Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: Yesterday finally saw a pause in the blistering rally in equity markets, as the major indices consolidated sharply after posting new cycle highs, although the bounce-back overnight in the futures market has already erased some of the modest damage. The omicron variant continues to rage and continues to fail to register on this market, even as global cases topped a million for the second day running.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities took a breather from new record highs for the S&P 500 index, while the Nasdaq 100 index just failed to reach its all-time high before consolidating yesterday. While wrapping up a very impressive 2021 indeed, US equities may find the environment next year somewhat more difficult, with rising wages and inflation possibly weighing on margins and earnings growth, and the risk of tighter Fed policy putting pressure on valuations, especially if longer treasury yields pick up next year.
USDJPY - as noted below in the “calendar roll effects”, USDJPY has seen clear quarter-end patterns for every quarter of the year thus far, with the price action spiking into quarter-end, followed by a significant consolidation or sell-off as the next quarter gets underway. As well, USDJPY seems to be outperforming one of the more useful coincident indicator for the pair, long US treasury yields, which haven’t done much of anything in recent days and are not supporting the last leg of the recent rally to nearly 115.00. Technically, the key resistance is the 115.52 high posted just prior to the sharp sell-off inspired by the announcement of the omicron covid variant of concern at the end of November.
AUDJPY – this classic risk proxy pivoted yesterday back to the downside after a rather precise test of the 61.8% retracement (at 83.40, actual high was 83.45) of the sell-off from the major highs of 2021, a key technical point and a JPY pair to watch in light of seasonality, etc, as noted for USDJPY.
Crude oil trades near a one-month high after API’s weekly stock report showed a 3.1 million barrels drop in US crude inventories with smaller declines also seen in gasoline and distillates. The underlying low liquidity momentum driven rally this month has taken the price of WTI and Brent well above the range lows (approximately 77 for Brent and 75 for WTI) seen prior to the late November omicron sell off. With the market currently betting the omicron virus, despite a global surge, will not derail robust global demand, the mentioned hold has opened the door for a return to the cycle highs from October. The lowest speculative bet on rising prices in 13 months also supporting. Short-term focus on today's EIA stock report and how China handles several virus outbreaks.
Gold (XAUUSD) - holds above $1800, the 2021 average price, but has struggled to attract the momentum needed to push above $1815, the 50% retracement of the Nov to Dec sell off. This is despite another bad stumble across cryptocurrencies, and the omicron virus variant raising short-term growth concerns. One of the reasons why gold trades down on the year, despite the highest inflation in decades, is the continued rally in stocks which has reduced demand from real money managers. A development that is visible in the ETFs where total holdings have seen a steady decline all year to the lowest since May 2020. Above $1815 and $1830, gold needs to retake 1,850+ (the major pivot high from mid-November is just above 1,875) to impress.
US short interest rates – much of the US yield curve is rather stuck in the mud, either because the market doesn’t believe in the outlook for sustained inflation or because it is predicting a drastic slowdown in the economy beyond the next year or two. But the US two-year yield has risen sharply higher, from a recent low of 60 basis points on December 20 to as high as 75 bps yesterday on market optimism that the omicron variant of covid will soon fade and that the Fed will bring forward its intention to hike rates as soon as the March FOMC meeting. The next round of US data next week (December payrolls and earnings) will offer the next major test after the calendar roll into the New Year.
What is going on?
The rise in U.S. home prices decelerating slightly. The S&P Case-Shiller October national home price index was up 19.1% YoY versus 19.7% in September. But all 20 metros are still up at double-digit year-over-year rates, with the biggest increases in Phoenix (32.3%), Tampa (28.1%) and Miami (25.7%). This fuels inflation, of course. This market is also a real challenge for buyers (see the full report.).
US Mid-Atlantic region still showing positive momentum in manufacturing activity. The December composite index released by the Richmond Fed was out at 16 versus 12 prior (revised figure). Most of the main components are rising as well: shipments, services index, new orders, while employment dipped to 10 versus 34 prior. The inflation headache remains. Prices paid increased to 13.98 versus 11.19 prior and prices received jumped to 8.26 versus 6.91 prior.
What are we watching next?
Calendar roll effects into 2022, particularly for the US dollar and US yields. The USD saw major direction changes on at least two calendar rollovers into a new year in recent years and USDJPY specifically has shown quarter-end effects (spiking higher into quarter end only to sell-off as the new quarter gets under way) in the first three quarters of this year, and has been rallying hard in the final days of this year. Large calendar effects over year-end were particularly notably in the transition 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.
Italian politics as the Italian presidential election will be held on January 4, 2022. Incumbent president Sergio Mattarella, who is eligible for another term, will not run. Yesterday, former Prime minister and current leader of the far-right Five Star Movement, Giuseppe Conte, indicated his preference for a woman as new Italian president. This would be symbolic. About 65% of MPs are men. This is a strategic move for Conte too. This would prevent current Prime Minister Mario Draghi from being elected president, which would automatically lead to a snap parliamentary election, which would be disastrous for the Five Star Movement, according to the latest polls. Conte positions himself as a progressive too.
French presidential election: the far-right candidate, Eric Zemmour, is losing momentum. A survey from IPSOS released on 27 December shows that 70% of people interviewed have a negative opinion about Zemmour against 63% in October. Zemmour is losing ground in voting intentions for the first round too. This is likely due to Zemmour’s own bad behaviour (cursing journalists and giving a middle finger to a demonstrator) but also the recent victory of former Sarkozy minister Valérie Pécresse, who has emerged as the candidate for Les Républicains. She is now polling well above Zemmour and even above Le Pen in some recent polls, in second place behind sitting president Emmanuel Macron.
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)
1330 – US Nov. Pending Home Sales
1530 – US DoE Weekly Crude Oil and Product Inventories
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