Market Quick Take - December 20, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - equities are extending their weakness post FOMC with Nasdaq 100 futures trading around the 15,570 level this morning just above the 100-day moving average that back in October was a key area of support. Equities have not experienced their year-end rally and investors seems to be lowering their short-term growth expectations due to Omicron and lower profit margins due to inflation is a theme that will continue to be visible in the Q4 earnings season starting in mid-January.

The U.S. dollar trades firm after strengthened in late trading on Friday, as risk-off sentiment returned to the market amid concerns over the rapid spreading omicron variant, lifting appetite for the safe-haven currencies, such as the greenback and to a lesser extent USDJPY. The change in direction mostly hurt the euro as it tumbled straight back towards the lower end of its established December range between €1.1225 to €1.1375.

Crude oil (OILUKFEB22 & OILUSJAN22) trades near a two-week low after extending Friday’s weak session to tumble more than 3.5% during the Asian trading session. The market focuses squarely on the fast-spreading omicron variant, raising concerns about the short-term demand outlook. Brent has seen the front end of the curve briefly flip into a bearish contango pattern, a sign the market, just like the IEA warned last week, is becoming oversupplied as lockdowns and travel restrictions hurt demand. Thinner market conditions and continued selling from hedge funds risk exacerbating price swings in the remaining trading sessions before the holiday period. Focus on OPEC+ and whether the latest developments could force a change in their production agreement.

US Treasuries (SHY, IEF, TLT). This week it's all about personal consumption expenditures, the consumer confidence index, and the University of Michigan Survey. Although the long part of the yield curve is stuck by Covid and growth fears, the front part of the curve might resume soaring, contributing to its flattening trend. Yet, investors should tread carefully and monitor the divergence between market expectations and the Fed rate hike’s projections. We believe that long-term yields have upward potential as the market will need to accept the Fed’s tightening agenda. Yet, Treasury yields might not begin their rise until January, when bond issuance resumes. Ten-year yields broke below 1.40%, and if they do not rise back above this level, they will find support next at 1.26%

European sovereigns (IS0L, BTP10). The focus will be on the E.U. consumer confidence released tomorrow and the producer price index coming out from Italy. For the month of November, Italian PPI spiked to 9.4%. A sustained number contributes to higher inflation in Italy as well as Europe. Yet, following last week’s ECB meeting, it’s likely rates will trade rangebound until the end of the year. In 2022 we see scope for steeper EUR curves as the central bank’s total net bond purchases will be less than half than this year. However, the steepening might not begin until January, as the customary large bond issuance at the beginning of the year.

What is going on?

U.S. Senator Joe Manchin, a moderate Democrat, on Sunday rejected Joe Biden's $1.75 trillion tax-and-spending package, potentially killing the president's effort to tackle health care, climate change and child welfare by raising taxes on corporations and the wealthy. His changing stance driven by worries about its inflationary impact, blindsided the White House and outraged fellow Democrats with the administration vowed to press on. Goldman cut its forecast for U.S. first-quarter GDP to 2% from 3% after the announcement.

GlaxoSmithKline to IPO consumer health care unit in 2022. Like so many other conglomerates GSK is following the trend of breaking up their business into smaller units. Often these large groups within the industrial or consumer sectors have business units that can attract a much higher equity valuation if valued on a standalone basis.

Chinese Estates plunges 35% on failed privatization. The Chinese real estate developer lost the support from shareholders to go private as a minority shareholders rejected the plan. This rejection as sparked renewed weakness among China’s real estate developers and at the same time the central bank and commercial banks are easing financial conditions to soften the blow from the housing weakness.

In Turkey the Lira hit a fresh low as President Erdogan hapless mismanagement of the country’s currency continued after he pledged to extend Turkey’s rate cuts. The EURTRY surged towards 20 after starting the year below 10, and it is by far the world's worst performing currency. The market was blindsided by the President after the central bank committee last week said the latest cut would be the final cut for now.

The EU gas and power crisis continues with Europe bracing for energy shortages as freezing weather drains stock as supplies can’t keep up. As a result, the Dutch TTF first month gas contract (TTFMF2) has opened 5% higher this Monday at €144/MWh or $47.5/MMBtu while day ahead power prices across the region are hitting fresh records.

What are we watching next?

Equity weakness in December as liquidity dries up. Are we going to see a repeat of equity weakness like in 2018 where the post FOMC narrative was that of a policy mistake. This time around it does not smell of policy mistake as the Fed changed its outlook to match that of the market, but the Omicron and fiscal drag next year are both adding to growth concerns in the short-term and with liquidity drying up as trading books are closed, we could see more weakness.

Chinese housing crisis and monetary easing. The prime lending rate was lowered in China for the first time in 20 months and commercial banks have recently been instructed to lower loan rates to ease financial conditions. These steps coupled with recent liquidity injections are signs that China is moving in easing direction while the rest of the world is tightening. China is doing this of course to offset the weakness on demand coming from lower new home prices and Chinese real estate developers under pressure to reassure their financials. If China goes into more aggressive stimulus mode in early 2022 it could be major positive for emerging market assets as it will drive demand for commodities and could lower the value of the USD.

Earnings Watch – no earnings this week and will stay light until the Q4 earnings season starts in mid-January.

Economic calendar highlights for today (times GMT)

1500 – US Nov Leading Index

1800 – Brazil Trade Balance Weekly Dec 19

2100 – South Korea PPI Nov

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