Summary: Equity markets in the US were broadly weak yesterday, weighed down in particular by $150 billion in market cap gushing out of Tesla stock yesterday. Elsewhere, Chinese producer prices rose by their fastest clip for the cycle and oil prices jumped back higher and close to cycle highs. Today the focus swings to US October CPI data and whether this can reverse the recent rally in US treasuries, especially after a weak 10-year Treasury auction yesterday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the jolt from Tesla shares was felt across US equity futures yesterday, but the market is bouncing back this morning with Nasdaq 100 futures trading above yesterday’s close. The 16,130 level in Nasdaq 100 futures which was today’s low and the open print four sessions ago is now firmly the key support level that must hold for keeping upward momentum intact.
EURUSD – the modest bullish reversal on Friday and minor support the pair has achieved on US treasury yields tanking this week (some of which may be linked to the Fed Chair nomination suspense as mentioned below) has not resulted in any notable rally, so the action looks heavy here for the pair in its current range. The next action will likely key off today’s US CPI data and possibly risk sentiment. If yields rise and sentiment is soft on hotter than expected US CPI data, EURUSD could push down on the cycle support and the big psychological level at 1.1500. To the upside, there is a rather thick layer of resistance from 1.1616 to 1.1692 that must be cleared to shift the focus back higher.
USDJPY – the JPY is likely one of the more sensitive currencies to the direction in US yields in the wake of today’s important US October CPI release after having strengthened across the board on the recent pronounced dip in yields at the long end of the US yield curve. Some of that fall in yields may be due to noise that Fed Chair Powell will not be renominated as mentioned below. Regardless, USDJPY has consolidated from the top above the important 114.50 area and is in a zone of uncertainty that stretches to the 111.50-111.25 area, but today could prove pivotal for establishing local support, particularly if US treasury yields pop back higher post data.
Crude oil prices jumped on Tuesday after the U.S. Energy Information Administration (EIA) in its monthly report forecast an oversupplied market by early next year, thereby supporting OPEC+ and their steady approach to rising production. The bullish market reaction to bearish news which included a forecast for rising US production, sprung out of the fact the Biden administration may now back away from releasing strategic reserves into the market. The API late in the day added support after reporting a 2.5-million-barrel drop in crude stocks and a near 8-million-barrel drop in fuel stocks. Ahead of tomorrow's monthly oil market report from OPEC, the focus turns to US CPI and EIA’s weekly report and whether WTI and Brent can find a bid to challenge the recent highs.
Gold (XAUUSD) trades lower after once again finding resistance above $1830, an area that has been rejected eight times since July. Ahead of today’s key US CPI report, China overnight released another strong reading on both CPI and not least PPI (see below). Supporting gold’s latest attempt to cross the line has been a continued drop in US bond yields which together with elevated breakevens has pushed ten-year real yields down to minus 1.2 percent. ETF holdings meanwhile dropped to a fresh 18-month low as some investors continue to sell into the recent price bounce. Silver dropped after finding resistance at $24.50, and just like gold it will be facing stiff resistance above with focus on the double top around $24.85.
US treasuries (TLT, IEF, SHY). The recent bond rally does not seem to resonate with investors. Yesterday’s 10-year note auction tailed by 1.2bps, the most since April 2020. The bid-to-cover dropped from 2.58x the previous month to 2.35x, the lowest since December 2020. It was enough to help yields bounce back from the day’s low at 1.41%. This morning the 5-year breakeven rate continues to advance hitting 2.99%, the highest since 2002. The overall focus remains on today’s inflation readings and the 30-year auction. Although it is very unlikely that inflation will disrupt markets unless it exceeds expectations by much, the current trend indicates that more bear flattening of the yield curve is possible especially in the 5s30s space.
German Bunds (IS0L). The ZEW report showed that financial market professionals are more bullish about the next six months than the current situation. 10-year Bund yields dropped further to –0.29% and they are now testing resistance at their 100 days MA. Today the German DMO will sell 10-year Bunds.
UK Gilts (IGLT). The Gilt yield curve flattened yesterday. Two-year Gilt yields rose 4bps, while the 10-year dropped 7bps. On Thursday, growth, industrial and manufacturing data will be released for the UK. If numbers are weak, we could witness another rally in Gilts. Despite last week’s dovish Bank of England meeting, the market is still pricing four interest rate hikes in 2022, giving investors plenty of room to scale back further on rate hikes expectations.
What is going on?
