Summary: Risk sentiment rebounded yesterday in the US session, erasing the rather steep losses of the prior day. Sentiment in Asia is also on the mend, while oil prices recovered all of the lost ground from an intraday plunge in the wake of the OPEC+ meeting yesterday. Today, focus swings to the US November jobs report, with extra focus likely on average hourly earnings data as investors watch for signs of a wage-price spiral developing.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities bounced back yesterday after finding a new low for the current short-term cycle lower with Nasdaq 100 futures trading around the 15,975 level this morning in European trading. Long-term US interest rates are not moving much so we expect a quiet session unless the Nonfarm Payrolls for November throws a curveball at the market. In the medium-term risk in equities will be determined by pricing of interest rates hikes next year and updated information on the new Omicron variant of Covid.
Stoxx 50 (EU50.I) - Stoxx 50 futures are stuck in a stabilisation zone between 4,100 and 4,160 with the 100-day moving average at 4,157 which is obviously the key resistance level to watch today should we get risk-on. European equities remain pulled by two opposite forces with the first being that higher expected interest rates are positive for this value market, while the continent has the most to lose short-term from the Omicron variant. If the latter fades over the coming weeks, we expect investors to move back into European equities.
USDJPY and JPY crosses – With every day that passes and no follow-through lower unfolds after the recent omicron-variant inspired tumble from the 115.00+ level, the odds of a reversal back higher grow, though as we have mentioned often in this space, this would likely require that US yields lift all along the curve, not just near the front of the curve where Fed expectations operate the most forcefully. A fresh wave of weak global risk sentiment, on the other hand, could bring another wave of JPY strength, particularly in the crosses like AUDJPY and CADJPY, some of which saw their largest single-day moves since the pandemic outbreak early last year. For USDJPY, the downside pivot is now near 112.50.
USDCAD – USDCAD has rallied as the market has been adjusting to the more hawkish shift from the Fed, especially after this week’s testimony from Fed Chair Powell. As well, uncertainties and the real threat of a reduction in travel due to the new omicron variant of covid have taken down crude oil prices nearly twenty dollars from their late October peak, around the time USDCAD was bottoming out near 1.2300. Now it trades near 1.2800 and the top of the range (only intraday price spikes from August and September rose above this level) as oil has staged a significant rebound yesterday. If risk sentiment can stabilize and oil prices recover, this important 1.2800+ area resistance could hold.
Crude oil (OILUKFEB22 & OILUSJAN21) trades up 8% from yesterday’s low point after the OPEC+ group of producers adopted a flexible approach on supply while at the same time agreeing to maintain the current rate of production increases. The market gripped with omicron angst this past week rallied on the news due to several reasons 1) the market had already priced in a significant and not yet realised reduction in demand, and 2) it the meeting was left “in session” meaning changes can be made before January 4. 3) the move eased political tensions with large consumers, 4) some of the SPR barrels on offer may not leave storage due to lack of demand from refineries, and 5) members with spare capacity wanted to increase production, as the group has not delivered the promised increases due to some struggling to reach their quotas. The next upside level to watch being the 200-day moving average at $72.85.
Gold (XAUUSD) slumped to a one-month low at $1762 yesterday, as the dollar strengthened in response to robust economic data, before finding a small bid from recovering crude oil prices. Otherwise, it has been another troubled week, the third in a row, with the yellow metal struggling to put up a defense against the Fed’s changed focus from employment to combatting inflation. In addition, the spreading of the omicron variant and its potential threat to the economic recovery has so far failed to support prices despite driving bond yields sharply lower and the VIX higher. Silver (XAGUSD) has struggled even more given its industrious link with XAUXAG ratio trading near a two-month high. Focus today being the US job report with the first major upside level of interest in gold being $1792 with support at $1760.
US Treasuries (IEF, TLT). Today the focus is on the nonfarm payrolls numbers, as a better-than-expected report would confirm the intention of the Federal Reserve to taper at this month's FOMC meeting. The US yield curve continued to bear-flatten yesterday as Fed’s speakers including Bostic, Daly, Quarles, and Barkin commented on the possibility of a faster tapering to open for rate hikes next year. Two-year yields rose by 8 bps, while five-year yields cheapened by 5bps. Long-term yields dropped contributing to an increased flattening of the yield curve in the 2s10s and 5s30s areas. In the meanwhile, Eurodollar futures have started to price rates cut in 2025. We expect the flattening of the yield curve to continue until Covid distortions are eased. Afterward, the long part of the yield curve will need to shift much higher adjusting to interest rate hikes expectations.
