Summary: Markets stumbled into the close last week, shaken in Europe by a resolute, and possibly unrealistic ECB stance at last Thursday’s ECB meeting, while a heavy calendar of event risks combined with trillions in options expiries roiled US markets last week. The two final weeks of a remarkable 2022 await. Are traders willing to put any risk to work here after an exhausting year or hanging up their spikes until 2023?
Following a close at the 50-day moving average on Friday, S&P 500 futures are attempting to rebound this morning trading around the 3,885 level driven by fresh sentiment change over China’s alleged move to enact pro-business policies and stimulus in 2023. There are no meaningful earnings or macro releases expected today so we expect a calm trading session with Friday’s low in S&P 500 at the 3,855 level being the key level on the downside and the 100-day moving average at the 3,935 level being the key upside level to watch.
European equities are still digesting their decline last week, biggest decline in many months, as the ECB delivered a more hawkish message than expected. STOXX 50 futures are trading around the 3,818 level getting a little bit of tailwind electricity prices coming down from excessive levels. The IFO December survey out at 0900 GMT is today’s main macro release that could jolt market sentiment. Analysts expect an improvement in the IFO survey for December.
Hong Kong and Chinese stocks pared all the early gains and turned lower as investors turned cautious during a surge in media reports of rises in Covid inflections and death tolls. The lack of commitment to more large-scale economic stimulus measures from the Central Economic Work Conference was considered underwhelming. Nonetheless, a shift to a more conciliatory stance towards the private sector from the meeting may be a positive that will contribute to growth and reduce risk premium in the medium-term. More details about the Central Economic Work Conference can be found here. Hang Seng Index dropped 0.9% and the CSI300 Index tumbled 1.8%.
EURUSD has rebounded slightly from the Friday close as the market must decide whether the ECB can maintain the hawkish bluster on display at last Thursday’s meeting, which initially supported the euro, but subsequently saw doubts emerging as peripheral EU spreads widened sharply. USDJPY had a volatile week as a drop below 135 was not maintained despite US yields remaining capped, but a fresh bout of JPY strength arrived overnight on reports that Japan PM Kishida is considering a tweak in BOJ’s 2% inflation goal next year (read below).
Oil prices started the week on a firmer footing, with WTI rising towards the $75/barrel mark and Brent heading back towards $80. While there are unconfirmed reports of massive number of cases and fatalities in China from the spread of Covid, the government’s official message continues to stress upon the need to expand consumption as the key economic priority for 2023. This helps paint a better demand outlook for oil, as global demand slowdown concerns continue to mount in the US and Europe and Russian flows show no signs of slowing. Moreover, it was reported that the US is starting to replenish the Strategic Petroleum Reserve (SPR), starting with a 3-million barrel, fixed-price purchase. In week to Dec 13 funds cut bullish Brent and WTI bets to lowest since April 2020.
Since the current run up in gold started in early November, the price has not dipped below its 21-day moving average, today at $1775. Speculators increased bullish gold and silver bets by 50% in the week to December 13 when prices briefly spiked in response to a softer dollar and CPI print. The subsequent setback following Wednesday’s hawkish FOMC, however, was not big enough to rattle recent established longs. For that to happen the price in our opinion as a minimum need to break below $1765. The risk of a recession and the FOMC hiking into economic weakness – potentially without succeeding getting inflation under control - continues to strengthen the upside risk for investment metals in 2023.
Soft US preliminary PMIs on Friday and weak risk sentiment kept treasuries supported and the 2-year benchmark yield remains near recent lows as the market refuses to price in the projected Fed Funds rate projections from last week’s FOMC meeting, as the market persists in pricing in high odds of Fed rate cuts late next year. At the longer end of the curve the 10-year yield remains pinned near the 3.50% level and the 2-10 slope steepened to –67 basis points this morning, near the highest reading in a month.
The survey reading was 75.6, a huge drop from 87.6 in Q3 and the lowest reading in the 34-year history of the survey and below the 78.7 former record low from Q2 of this year and the 81.7 trough during the global financial crisis. NZD gapped lower after another strong week on the recent relative hawkishness of the RBNZ, a stance that may soften in coming weeks. AUDNZD hit lows since late 2021 over the last couple of weeks after trading at the highest in years as recently as last September.
Flash December PMIs for the US slumped to fresh lows, sending more warning signals about the economic momentum going into 2023. Manufacturing PMI came in at 46.2, below last month’s 47.7 and the expected 47.8, while the services PMI receded to 44.4 from 46.2 previously – that survey has shown little correlation with the ISM Services survey, which continues to suggest an expanding US services sector.
Reports suggested that Japan PM Kishida plans to revise a ten-year-old accord with the BOJ and will consider adding flexibility to the agreement's 2% price goal. Kishida will discuss the matter with the next central bank governor, who'll take office in April. Furthermore, some more comments from officials this morning continued to signal that the authorities may be considering a policy review in 2023, and more hints are awaited at the BOJ meeting tomorrow. Ex-BOJ Deputy Governor Yamaguchi said that the BOJ must stand ready to tweak YCC next year if Japan's economy can withstand overseas economic risks, while also warning that once inflation expectations become entrenched, it is very hard to control them.
The latest Commitment of Traders report covering the week to December 13, when the market responded to a softer dollar and CPI print, showed speculators increase their dollar short against nine IMM currency futures to a 17-month high. The selling of CAD being more than offset by short covering in AUD, GBP, and not least the JPY. Since the turn of the dollar in early November, the speculative short in JPY has almost halved. In commodities, the net longs in gold, silver and platinum all increased strongly. Crude oil was mixed with the Brent long being cut to a 26-month low, the natural gas short was cut in half. Across the agriculture sector, the soymeal long hit a 4-½ year high, the cocoa position flipped back to long while buyers returned to coffee.
Many long only equity funds have suffered their worst year since 2008, and “balanced” stock-bond funds have put in their worst year in modern memory on the surge in bond yields this year that has seen the 2022 calendar year providing nowhere for the passive investor to run and hide. On the flip side, some hedge funds and volatility traders enjoyed the market environment of the last 12 months. As we wind down 2022, note that new themes can quickly develop in 2023, as many have closed their books on taking risk as liquidity thins out for the holiday time frame and may be set to put on significant risk on the rollover into the New Year.
This week’s earnings focus is Nike, FedEx, and Carnival which we previewed in the earnings watch note on Friday. The bar is set high for Nike earnings as sell-side analysts have recently hiked their price target on the stock and increased their expectations for 2023 on margins. Today’s earnings focus is HEICO which sells aerospace products to the airline industry and defense contractors. Analysts expect FY22 Q4 (ending 31 October) revenue growth of 18% y/y and EPS of $0.70 up 12% y/y.
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy