What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities extended their gains yesterday with S&P 500 futures up 1.4% and are unchanged this morning trading around the 4,780 level. Among our equity theme baskets, the winners yesterday were this year’s winners such as semiconductors, mega caps, and cyber security. The US 10-year yield is still holding steady just below the 1.5% level providing support for equities and the market continues to be relaxed about the Omicron variant and inflationary pressures extending well into 2022.
Oil and Natural Gas (OIL:xmil) - both Brent and WTI crude oil futures rose sharply yesterday, clearing the important resistance line formed by the range lows prior to the announcement of the omicron variant of covid back on the watershed day for crude oil markets on November 30. A hold of these levels (approximately 77 for Brent and 75 for WTI) opens the door for a return to the cycle highs in play back in October, which are above 86 for Brent and 85 for WTI. The natural gas price rose by the most since October in the US on the anticipation of the arrival of a major cold wave, while it fell further in Europe yesterday after the most recent incredible surge as a flotilla of US LNG cargoes are bound for European ports to take advantage of the high prices.
USDJPY - the USDJPY pair is rallying and continues to “over-achieve” relative to long US treasury yields, which are rangebound below 1.50%, even if they have risen recently. But the backdrop of stronger EM currencies and strong global risk sentiment are a boon to carry traders that fund in Japanese yen. There is nothing now in the way of technical resistance ahead of the 115.00+ top from November that was harshly rejected on the news of the omicron covid variant. Can USDJPY push to new highs without more support from higher US yields? Critical to note that end-of-year effects may also be in play here for the US dollar (more on that below).
Gold (XAUUSD) - gold continues to make a bid at staying relevant, as cryptocurrency prices stumbled badly yesterday despite strong risk sentiment elsewhere. But the focus on gold may only really pick up on either a shift lower for the US dollar or on a sudden weakening in risk sentiment or more pronounced signs of inflation concerns, and technically, the precious metal needs to retake 1,850+ (the major pivot high from mid-November is just above 1,875) to impress.
US short interest rates – the two-year US yield is pushing up against cycle highs into year-end and traded overnight at a post-pandemic high just shy of 75 basis points as the market may be anticipating that omicron concerns will clear quickly and leave the US Fed clear to begin hiking rates at the March FOMC meeting (currently priced with about 60% odds, versus just above 40% odds in the wake of the FOMC meeting less than two weeks ago)
What is going on?
Worst covid outbreak since the pandemic outbreak in China continues in Shaanxi province, where 150 new cases were discovered on Sunday in Xi’an, the largest city of the province. The entire Xi’an population of 13 million will undergo a fourth round of mandatory testing as the country’s “zero tolerance” policy requires significant disruption of activity in areas with even small case numbers.
Meta up 3% reaching highest level in six weeks on Oculus sales. Meta (parent company of Facebook) has gained more than 10% since it changed its name in late October and laid out its strategy to create the metaverse. Part of this strategy is the VR/AR headset from Oculus and according to retail indicators the headset has been one of the best-selling gifts this holiday.
The condition of the U.S. households remains strong despite risks related to high inflation and the new variant Omicron. A report from Mastercard SpendingPulse shows that holiday sales in the period from 1 November to 24 December jumped 8.5 % from last year (read the full report). Sales surged in many sectors: apparel +47 %, jewelry +32 %, electronics +16 % and online shopping +11 %, for instance. This is a positive signal while CPI is skyrocketing at an annual pace of 6.8 % in November and will likely keep increasing at least in the short-term.
Texas manufacturing activity continues to increase strongly in December. The production index, which is the key measure of state manufacturing conditions, was out at 26.7. This is indicative of solid output growth. The other measures of manufacturing activity indicated continued growth, too (new orders, shipments and capacity utilization, for instance). The general business activity was positive, though slightly lower than in November, at 8.1.
Startups with value above $1bn triples in 2021. According to the Wall Street Journal the number of startups that received a market valuation above $1bn tripled in 2021 compared to the years before suggesting excessive risk taking in the venture capital and private equity industries which is a sign that the growth pocket of the economy is reaching expectations levels that potentially cannot be supported by underlying economic growth.
Spain will receive the first payment under the Next Generation EU recovery package in coming days. This is the first EU country to complete and validate the arduous process of defining projects and meeting initial targets and reform objectives. The first disbursement will be of €10bn out of a total of €140bn over the next six years.
Is this the end of France’s mass unemployment? According to Pôle Emploi, the number of people registered as job seekers fell by 55,800 in November. Since January, it has decreased by more than half a million. This is a remarkable performance. In addition, the level of youth unemployment is now at its lowest level for 15 years. Expect the positive trend to continue into 2022.
Israel is the first country to study an additional booster dose. Israel has reported more than 22,000 coronavirus cases and at least 53 deaths from the virus in the past 28 days, according to data from Johns Hopkins University.
What are we watching next?
Calendar roll effects into 2022, particularly for the US dollar and US yields. The calendar roll effect has been particularly large on at least two occasions in recent years, particularly in the shift from 2016 to 2017, when the US dollar went from extreme strength to pronounced weakness, and the opposite experience in the roll into 2021, when the USD suddenly ended its major slide of late 2020 during the first week of this year.
Watching for the fading of the omicron variant impact – After the omicron variant of concern was announced on November 30, based on a surge in new cases in South Africa, that country’s case count surged wildly, but had already peaked within two weeks of the announcement and is now in steep retreat, with low health impacts compared to previous waves. But many are reluctant to use the country’s experience as a model for what may happen in Europe and the US, due to the country’s lower vaccination level, possibly greater herd immunity from prior virus waves, and its outbreak having occurred in the Southern hemisphere’s summer. The coming days and weeks will show first, to what degree the enormous ramping of case counts is overwhelming healthcare systems in the countries with the worst outbreaks, particularly in Europe, and subsequently, and secondly, when the inevitable rollover in case counts will occur. The most advanced timeline for omicron in a less restriction-impacted economy is the UK (as opposed to Germany and elsewhere, where the decline in case counts was more linked with the response to a delta variant surge and significant where significant restrictions likely helped deliver a fall in cases over the last month, though disentangling the delta and omicron surges is difficult). The UK is declining to announce new restrictions ahead of New Year’s celebrations.
Earnings Watch – no major earnings releases this week and the earnings calendar will stay light until the Q4 earnings season starts in mid-January.
Economic calendar highlights for today (times GMT)
0830 – Sweden Nov. Household Lending
1400 – US Oct. House Price Index
1500 – US Dec. Richmond Fed Manufacturing Index
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