Market Quick Take - February 2, 2022
Saxo Strategy Team
Summary: US stocks gained again yesterday and followed through overnight on strong results from Google parent Alphabet, with share galloping higher after the close on the announcement of a stock split. Ahead of the ECB meeting tomorrow and in the wake of hot CPI releases from individual EU countries, ECB rate expectations are on the move, supporting the EURUSD comeback attempt.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures tried to close above the 200-day moving average but failed, however, this morning the Nasdaq 100 futures are trading well above sitting around the 15,165 level in early European trading hours. This is just below the 50% retracement level at 15,237 which marks the mid-point from the recent peak to trough. US equities were again led higher by the theme baskets that were down the most this year such as e-commerce and bubble stocks. Finally, a handful of strong US earnings releases is also helping on risk sentiment with especially earnings from Google solidly beating estimates. The VIX Index closed at 21.96 yesterday and is not far from coming into its historical normal range indicating that nervousness has cooled a lot over the past week.
EURUSD - ECB rate expectations have jumped this week, with most of the gains coming in the wake of Germany’s January CPI release on Monday, but Spain’s CPI was also hot for the month, while the French CPI release yesterday was far more muted. The Euro Zone-wide CPI figure is up later today, but more importantly, the ECB is up tomorrow and is the key event risk as investors watch whether the ECB is prepared to shift its stance on inflation and with it, the need to hike rates as soon as later this year, with the market now pricing in nearly 25 basis points of rate tightening by the December ECB meeting this year. EURUSD has traded up toward the pivotal 1.1300-50 zone, a close above which suggests a bullish reversal after the pair recently posted a new cycle low.
AUDUSD – The Aussie has been one of the strongest G10 currencies over the last two sessions, buoyed by risk sentiment recovering in a near vertical fashion from the recent spike lows and ignoring a rather dovish RBA meeting on Tuesday, which has lowered RBA rate hike expectations for this year. It would seem, therefore, that risk sentiment is in the driver’s seat and the tactical outlook for AUDUSD will correlated with global equity market direction. Overnight, RBA Governor Lowe said it was “plausible” that the bank would need to hike rate this year, a comment that could be taken either way. Technically, a fuller bullish reversal of the recent plunge to below 0.7000 would require a close above 0.7200, while a fresh close below the huge 0.7000 level would re-establish the bearish case.
Crude oil (OILUSMAR22 & OILUKAPR22) remains anchored near a seven-year high with the market focusing on the outcome of today’s OPEC+ meeting. While another 400k barrels/day increase is the expected outcome, some last-minute speculation has emerged on whether Saudi Arabia may surprise with a short-term unilateral decision to hike production by more to offset the accumulated missing 900k b/d barrels from several other producers. Also, on tap the weekly EIA report with last night’s API report showing a drop as opposed to surveys looking for a rise in crude oil stocks.
US Treasuries (IEF, TLT). After last week’s FOMC meeting, more bear-flattening of the yield curve is to be expected. The Federal Reserve is looking to use interest rate hikes as the primary tool to tighten the economy. It means that the front part of the yield curve will continue to rise as the Fed’s becomes more aggressive while long-term rates will remain compressed due to growth fears. The yield curve is close to inverting between seven and ten years. The market’s focus is on Friday’s nonfarm payrolls, which seem likely to surprise on the downside. Regardless, we believe strong average hourly earnings and an unemployment rate in line with expectations will be enough to pave the way for a rate hike in March.
European sovereigns (VGEA). Interest rate hikes expectations continue to advance in the euro area as money markets are now pricing nearly 10 bps of ECB tightening already in July. To reinforce the message, German 2-year yields broke above the ECB deposit rate for the first time since 2015. This might be the week negative 10-year Bund yields will become a memory, as a hawkish Fed together with an aggressive BOE will inevitably sustain European sovereign yields above this level. Yet, the market might be ahead of itself as rising yields are already tightening the economy, and the central bank is unlikely to want to add further pressure as it prepares to end the PEPP program in March.
Italian BTPS (BTP10). Sergio Mattarella has been elected president of the republic for a second mandate, leading to a political status quo which appeals investors. However, BTPS might have quickly forgotten the news as Italian sovereign yields resumed their rise amid expectations of an aggressive ECB meeting on Thursday. As volatility remains sustained in rates, we can expect the BTP-Bund spread to resume its widening.
What is going on?
U.S. January ISM manufacturing index at a 15-month low. The survey was out at 57.6 (dropping 1.2 point). Most of the components fell: New Orders at 57.9 (-3.1), production at 57.8 (-1.6) and supplier deliveries at 64.6 (-0.3). Inflation is still hot as Prices Paid was 76.1 (+7.9). This is a sign of cooling demand but also remaining labor issues. Inflation was also a key focus point in the Dallas Fed Texas service sector index for January, released yesterday. In the first month of 2022, wages and prices continued to surge in Texas and indexes were hovering near historically high levels. The wages and benefits index was at a record 37.4, for instance.
Starbucks shares fall on cost pressures. Starbucks earnings show that labor costs, Omicron, and rising commodity prices are pressuring retail chains and the coffee chain disappointed on operating income with shares falling in extended trading.
Alphabet (Google) shows strength in its ads business. Q4 revenue ex-TAC was $61.9bn vs est. $59.4bn and EPS was $30.69 vs est. $27.35. The cloud business missed operating income estimates, which was clearly a disappointment given the profitability in Amazon’s and Microsoft’s cloud business. The higher expenses at Alphabet were largely driven by higher headcount and on the earnings call the CEO said that the company is looking at blockchain. Finally, the company is splitting its shares by a 20-to-1 ratio.
