Market Quick Take - January 14, 2022

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - very US confusing equity session yesterday with bubble stocks declining 6% despite falling interest rates and e-commerce stocks were rallying 3% which is odd given these two pockets of the market are normally quite correlated. Nasdaq 100 futures dropped 2.5% closing just below the 15,500 level but are attempting to rebound in early European trading this morning trading around the 15,550 level. If the rebound continues today the 15,728 level is the next key level to watch and if equities sell off again Nasdaq 100 futures are quite open-ended on the downside all the way down to the 15,152 level.

EURUSD and AUDUSD - the big EURUSD pair broke free of sub-1.1400 resistance earlier this week in the wake of a strong US CPI data, but will the action carry through the next layers of resistance 1.1500-25? On the one hand, it was impressive to note the euro’s resilience and the Aussie’s resilience in the face of very weak global risk sentiment yesterday. On the other hand, if the selling deepens further, the USD could gain the upper hand as it normally out-performs as a safe haven. AUDUSD needs to maintain the 0.7200-50 area to keep the focus to the upside.

USDJPY and JPY crosses – the JPY rose to the top of the heap yesterday as risk sentiment rolled over and safe haven bond yields fell, the one-two combination that often supports the currency. The action helped to cement the reversal in USDJPY below 115.00, with the next focus there on 112.50 if the next major equity market supports give way – possibly eventually 110.00 on a larger scale correction. Elsewhere, the JPY was also throwing its weight around, although with lower beta than in USDJPY. Levels for other JPY crosses in focus include the 82.00 area in AUDJPY and 130.00 in EURJPY.

Another roller-coaster week in global gas markets. After jumping 14% on Wednesday in response to frigid cold weather US natural gas (NATGASUSFEB22) slumped 12% on Thursday as weather forecasts turned milder. Adding to this the recent surge in LNG shipments to Europe and the once-insulated US market has become much more exposed to international developments. Meanwhile in Europe, Dutch TTF benchmark gas (TTFMG2) briefly traded below €70/MWh on Thursday in response to continued mild weather and strong overseas LNG supplies, before suffering a sharp reversal after Russia-US talks failed to ease fears of military action in Ukraine, a crossing point for around one-third of Russian gas to Europe. In early trading Friday the TTF contracts traded more than 40% above Thursday’s low.

Gold (XAUUSD) has returned to key resistance in the $1830 area after finding a bid during yesterday’s lower-than-expected-driven US PPI correction to $1813. Supported by continued dollar weakness and after several hawkish comments from Fed members (see below) were seen as already priced in (four rate hikes in 2022 starting March). The comments, however, did drive renewed weakness in growth stocks traded on Nasdaq while bond yields are increasingly torn between a Fed-driven increase in bond yields against the rising risk of an economic slowdown. Silver’s recent outperformance faded in response to profit taking among industrial metals. In gold a break above $1830 could see it target $1850 ahead of the November peak at $1877.

US treasuries (IEF, TLT) - Demand at yesterday’s 30-year auction was good despite it tailed by 0.3bps. Indirect bidders rose to 64.9% above the six-auction average in a sign that investors are positioning for a policy mistake in the long part of the yield curve. In the meantime, Leal Brainard joined other Fed officials in saying that a rate hike is probably already in March. Biden is now looking to nominate Sarah Bloom as vice chair for supervision at Fed. She has been a climate change advocate and supporter of tougher regulations on banks. The White House is also pushing forward Lisa Cook and Philip Jefferson as governors, the latter advocated for the benefit of lower rates being worth the risk of higher inflation. Therefore, such appointments could slow down the Fed tightening agenda for this yield lifting some compressing forces on the long part of the yield curve.

German Bunds (IS0L) - The German yield curve bull flattened yesterday with 10-year Bund yields falling by 3bps to 0.9% as money markets adjust ECB rate hike bets down. Yet, everything continues to point to positive Bunds yields ahead, starting with the the fact that the ECB will halve stimulus to the economy this year.