US junk bonds (HYG, JNK). According to Bloomberg Barclays indexes, junk bonds’ OAS widened by 30bps to 330bps amid last Friday’s selloff reflecting the lack of liquidity in markets. Despite negative real rates continuing to support corporate bond valuations, it’s safe to expect junk bond spreads to widen throughout the end of the year amid poor liquidity. If the volatility in rates remains sustained, the widening of spreads could accelerate, posing a threat also for stocks.
German Bunds (IS0L). Rate hikes expectations for the eurozone were pushed to 2023 yesterday amid a slump in tech stocks. German and Italian government bonds more than reversed Wednesday’s losses. In Europe, Covid distortions are keeping bond yields in check. However, when Covid fears ease we can expect yields in the euro area to adjust higher given the inflationary backdrop and the new German government.
What is going on?
Omicron covid variant cases rise, reinfection risk judged high in one study. South African officials note that the omicron variant of covid is spreading faster than the delta- or any other variant of the virus despite estimates by some that a majority of the South African population was infected with covid in prior waves. National cases were at 11.5k yesterday versus 8.6k on Wednesday and 4.4k on Tuesday. A study there of the reinfection risk suggests that it is some three times higher than prior variants. Omicron variant cases have now been discovered worldwide, including Italy, the US and South Korea.
DocuSign shares plunge 30% in extended trading. The company guided Q4 revenue of $557-563mn vs est. $574mn which is a small revenue miss, but enough to spark a massive selloff in extended trading. Investors took clearly little comfort in the fact that the company is consistently improving operating margin hitting 3.1% in Q3 and expected to climb significantly in the coming quarters.
China moves to delist Didi from US exchanges. US SEC set to move against Chinese listing. The Chinese ride-sharing and transportation platform company will delist in the US and move to a Hong Kong listing, perhaps in the March time frame. Meanwhile, the US SEC is set to move against a number of Chinese companies listed on US exchanges on charges that their accounting disclosures are not in compliance with US regulations.
Another strong US weekly jobless claims number was out yesterday at 222k, lower than expected and near the levels during the strong labor market before the early 2020 pandemic outbreak. The prior week’s number was one of the lowest ever and was revised even lower to 194k, suggesting a very tight labor market.
What are we watching next?
Study of omicron variant and its virulence. Scientists will work with the provincial government of Gauteng in South Africa, which has the most measured cases of the new omicron variant, to complete a study of the new variant’s virulence as soon as next Tuesday, though results will be released to the public later. A local official there said that hospitalizations and mortality are lower than expected thus far.
US November Nonfarm Payrolls Change and Average Hourly Earnings today. With the US economy operating at full capacity according to estimates from CBO, continued strong job gains will add fuel to the “inflation fire”. Wednesday's 534k increase in the November ADP private payroll number suggests that the job market growth remains healthy in the US as we await the official nonfarm payrolls numbers today (expected to show 500k+ jobs added), where strong upward revisions to prior months’ data has been a notable trend this year due to data collection issues. As well, Average Hourly earnings numbers will be closely watched for any budding signs of a wage-price spiral, as a constrained supply of labor could see companies bidding up wages and October showed a strong rise in earnings at a faster pace than at any time from the start of the survey in 2007 to the outbreak of the covid pandemic. The October Average Hourly Earnings number rose to 4.9% year-on-year, and 5.0% is expected for today’s November number.
Earnings Watch – today is a quiet day on earnings with only Bank of Montreal reporting earnings. We have also put in next week’s earnings releases.
Friday: Bank of Montreal
Next week’s earnings:
Monday: Sino Pharmaceutical, Acciona Energias, MongoDB, Coupa Software, Gitlab
Tuesday: SentinelOne, AutoZone, Ashtead Group
Wednesday: Huali Industrial Group, GalaxyCore, Kabel Deutschland, Dollarama, Brown-Forman, UiPath, GameStop, RH, Campbell Soup
Thursday: Sekisui House, Hormel Foods, Costco Wholesale, Oracle, Broadcom, Lululemon Athletica, Chewy, Vail Resorts
Friday: Carl Zeiss Meditec
Economic calendar highlights for today (times GMT)
0815-0900 – Euro Zone final Nov. Services PMI
0900 – Norway Nov. Unemployment Rate
0930 – UK Nov. Final Services PMI
1100 – UK Bank of England’s Saunders to speak
1300 – ECB Chief Economist Philip Lane to speak
1330 – US Nov. Change in Nonfarm Payrolls
1330 – US Nov. Average Hourly Earnings
1330 – US Nov. Unemployment Rate
1330 – Canada Nov. Net Change in Employment
1330 – Canada Nov. Unemployment Rate
1415 – US Fed’s Bullard (voter in 2022) to speak
1500 – US Nov. ISM Services
1500 – US Nov. Factory Orders
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2024: The wasted year
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.
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With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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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.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
