What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities seem confused about in which direction to charge with the market sensing nervous central bankers on the inflation question and signs of margin pressures among companies. S&P 500 futures have opened higher from yesterday’s ugly close with the 4,544 level as the clear critical support level to watch today if the selling continues. The VIX forward curve is still in steep contango suggesting little nervousness about volatility and risk in the short-term.
USDJPY and JPY crosses – very interesting to note the resilient Japanese yen even as the market is aggressively repricing central bank rate moves over the coming year, which has produced a strong flattening of yield curves, with long yields pinned and even lower while the shorter yields have soared. This underlines once again that the JPY only has eyes for the longer end of the curve. Still, we must keep in mind that the JPY suffered a very weak month in October until about a week ago, so end-of-month rebalancing through tomorrow are an important hurdle to get past for the lay of the land for JPY crosses. Technical reversals in key JPY crosses would only come into view if EURJPY, for example, dips below 130.50 and USDJPY all the way back below 112.00.
USDCAD – interesting to see that USDCAD is almost back to where it was before the Bank of Canada meeting yesterday, despite the very hawkish surprise (more below). Clearly, a strong sell-off in oil prices is weighing on the currency, but the lack of more significant support for CAD despite the most hawkish of outcomes might suggest the risk of CAD weakness, especially on a more hawkish FOMC next week. A close above 1.2400 could usher in a test of the first key resistance level up at 1.2500.
Crude oil (OILUKDEC21 & OILUSDEC21) trades lower as Iran and EU prepare to resume nuclear talks and as the gas-to-oil switching focus fades with gas and especially coal trading sharply lower. Chinese coal prices have almost halved in less than ten days while Dutch TTF benchmark gas trades back below €80/MWh in response to Putin promising more supplies next month after Nord Stream 2 gets closer to being approved in Germany. The weekly US stock report was mixed with an expected seasonal rise in stocks being somewhat offset by another big drop at Cushing, the delivery hub for WTI crude oil futures. WTI has so far managed to find support ahead of $80.50, the 21-day moving average while Brents s/t technical outlook looks more challenging.
Industrial metals trades lower in response to recent developments in China where supply disruptions and spiraling energy costs have eased following China’s plans to cap coal prices to resolve the power crunch. A near 50% drop in coal prices during the past ten days has helped send aluminum, the most energy intensive metal to produce, down by 20%, while the copper (COPPERUSDEC21) market has gone from focusing on low stockpiles to long liquidation from funds and investors who got sucked into last week’s run up in prices. The strong fundamental outlook has in our opinion not changed but recent developments highlight the kind of volatility these markets can throw after us when both supply and demand uncertainties are at play.
Gold (XAUUSD) remains rangebound with support from a continued fall in US real yields and a stable dollar. The technical outlook remains supportive after two failed attempts to break below the 200-day moving average, currently at $1792, left the chart with two long tails, signaling lack of selling conviction below that level. The market still looks like it is lacking the energy to properly challenge resistance at $1813 before the big one at $1835. The mentioned slump across industrial metals has led to renewed headwind for silver driving the gold-silver ratio to a one-week high.
What is going on?
Bank of Canada surprises by ending QE, moving forward lift-off guidance. The Bank of Canada surprised the market by abandoning QE and moving to a “replacement only” stance to maintain its current balance sheet size, while also bringing forward the guidance on the expected time frame for a lift-off from “second half” of 2022 to the “middle quarters” of next year – meaning as early as the April meeting, although the market continues to front-run the Bank’s guidance, already appreciable odds of a rate hike already at the December meeting and almost fully priced for a hike at the January meeting. The Bank brought down its GDP forecast for next year to 4.25% from 4.5%, but only due to supply-side constraints.