Italian BTPS (BTP10) - Italian government bonds gained the most yesterday as yields were dropping in Germany. To favour the move were the solid 2-year and 7-year BTPS auctions in the morning, and news that the centre-right bloc supports the nomination of Berlusconi as Presidente della Repubblica. As long as Draghi does not leave his Prime Minister role, markets believe that a political crisis will be avoided.

What is going on?

Russia says talks with the US and its allies are at “a dead end”. Further talks are scheduled, but Russia’s declaration spooked the ruble exchange rate yesterday and saw European natural gas prices opening higher this morning.

Fed Vice Chair nominee Lael Brainard says she is open to March rate move in her nomination hearing yesterday. This is not particularly dramatic, given the pricing of a March rate hike from the Fed is priced at over 90% odds now, meaning that to surprise, the Fed would have to either hike more than the 25 basis points expected or raise expectations for a faster pace of hikes, whether via the March round of forecasts or at the January 26 FOMC meeting.

The Fed’s Waller says three Fed rate hikes this year a “good baseline”.  Waller is on the Board of Governors and indicated a very flexible outlook on the Fed’s potential to hike rates this year, saying in an interview that three hikes is a “good baseline”, with four or five hikes possible if inflation stays high, but possibly fewer hikes if inflation falls as he expects it to.

Japan’s 5-year JGB yield hits highest level in years – nearly trading at 0% for the first time since the Bank of Japan implemented a negative –0.1% rate policy back in early 2016.. Japan reports its December CPI data next week, and it is expected to show a rise of +0.9% at the headline, the highest since early 2019, although the year ago level was -1.2%, suggesting little change in Japan’s CPI for the last two years.

China’s exports reach record numbers in December - as global demand soared on fiscal largesse during the pandemic and as companies rushed to fill low inventories. Total exports for the month were $340.5 billion while the trade balance was a record $94.5 billion, as domestic consumption was constrained by China’s zero tolerance policy on covid and uncertainty after a crackdown on property development companies.

What are we watching next?

Inflation expectations in the University of Michigan survey - so far, the survey of 1-year and the 5-10 year inflation expectations has failed to show any real loss of anchoring in inflation expectations for the longer term, even as the shorter-term expectations have risen as they usually do with the price of gasoline at the pump. The University of Michigan survey is one of the inputs into the Fed’s inflation expectations models, so any fresh rise in the longer term 5-10 year expectations portion of the survey to above 3.0% (which has been approached a few times in 2021 but not exceeded since 2011) could add urgency to the Fed’s rate hike cycle.

Earnings Watch – today’s earnings focus is naturally on the three major US financials JPMorgan Chase, Citigroup, and Wells Fargo with analysts expecting Q4 EPS to be lower for these financials as capital markets activity was lower in Q4 as shown by Jefferies’ earnings on Wednesday and loan growth in the US is still only half of trend growth before pandemic. But US financials will likely report a strong outlook given the signals from the Fed and accelerating credit growth. We have also added next week’s earnings releases.

Today: Wells Fargo, BlackRock, First Republic Bank, JPMorgan Chase, Citigroup

Tuesday: Goldman Sachs, PNC Financial Services, Truist Financial, Bank of New York Mellon, Interactive Brokers

Wednesday: ASML, EQT, UnitedHealth, Bank of America, Procter & Gamble, Morgan Stanley, Charles Schwab, US Bancorp, Kinder Morgan,

Thursday: Sandvik, Netflix, Union Pacific, Intuitive Surgical, CSX, SVB Financial Group, CSX, Travelers,

Friday: Investor, Schlumberger, IHS Markit

Economic calendar highlights for today (times GMT)

0800 – Hungary December CPI

0830 – Sweden Dec. CPI

1300 – Poland National Bank of Poland meeting minutes

1330 – US Dec. Retail Sales

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