What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
S&P 500 futures started the year’s first day of trading yesterday with the element that they had plenty of in 2022, namely volatility. The index futures started rallying in the beginning of the session helped by positive sentiment in Europe and China trading up as much as 1.2% at the intraday high, but spillover effect on sentiment from the slide in Tesla shares and related technology stocks took S&P 500 futures down 0.4%. The intraday price range in S&P 500 futures was more than 2%. The first important macro events of the year are the ISM Manufacturing and the JOLTS Job Openings report for December which could move interest rates and inflation expectations and thus US equity futures later in the session.
Hong Kong’s Hang Seng (HIF3) and China’s CSI300 (03188:xhkg)
Hang Seng Index rallied for the second straight session in 2023 rising by 1.8%. Hang Seng TECH Index surged 3.4%, led by Alibaba (09988:xhkg) soared more than 7% following the news that the Chinese authorities approved an increase in registered capital of the consumer finance unit of Ant Group. Shares of Chinese developers and management services providers climbed on anticipation of state support from the state-owned Economic Daily emphasizing the importance of the real estate sector to the economy in its editorial. Longfor (00960:xhkg) and Country Garden Services (06098:xhkg) each jumped around 10%, being the top performers of the Hang Seng Index. Sunny Optical (02382:xhkg), a supplier to Apple (AAPL:xnas), plunged 12% on analyst downgrades and a Nikkei report that “Apple has notified several suppliers to build fewer components for Airpods, the Apple Watch and MacBooks for the first quarter, citing weakening demand”. CSI 300 is unchanged.
FX: Yesterday’s USD rally moderates. AUD surges on possible end of Chinese coal ban
The US dollar surged yesterday for no readily apparent reason, even as US treasury yields dropped and risk sentiment was strong early in the day. The rest of the day saw very choppy action that suggests currency traders are struggling to find their feet in 2023, although the greenback generally ended the day stronger than where it started ahead of the first important macro data of the year this Friday. Overnight, the Aussie surged sharply, erasing the AUDUSD losses yesterday and seeing AUDNZD to new local highs as Chinese authorities discussed a partial lifting of the Australia coal import ban.
Crude oil (CLG3 & LCOH3)
Crude oil futures, led by gasoline and diesel, turned sharply lower during its first full day of trading with the early 2023 focus being centred around a short-term deterioration in demand as China struggles with Covid-19, milder weather reduces demand for heating fuels and the IMF’s latest warning that one third of the world may suffer recession in 2023. OPEC increased production by 150k b/d last month according to a Bloomberg survey as Nigeria, currently producing below its quota, ramped up production. US production meanwhile is expected to rise by just 600k b/d in 2023, with the pre-pandemic record peak at 13m b/d remaining out of sight. On the supply side Russia’s December shipments of oil slumped to the lowest for 2022 driven by storm disruptions and a shortage of vessels. In Brent, the uptrend from early December looks challenged with a break below $81 signalling further loss of momentum, initially towards $79.65.
Gold (XAUUSD), silver (XAGUSD) and platinum (XPTUSD)
This trio of investment and semi-industrial metals, led by gold’s break higher, are the only commodities trading in the black this week. On Tuesday, sudden dollar strength was being offset by a sharp fall in US treasury yields, both highlighting weak risk sentiment at the beginning of a new trading year. In general, we are looking for a price friendly 2023 for investment metals supported by recession and stock market valuation risks, an eventual peak in central bank rates combined with the prospect of a weaker dollar and inflation not returning to the expected sub-3% level by yearend. However, in the short-term continued dollar strength - as risk appetite elsewhere suffers - may prove too hard to ignore, thereby raising the prospect for a correction and better buying levels. Focus on today’s FOMC minutes and Friday’s US job report. Key support in gold at $1801 with trendline resistance at $1852 being followed by $1878.
Yields on US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) fall sharply on US first trading day of 2023
US Treasury yields fell sharply all along the curve, but fell the most at the longer end of the curve, with the 10-year yield benchmark down almost 15 basis points to 3.73%. Some of the move was in sympathy with European yields, which dropped on a much softer than expected German CPI print. The 10-year US Treasury 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. To the downside, the cycle lows below 3.50% (intraday cycle low was 3.40%) are the focus, with the first major test of the US Treasury market up this Friday on the release of US jobs data and the December ISM Services index and next week on the December CPI report on Thursday, January 12.
What is going on?
US House Republicans so far failing to elect new Speaker of the House
A minority of more Trumpist-leaning Republicans are holding back the election of Kevin McCarthy to become the next Speaker, as he failed to win approval after three rounds of voting yesterday. The House is unable to conduct any kind of business until a new Speaker is elected, and the degree of dysfunction in the House over the next two years will likely be determined by the identity of the leader in the house.
Inflation is cooling down in Germany
Germany December CPI rose 8.7 % year-over-year against prior 10.4 %. The monthly decline is astounding: minus 1.0 % from November to December. In parallel, inflation also slowed down in Germany’s largest state by population – North Rhine Westphalia – with CPI out at minus 1.0 % month-over-month. This matters because it is one of the major industrial states. The drop is partially explained by the drop in energy prices and the one-time government support to reduce the gas bills of households and SMEs. This means the decline in inflation may not last. It will highly depend on the evolution of energy prices this winter. But this is a welcome figure as we kick off the new year.
Officials in China discuss easing Australia coal import ban
Bloomberg is breaking this story, citing sources familiar with the matter, which claim that bureaucrats are proposing allowing a few major coal consumers in China to resume imports as soon as April 1. The Australian dollar jumped sharply in response, as did Australian coal exporters, and even major miner BHP Billiton posted a strong session overnight.
Tesla shares plunge 12% to lowest levels since August 2020
Tesla had a bad start to 2023 as the EV maker reported worse than expected Q4 deliveries Tuesday night trailing the productions figures for the quarter expanding the gap between production and deliveries to a new high. Investors are speculating whether Tesla is facing a demand issue and the recent implemented discounts to entice buyers are still in place suggesting Tesla is willing to sacrifice its operating margin at the expense of keeping up demand to maintain high utilization of its factory capacity. Read our take on Tesla in yesterday’s equity note.
What are we watching next?
November JOLTS Job openings up later, FOMC Minutes up tonight
The JOLTS survey of job openings dropped in October back toward the low for 2022 at just above 10.3M as the November release today is expected to post a new cycle low near 10.0M. Still, these numbers are far north of the previous pre-pandemic record near 7.5M. The FOMC minutes tonight may not move markets much, but are worth watching for where FOMC members are expressing their inflation concerns.
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. This week’s earnings focus is Walgreens Boots Alliance (WBA) and Conagra Brands, with WBA expected to -3% revenue growth y/y for the quarter that ended on 30 November adding to the series of quarters with negative revenue growth. Conagra Brands is expected to deliver 7% revenue growth y/y for the quarter that ended on 30 November as the manufacturer of packaged foods is able to pass on inflation to its customers.
- Thursday: Walgreens Boots Alliance, Conagra Brands, Lamb Weston, Constellation Brands, RPM International
- Friday: Naturgy Energy
Economic calendar highlights for today (times GMT)
- 0745 – France December Flash CPI
- 0815-0900 – Eurozone final December Services PMI
- 0930 – UK Nov. Consumer Credit/Mortgage Approvals
- 1500 – US Dec. ISM Manufacturing
- 1500 – US Nov. JOLTS Jobs openings
- 1900 – US FOMC Minutes
- 2130 – API's Weekly Crude and Fuel Inventory Report
- 0145 – China Dec. Caixin Services PMI
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