Yield curve flattening mayhem. The Bank of Canada move yesterday saw the Canadian yield curve the latest one to flatten viciously as Canadian two-year yields surged some 20 basis points higher, while the 10-year yield fell slightly and the 30-year yield punched some 7 bps lower. Likewise, the UK yield curve flattened sharply with 30-year yields dropping some 15 basis points in the wake of the fall budget statement. And the US yield curve was no exception, although the rise in 2-year yields has been slower there. in aggregate, the moves suggest the market realization that most central banks are both taking the inflation far more seriously, but also that their tightening will very quickly put the screws on the economy and the risk of more sustained inflationary outcomes.
Volkswagen lost momentum against Tesla in Q3. Volkswagen has reported Q3 earnings this morning showing operating margins under pressure for Germany’s largest carmaker with its volume brand group posting a operating loss in Q3. The transition to EV and the global supply constraints will eat into profitability in the short-term but the market is still betting that VW is most suitable competitor against Tesla’s race to dominate the future of cars. Volkswagen delivered 122,138 new EVs in Q3 up 10% q/q failing to keep pace with Tesla’s 19.9% q/q increase in deliveries.
UK Fall Budget statement sees higher spending estimates, but lower gilt issuance as UK tax revenues are set to increase. While UK taxes are set for their highest levels since the 1950’s to help pay for the pandemic largesse and further spending needs under the current government’s spending priorities, Chancellor Sunak tried to spin the budget statement as an important step for shoring up the country’s fiscal position for the longer turn as he lowered the treasury’s borrowing forecast for the next five years by GBP 150 billion. UK long yields reacted sharply with a significant drop, while the reaction in sterling was insignificant.
TotalEnergies beats expectations for Q3 earnings and sounds alarm on natural gas. The French energy company beat earnings estimates driven by surging gas prices in Europe and especially in liquified natural gas in which the energy company is leading. The French energy company expects natural gas prices to remain elevated into late Q2 2022 which is bad news for Europe’s industry trying to cope with rising input costs.
What are we watching next?
ECB meeting for any signs of recognizing inflation risks. While opinions are clearly divided on the ECB governing council on the inflationary risks from here, the central bank may do all it can to delay any shift in its stance until the December meeting, which will bring the next set of economic forecasts and likely firmer plans for what the bank plans to do once the PEPP QE purchases wind down in March of next year. Still, worth watching for signs that the bank is opening up for a more flexible stance on inflationary risks. The market has even gone as far as to predict rate hikes beginning slowly some time late next year.
Earnings Watch – this is the biggest earnings week during the Q3 earnings season with all the major US technology companies reporting. Today’s key focus is on earnings Apple, Amazon, Mastercard, and Caterpillar, which will set the direction and settle whether the margin squeeze is for real in aggregate terms. There might be considerable downside risk to Mastercard given Visa’s recent earnings disappointment, and Apple might also have a downside risk due to supply constraints, although their Services segment could offset the weakness in hardware.
Thursday: Anheuser-Busch, Shopify, Suncor Energy, Sanofi, Dassault Systems, TotalEnergies, PetroChina, BYD, Agricultural Bank of China, UniCredit, Sony, Keyence, Royal Dutch Shell, Lloyds Banking Group, Hexagon, Apple, Amazon, Mastercard, Comcast, Merck & Co, Linde, Starbucks, Caterpillar, Atlassian, Newmont, Volkswagen
Friday: BNP Paribas, Daimler, Merck, China Construction Bank, Bank of China, Eni, Exxon Mobil, Chevron, AbbVie, Colgate-Palmolive
Economic calendar highlights for today (times GMT)
0710 – Hungary Central Bank chief Matolcsy to speak
0730 – Sweden Sep. Retail Sales
0730 – Sweden Q3 GDP
0755 – Germany Oct. Unemployment Change
0900 – Euro Zone Oct. Confidence Surveys
1145 – ECB meeting
1200 – Germany Oct. Flash CPI
1230 – ECB President Lagarde press conference
1230 – US Weekly Initial Jobless Claims
1430 – US Weekly Natural Gas Change
1500 – Norway Norges Bank’s Olsen interview
2300 – South Korea Sep. Industrial Production
2350 – Japan Sep. Flash Industrial Production
0030 – Australia Q3 Retail Sales
0030 – Australia Q3 PPI
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