AMD beats massively against estimates. The US chipmaker has a hot streak these years with a lot of product innovation and growth, and yesterday’s Q4 earnings did not fail. Q4 revenue and EPS beat estimates by a wide margin and the Q1 Outlook was impressive against expectations showing that AMD is growing significantly faster than the overall market.
PayPal shows ugly 2022 guidance. The payments company missed on Q4 payment volume and sees TPV growth of 21-23% in 2022 with EPS guidance for 2022 at $4.60-4.75 vs est. $5.23. The company said that inflation and supply chain constraints had impacted volume, and it is abandoning its long-term target on the number of accounts.
Novo Nordisk FY21 figures in line. The drugmaker reports FY21 figures this morning in line with estimates and guides revenue growth of 6-10% this year on a constant FX basis with operating income only growing 4-8% suggesting downward pressure on operating income. The company has recently slipped a bit due to production issues in the US over its new obesity drug, but plans to catch up by the second half of this year.
Sony lifts guidance. The Japanese entertainment and gaming console maker is lifting its operating income guidance for the current fiscal year above its previous target and the current estimates. The company is selling fewer PS5 than expected due to chip constraints but expect the impact to be short-term with demand still being strong for PS5.
France’s CPI keeps rising, but lower than elsewhere in the Euro Zone. The first estimate of France’s CPI for January is out at 2.9 % year-over-year versus expected 2.4 % and prior 2.8 %. Energy prices and the services component are the two main drivers behind higher inflation. Expect inflation to move above 3% in the coming months before it might start decreasing in Spring as the impact of energy prices will decrease. In other eurozone news, the unemployment rate is falling in several eurozone countries (5.1 % in Germany in January and 9.0 % in Italy in December).
Orpea’s share is down 54 % since the beginning of the year. The French retirement home group Orpea is facing a rough time following allegations of systematic mistreatment, patient abuse and hygiene negligence in order to maximize profit margins (food and care products were being rationed, for instance). This has caused a huge scandal in France. The chief executive was dismissed on Sunday. The French government announced a financial and an administrative investigation yesterday. The group operates nearly 1,200 homes worldwide, with around 350 of them in France. It used to be one of the best performing stocks in the French stock market (+62 % over the past ten years).
BHP (BHP) - In case you missed it, BHP's (BHP) amalgamation has been completed. The newly issued shares, from the delisted UK BHP listing, started trading on the ASX today, in the existing BHP Group Limited. Today 2.1 billion new BHP Limited were allotted for the purpose of unification, representing 42% of the total number of BHP shares. For long term BHP Group Limited shareholders; the unification benefits them as BHP brings forward over $6 billion of franking credits, reinforcing BHP’s dividend security. Meanwhile, BHP will now be able to complete more share buy backs (on the one registry), which supports BHP Group Limited’s share price growth. Over the last week, fund managers and ETF providers have increased their positions in BHP.
What are we watching next?
Hearings for three Fed nominees for the Board of Governors on Thursday – these include Lisa Cook and Philip Jefferson, two economists thought to hold dovish views on policy and Sarah Bloom Raskin, who is nominated for the role of Vice Chair of supervision at the Fed. The US Chamber of commerce recently sent an article to the Senate warning of Raskin’s views on oil and gas as she has called for cutting off access to support for the oil and gas industry from the federal governments. This was an unprecedented move.
ADP payrolls change today after White House, Fed warn of weak US jobs report on Friday: White House officials warned that the survey for the January jobs report was taken in the weeks when the impact of the omicron variant on absences was at its height in January, and that those absences could be tallied as payroll reductions. Philadelphia Fed president Patrick Harker also weighed in with a similar forecast of a bad report due to omicron. Expectations are for payrolls growth of +150k, but given a very tight job market (still near record job openings), the payrolls number could come in well into the negative. The question is the degree to which this is now baked into expectations.
China’s market closed all week for Chinese Lunar New Year Holiday while Hong Kong will reopen on Friday.
Earnings Watch. Big earnings day with several major companies reporting in both Europe and the US. Yesterday’s earnings added to the picture that technology companies are better able to maintain operating margins than companies in the physical world, while at the same time growing faster. The key earnings to watch today of course is Meta (parent of Facebook) given the strong earnings from Google last night.
- Today: Novo Nordisk, Orsted, Kone, Sony, Mitsubishi UFJ Financial, Denso, Prudential, Telenor, Banco Santander, Hexagon, Swedbank, Novartis, Meta Platforms (Facebook), Alibaba, AbbVie, Qualcomm, Thermo Fisher Scientific, Ferrari, Spotify Technology, DR Horton
- Thursday: Suncor Energy, Danske Bank, Nokia, Dassault Systemes, Siemens Healthineers, Infineon Technologies, Merck KGaA, Enel, Nintendo, SoftBank, Mitsubishi, Takeda, Shell, ING Groep, BBVA, Siemens Gamesa Renewable Energy, Nordea, Roche, ABB, Amazon, Eli Lilly, Merck & Co, Honeywell, ConocoPhillips, Estee Lauder, Ford Motor, Fortinet
- Friday: Carlsberg, Sanofi, Vinci, Intesa Sanpaolo, Assa Abloy, Bristol-Myers, Regeneron Pharmaceuticals
Economic calendar highlights for today (times GMT)
- 1000 – Eurozone Jan. CPI Estimate
- 1315 – US Jan. ADP Employment Change
- 1530 – EIA Weekly Crude & Fuel Stock Report
- After 1400: OPEC+ production decision
- 2000 – Canada Bank of Canada’s Macklem to speak to Senate committee
- 2130 – Brazil Selic Rate Announcement
- 0030 – Australia Dec. Building Approvals
- 0030 – Australia Dec. Trade Balance
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