What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
After a weak session yesterday that saw the major indices losing about a percent, futures traded lower still overnight after the Bank of Japan decision to tweak its policy (more below) took US long yields sharply higher overnight. The next technical focus lower could be the 61.8% retracement of the rally from the October low – which is at a rather lower level for the cash index at 3,724 because the wild spike higher in US equity futures on the CPI release last week was not traded in the cash market. Equity traders will keep at least one eye on treasury yields after the surge overnight.
Euro STOXX 50 (EU50.I)
STOXX 50 futures are some 1.5% lower this morning from yesterday’s close after the surprise BoJ policy shift overnight cratered sentiment and have tumbled over 5% since the ECB’s hawkish meeting last week. The next technical focus lower could be the 200-day moving average, which for the cash index comes in near 3,675.
Hong Kong’s Hang Seng (HIZ2) and China’s CSI300 (03188:xhkg)
Overnight U.S. stock market weaknesses, concerns about spreading of Covid-19, and the upward adjustment of yield cap by the Bank of Japan contributed to the risk-off sentiment in the Hong Kong and mainland Chinese stock markets. Both the Hang Seng Index and CSI300 Index plunged around 2%. Technology stocks underperformed. Hang Seng TECH Index tumbled 4%, with Alibaba (09988:xhkg) and Tencent (00700:xhkg) dropping by more than 4% and Bilibili (09626:xhkg) tumbling more than 8%. Placement of shares at discount from two Hong Kong listed Chinese developers weighed on the property sector. Chinese banks fixed their 1-year and 5-year loan prime rates unchanged.
FX: BoJ move sees massive JPY surge, particularly in the crosses
The market was surprised to see a shift in BoJ policy overnight, as Governor Kuroda and company shifted the cap on the 10-year JGB to 0.50% from 0.25%, even as they left the base policy rate of -0.10% alone. The move took the JPY sharply higher, with USDJPY trading some 3% lower to new cycle lows below 133.00, while non-USD JPY crosses surged somewhat more as the BoJ’s move triggered a global surge in bond yields and took risk appetite down a few notches, helping support the US dollar elsewhere.
Crude oil (CLF3 & LCOG3) prices modestly higher
Crude oil prices continue to find it challenging to balance the varied narrative around the demand outlook. China demand faces short-term headwinds as the Covid wave spreads but is likely poised for a rebound in the medium term as authorities remain committed to driving up consumption recovery. Meanwhile, global demand outlook faces headwinds amid the massive tightening seen by global central banks this year. Supply side volatilities also persist with US refilling its SPR and sanctions on Russian oil with a government response close to being completed. In week to Dec 13 funds cut bullish Brent and WTI bets to lowest since April 2020 and it highlights the risk of large price swings as the short-term outlook remains very clouded. Crude oil prices were slightly higher, with WTI futures above $75/barrel and Brent futures getting close to $80.
Gold (XAUUSD) maintains a bid near $1800
... after Bank of Japan’s surprise tweak of its yield cap sent mixed signals for bullion as the dollar dropped and bond yields rose. Overall, however, the prospect of higher yields in Japan following years of artificially low rates could potentially be seen as gold negative given that the BOJ’s steadfast commitment to defending its 10-year yield cap has served as an anchor indirectly helping keep borrowing costs low around the world. Since the current run up in gold started in early November, the price has not dipped below its 21-day moving average, today at $1777. With momentum showing signs of slowing a break below may signal a period of consolidation ahead of yearend while a close above $1815 is needed for that risk to fade.
US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) drop on BOE and BOJ actions
The surge in yield across the pond in the U.K. and Eurozone as well as the surprise announcement from the BOJ that it will lift the yield cap on 10-year JGB’s from 25 bps to 50 bps has driven U.S. Treasury yields higher, with the yield on 2-year notes rising to 4.27% and that on 10-year notes to 3.68%. In futures, large selling was seen on the 10-year (ZNH3) and the ultra-10-year (TNH3) contracts. The 2-10-year curve steepened to -60bps from the recent peak at -84bps. The move was supported on Monday by a 17bp jump in the yield on the U.K. 10-year Gilts after the Bank of England announced the Q1 2023 bond selling schedule for its Asset Purchase Facility portfolio.
What is going on?
