What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
It is a US holiday today so US equity markets will be closed. US equities fell the most in 2022 since 2008, ending a year that saw inflation and interest rates coming back to haunt excessive equity valuations. The first two weeks of the year are going to be very exciting to see whether last year’s momentum in commodities and defence stocks continues or new trends in our theme baskets will start to emerge.
Stoxx 50 (EU50.I)
First day of trading under way in Europe with STOXX 50 futures up 0.7% despite several recent remarks from ECB members that policy rates must remain high or go even higher to curb inflation. STOXX 50 futures remain in a tight trading range established since mid-December with the 3,782 level being the key level to watch on the downside and the 3,875 level on the upside.
FX: USD trades near multi-month lows as 2023 gets under way
Interesting to see the USD weakness despite a solid surge in US treasury yields, especially at the long end of the yield curve, as 2022 drew to a close. The first week or two of this year will be needed to see if some portion of the USD’s weakening was down to end-of-year effects. USDJPY trades not far above the important 130.00 level as investors anticipate that the new Bank of Japan leadership change in April will finally bring some tightening, while the market still predicts that the Fed will quickly reach its “terminal” high in the policy rate and eventually ease policy before the year is over. But will the first data points of the year, starting with this Friday’s December US jobs data, support this view?
Crude oil (CLG3 & LCOH3)
Crude oil futures ended a volatile 2022 close to unchanged after having traded within the widest range since 2008. Another volatile year undoubtedly lies ahead with multiple uncertainties still impacting supply and demand. The two biggest that potentially will weigh against each other in the short term remain the prospect for a recovery in Chinese demand being offset by worries about a global economic slowdown. Covid fears, inflation fighting central banks, lack of investments into the discovery of future supply, labour shortages and sanctions against Russia will also play its part in the coming months. Ahead of yearend, hedge funds raised bullish Brent crude oil bets by the most in 17 months. At 144k contracts, however, it remains around half the five-year average.
Gold (XAUUSD) and silver (XAGUSD) ended 2022 on a high note
Having closed 2022 near unchanged despite massive headwinds from a stronger dollar and surging treasury yields, the outlook for 2023 looks more price friendly with recession and stock market valuation risks, an eventual peak in central bank rates combined with the prospect of inflation not returning to the expected sub-3% level by yearend all adding support. In addition, the de-dollarization seen by several central banks last year, when a record amount of gold was bought look set to continue, thereby providing a soft floor under the market. As always, the dollar and yield movements will be a key focus while in the short term the market will look ahead to Wednesday’s FOMC minutes and Friday’s US job report.
Yields on US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) start the year near multi-week highs
US Treasury yields backed up higher as 2022 drew to a close, particularly at the longer end of the yield curve, helping to steepen the yield curve from its most inverted levels in some four decades earlier in December, but still starting the year with an inversion for the 2-10 yields of around –50 basis points as market participants figure that a recession is on the way this year that will see the Fed chopping rates by year end. The 10-year yield level to watch to the upside is perhaps the 4.00% area ahead of the 4.34% high from October, which is a 15-year high.
What is going on?
2022 was the worst year for combined stock and bond portfolios in modern memory
The year of 2022 was so unusual as bonds failed to provide any diversification in what investors have traditionally seen as “balanced” portfolios of, for example, 60 percent stocks and 40 percent bonds. An FT article calculated that 2022 was the worst year, in nominal terms, for combined equity and stock portfolios, since 1871.
China official December Non-manufacturing PMI plunges to 41.6
... as December was the month (December 7 seen as the major turning point) that China finally backed away from its zero Covid policy, ironically meaning that in the short term, activity levels have plunged as the virus spreads rapidly throughout the country rather than due to official restrictions on activity. In a New Year’s address, President Xi Jinping discussed the “new phase of Covid response”.
Hedge funds increased commodities exposure ahead of year-end
Speculators went on a buying spree ahead of yearend with broad demand lifting the combined net long across 24 major commodity futures contracts by 16% to a six-month high of 1.4 million lots. Except for natural gas all other contracts saw net buying led by Brent crude which saw the net long jump by the most in 17 months. The other main contributors were gas oil, gold, grains led by corn, as well as sugar and cocoa. Combined with the prospect of a recovery in demand from China, continued dollar weakness ahead of yearend may have played a role supporting demand. Speculators exited 2022 with the biggest dollar short since July 2021, but it is worth noting the bulk being against the euro where the €18.5 billion long is the biggest in 23 months.
What are we watching next?
US Data this week relative to market expectations for Fed policy
The market continues to express the view that inflationary pressures will decelerate and that the labour market will loosen up sufficiently for the Fed to begin chopping rates before year-end. Last week’s US Consumer Confidence survey for December showed a strong surge in confidence, a development that is at odds with past patterns for the survey if the country is tilting into a recession. Further strong US data for December and the next month or two would be an interesting challenge of the market expectations. This week sees the release of the December ISM manufacturing survey on Thursday and the December jobs report on Friday.
Earnings to watch
The earnings calendar is light in the first week of the new year, but in a couple of weeks the first Q4 earnings releases will begin to be released. The Q4 earnings season will continue its focus on margin pressures related to input costs on employees and raw materials including energy.
- Thursday: Walgreens Boots Alliance, Conagra Brands, Lamb Weston, Constellation Brands, RPM International
- Friday: Naturgy Energy
Economic calendar highlights for today (times GMT)
- 0815-0900 – Eurozone Final Manufacturing PMI
- UK Markets Closed
- US Markets Closed
- 0145 – China Dec. Caixin Manufacturing PMI
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