese equities responding to ‘all-out efforts’ which was a strong worded statement from the Heilongjiang’s government but was later redacted. However, investors have viewed the comment as behind the curtain signs that the Chinese government is planning a bigger bailout of the housing sector including its real estate developers which are under much pressure.
Maersk to buy LF Logistics for $3.6bn. This shows Maersk’s intention to become a bigger and fully fledged logistics company, a trend we think will continue in the future, and underscores the industry’s confidence about next year. LF Logistics is Hong Kong based and the deal is an all-cash deal.
Aker BP agrees to acquire Lundin Energy’s oil and gas business. The deal is worth $10bn and will create the second-largest producer on the Norwegian Continental Shelf equivalent of 400,000 barrels of oil a day.
What are we watching next?
It’s already Christmas in the markets. Thin liquidity and mainly event driven moves over the course of the day. We expect these conditions to continue this and next week as we enter the final week of the year. The year has been mixed and as such some rotation towards defensive will likely happen. We have full focus on energy prices as a culprit for more inflationary pressure.
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)
0745 – France PPI Nov
1330 – Chicago Fed National Activity Index Nov
1500 – US Conference Consumer Confidence Dec
1500 – US Existing Home Sales Nov
1530 – EIA's Weekly Crude Oil and Fuel Inventories Report
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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.
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