China October producer prices rose by the most in 26 years as the year-on-year PPI registered a rise of 13.5%, well above the 12.3% expected and 10.7% from September. Part of the rise is due to output reduction due to the recent power crunch that required some factories to shut down The October China CPI also rose more than expected, though it was only +1.5% year-on-year versus 1.4% expected.
Grain and soybean futures trade higher after the monthly WASDE report confirmed expectations for shrinking global inventories. Soybeans surprised the most and rose 2.2% after the USDA unexpectedly trimmed domestic yields, thereby offsetting recent weakness due to lower Chinese demand forecasts. Tight global wheat supplies remain a worry after the report once again lowered its forecast, with key exporters all shipping out more than previously expected. The EU looks particularly tight as the current season could see the smallest stockpiles in decades.
European stocks to watch this morning. Adidas is surprising investors with a cut to their FY gross margin as the sportswear brand is hit hard by global supply constraints. Shares are down in pre-market trading. Infineon Technologies, which is the biggest supplier of semiconductors to the car industry, is raising its guidance for operating margin as pricing remains favourable driven by strong demand and supply constraints. Allianz is raising its outlook driven by strong performance in its asset management segment.
US earnings recap. Coinbase shares fell last night as the largest crypto exchange missed on Q3 revenue reporting $1.31bn vs est. $1.57bn, but the thing that worried investors the most was the lower-than-expected monthly transacting users on the trading platform which was down q/q. NIO, the largest pure-play EV maker in China, reported better than expected delivery and revenue figures for Q3 and narrowed its operating loss driven by stronger margins, but the Q4 revenue guidance was a tad to the weak side.
Rivian raises its IPO price to $78 and starts trading today. Following exceptionally strong demand for its shares, Rivian priced its shares at $78 which was significantly higher than the initial IPO pricing range of $57-62. The shares of the electric-truckmaker will start trading today and represent the first pure-play on commercial delivery vehicles. The company has Amazon as one of its biggest backers.
What are we watching next?
Who will Biden nominate to head the Fed in February? - This question is urgent for financial markets as the news that the supposedly more dovish candidate Lael Brainard (currently of the Fed Board of Governors) interviewing for the jobs as Fed Chair at the White House on Friday is seen by many as driving the significant rally in US treasuries since then. The news is likely to arrive inside the next two weeks. Powell is still favoured to be renominated for a second term starting next February, but powerful Democratic senator Elizabeth Warren has come out loudly against the Republican Powell’s renomination. A significant minority believe that Powell will be made to pay for the trading scandal that happened under his watch at the Fed, one that included Vice Chair Clarida and two regional Fed presidents. Brainard is nominally considered the most dovish of the likely nominees, although Powell has proven quite dovish himself since a pivot in early 2019.
US October CPI data today – the US October PPI was in line with expectation yesterday at very elevated levels, but the US October CPI today will receive far more attention, even if it seems the Fed has pre-declared that it will tolerate almost any level of inflation as long as the US economy hasn’t reached full employment and there are no real signs of a wage-price spiral. The reading today is expected at +0.6% MoM and +5.9% YoY for the headline, which would mark a new 30-year high for the year-on-year figure after +5.6% in September. The core CPI is expected at +0.4% MoM and +4.3% YoY after 4.0% in September and still below the high for the cycle from June at +4.5%.
Earnings Watch – today’s US earnings releases worth watching are Tencent and Walt Disney, with the former being China’s most powerful and wide-ranging digital company and Walt Disney in an epic fight against Netflix in video streaming and trying to get profitability back in its theme parks.
Wednesday: Genmab, Credit Agricole, EDF, Alstom, Allianz, adidas, Infineon Technologies, E.ON, Tencent, NTT, Walt Disney, SoFi Technologies
Thursday: Brookfield Asset Management, Siemens, Merck KGaA, Deutsche Telekom, Hapag-Lloyd, Semiconductor Manufacturing, Generali, Nexi, ArcelorMittal, Coupang
Friday: KBC Group, AstraZeneca, Richemont, Pinduoduo, Li Auto
Economic calendar highlights for today (times GMT)
0800 – Czech Oct. CPI
1330 – US Weekly Initial Jobless Claims
1330 – US Oct. CPI
1400 – UK BoE’s Tenreyro to speak
1530 – US Weekly DoE Crude Oil and Product Inventories
1700 – US Weekly Natural Gas Storage Change
0001 – UK Oct. RICS House Price Balance
0030 – Australia Oct. Employment Change / Unemployment Rate
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