Bank of Japan surprises with lift of yield cap on 10-year JGB’s
The BoJ left the policy rate unchanged at -0.10%, but lifted the cap on 10-year JGB’s to 0.50% from 0.25%, triggering an avalanche of JGB selling that immediately took the 10-year JGB yields close to the new target. The market was caught very off-guard despite recent rumblings that the BoJ would likely eventually shift policy. Most observers assessed, given Governor Kuroda’s constant stout defense of the BoJ’s policy mix, that a change to BoJ policy would take place after Kuroda’s exit on April 8 of next year. This decision overnight finally shows a willingness to move that will have the market more likely to anticipate follow up moves after next April, even hikes of the policy rate. For now, this decision took the JPY some 3% higher overnight and sent global bond yields sharply higher and risk sentiment broadly lower as the tightening move comes at a time when many other central banks are shifting to a deceleration of their respective tightening regimes.
Better German business climate than expected in December
The headline German IFO business climate index, which is based on 9,000 monthly survey responses from firms in the manufacturing, service sector, trade and construction, was out better than expected in December. It climbed to 88.6 versus the prior 86.3 and expected 87.2. The current economic assessment and the expectations also improved to 94.4 and 83.2, respectively. Companies are slightly less pessimistic about the macroeconomic trajectory. Though a recession is certainly unavoidable in Germany, the impact of the energy crisis has been so far more limited than initially feared. On a flip note, ECB policymaker Gediminas Simkus, who serves as the Chairman of the Bank of Lithuania, indicated that a 50-basis points rate hike in February is a done deal. This is aligned with comments from ECB president Christine Lagarde at last week’s ECB press conference.
US December NAHB housing market index slips further
The NAHB housing index fell for a 12th straight month from 84 in December 2021 to 31 this month. However, the rate of decline moderated to its slowest in 6 months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment. Of the index’s three components, current sales conditions fell 3 points to 36, buyer traffic was unchanged at 20, but sales expectations in the next six months increased 4 points to 35, also indicating an improved outlook.
BOE announces restart of long-end bond selling, triggering another sell-off in Gilts
After pausing the sales of long-end bonds recently to help the market to stabilize after the September rout, the Bank of England has announced that it will now start selling evenly across short, medium and long maturity bonds starting from Jan 9, as part of its QT. 2yr gilt yields up 20bps and 10yr up 17bps. Still, gilt yields are well below the peaks near 5% struck in late September and early October, when prices slumped in response to plans for tax cuts and extra spending from former British Prime Minister Liz Truss's short-lived government. Further pressure on gilts cannot be ignored as BOE likely to raise rates by another 50bps at the Feb 3 meeting.
European nations reached a deal to cap natural gas prices at €180/MWh
The deal that will apply for one year from February 15 have no impact on markets this winter given the timing of the implementation and ample supply with stock levels still up 290 TWh year-on-year, the equivalent of 39 days of peak winter demand. The Dutch TTF benchmark gas contract trades near €100/MWh in response to milder weather during the next week and increased power production from renewables reducing demand for gas. The price of gas for the winter 2023/24 period meanwhile has slumped to €110, further reducing the outlook for economic pain next year. Gas consumption in Europe is set to shrink by more than 50 billion cubic meters in 2022, a 12-15% drop and “the sharpest decline in history,” led by price-driven demand destruction and mild weather according to Bloomberg Intelligence.
What are we watching next?
Follow-on from Bank of Japan move overnight
The Bank of Japan move overnight was an uncomfortable one for global markets as it sent global bond yields sharply higher, including the US 10-year yield, which jumped over 10 basis points at one point overnight. Yields also rose elsewhere and this sudden new development in less liquid markets here toward the end of the calendar year could aggravate volatility risks across equity and bond markets.
Earnings to watch
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. The stock recently tried to retake the 200-day moving average above 110.00, but that effort failed and closed yesterday near 103 ahead of today’s earnings report after today’s close. FedEx will also report after the close.
- Today: Nike, FedEx, General Mills, FactSet Research Systems
- Wednesday: Toro, Micron Technology, Cintas, Carnival
- Thursday: Paychex, CarMax
- Friday: Nitori
Economic calendar highlights for today (times GMT)
- 1330 – US Nov. Housing Starts and Building Permits
- 1330 – Canada Oct. Retail Sales
- 1500 – Eurozone Dec. Consumer Confidence
- 2100 – New Zealand Dec. ANZ Consumer Confidence
- 2130 – API's Weekly Report on US Crude and Fuel Inventories
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