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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures shot lower from the moment they opened overnight on the new Covid variant news, a jolting development after Wednesday’s pre-Thanksgiving holiday closed seemed to show risk sentiment trying to make a stand after some early last week, and perhaps in part in anticipation of the traditionally strong seasonal run into the winter holidays in late December. Given poor liquidity today in the US as many are away from their desks for a long holiday weekend and the market is only for a half session, any significant flows by traders looking to reduce risk could mean significant volatility.
Stoxx 50 (EU50.I) - the main European equity futures contract is down 3.2% on the news of a new more infectious Covid strain as it increases the probability of new lockdowns to safeguard hospitals. We observe the pandemic playbook in equities with technology and online companies falling less than physical companies such as miners, energy, and retailers. Stoxx 50 futures have broken below the 50% retracement level measured on the recent runup since early October. The next critical support levels are at 4,125 and 4,058. As this is a Friday, the liquidity situation could be significantly worsened and exacerbate intraday moves.
USDJPY and JPY crosses – The huge shift in market mood overnight saw risk aversion sweeping across global markets driving US treasuries back higher and US yields lower, and triggering a huge jolt of JPY buying, as the JPY trading up against all of its G10 peers. USDJPY is well back below the 115.00 level that was broken overnight and the classic “risk proxy” AUDJPY was blasted for steep losses, with GPJPY also in particularly steep retreat. Another pair worth watching is EURJPY, where there is a well-defined range low near 128.00. Further risk aversion and falling yields could support a significant extension of the JPY rally if we are seeing a sustained change of mood here.
Gold (XAUUSD) traded higher overnight as renewed Covid fears spread to financial markets with US Treasuries trading sharply higher, thereby reducing the threat that earlier in the week helped send gold crashing below $1835. A combination of high inflation and the economic risks associated with the new virus strain could provide renewed demand following the recent washout. US ten-year real yields slumped to –1.09% while the nominal yield dropped to 1.54% just days after threatening to break above 1.7%. From a technical perspective, a break above $1816 would signal renewed strength and a possible fresh challenge towards the $1830-35 resistance area.
Crude oil (OILUKJAN22 & OILUSJAN21) slumped on renewed Covid concerns ahead of next week’s OPEC+ meeting. The market got caught up in a wave of caution overnight with Brent falling 3% as the new and fast mutating virus variant drives worries about renewed restrictions on mobility at the time when the existing delta is already triggering renewed lockdowns in Europe. Next week’s OPEC+ decision on production levels for January has suddenly been made extra hard with the risk of weaker Covid-related demand coming on top of the SPR release announcement earlier this week.
US treasuries (SHY, IEF, TLT). A new Covid wave is leading investors to fly to safety provoking yields to drop roughly 10bps across the whole US yield curve. However, we expect the bond rally to be short-lived for several reasons. First, the market has learnt through earlier new strains that Covid is temporary. Secondly, a renewal of lockdown measures would make supply chain bottlenecks worse, introducing even more inflationary pressures to the economy. Therefore, it’s necessary for central banks to stop stimulating demand, keeping intact the recent Fed’s hawkish tilt. We expect more aggressive monetary policies beginning with an acceleration of the pace of tapering in December, followed by earlier interest rate hikes expectations. It will be inevitable for yields to resume their rise and the yield curve to bear flatten. Today investors will find poor liquidity in markets due to the Thanksgiving holiday, cautious will be needed.
German Bunds (IS0L). The new German government unveiled a governing coalition deal. Among the extensive list of policies, bond investors should focus on the accommodative fiscal policies for 2022 and 2023, the beginning of a “decade of investment” and the rejection of a new lockdown amid a record rise of Covid cases. More spending translates to higher Bund yields. However, yields remain muted as Europe becomes the new epicenter of Covid-19 infections. With news of the new South Africa strain, yields might fall until we’ll have a full picture of what is happening.
Italian BTPS (BTP10). Italian government bonds remained in check as governments in Europe move forward to impose new restrictions due to a rise Covid-19 infections. Yet, investors should remain vigilant as the PEPP program will still end in March. To weaken sentiment in BTP’s further is also the news that President Mattarella is going to vacate his position in January leaving a political vacuum. Parties are pushing Draghi to il Quirinale to get rid of him and go to early elections. If that were to happen, the stability that Italian BTPS enjoyed since Draghi entered in Italian politics will vanish provoking a fast widening of the BTPS-Bund spread.
What is going on?
What we know about the new Covid virus variant that’s hurting markets. The new Covid virus variant, with a scientific description of B.1.1.529 but with no Greek letter yet designated, has been identified in South Africa and observers fear that its significant mutations could mean that current vaccines may not prove effective, leading to new strains on healthcare systems and complicating efforts to reopen economies and borders. Researchers have yet to determine whether it is more transmissible or more lethal than already known variants. As of Thursday, 90% of 100 positive PCR tests in a specific area of South Africa were of the new variant.
The South Korean central bank raised its policy rate 25 bps to 1.00% as expected and signaled further rate hikes to come, saying that rates are still accommodative after now having hiked twice for this cycle.
The Swedish Riksbank kept rates at 0%, sees lift-off by the end of 2024. This is the first time the bank has indicated a positive rate potential in their policy forecast horizon. SEK tried to rally yesterday, but is stumbling badly overnight, with EURSEK is soaring this morning in correlation with the decline in global market sentiment, as the Swedish krona is very sensitive to the EU economic outlook and a weaker euro and to risk sentiment more generally. The 2021 EURSEK high near 10.33 is suddenly coming into view after the pair traded south of 10.00 less than two weeks ago.
Australia Retail Sales leap 4.9% month-on-month versus 2.2% expected, as lockdowns ended across the country, but with the market is not in the right place to celebrate the news as new Covid strain fears elsewhere dominate the news flow and the Aussie traditionally trades weaker when risk sentiment tanks as it has done since last night.
What are we watching next?
This is a remarkable and violent shift in mood at an awkward time for markets - as the most liquid global market, the US, was out yesterday for a holiday and the Friday after Thanksgiving (today) usually sees the vast majority of traders and investors still on holiday, with the US equity market only open for a half session. Ahead of the weekend and with the new virus news afoot, markets may have a hard time absorbing new trading flows and the risk of gap-like moves rises.
Black Friday consumer spending – retail sales during Black Friday today and over the weekend is often a good barometer on consumer confidence and causes big moves in retailers the following week as their weekend sales are announced.
Earnings Watch – the new Covid-19 virus strain observed in South Africa is obviously overshadowing the two important earnings releases from Meituan and Pinduoduo, but they are important for investors investing in Chinese technology companies. Despite Chinese companies at the margin have fared better than expected on earnings in Q3, estimates for Q4 and beyond are still coming down.
Friday: Meituan, Pinduoduo
Economic calendar highlights for today (times GMT)
0800 – ECB President Lagarde to speak
0830 – Sweden Oct. Retail Sales
1300 – UK Bank of England Chief Economist Huw Pill to speak
1330 – ECB Chief Economist Lane to speak
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