What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - a less volatile session yesterday in US equities although weakness was material among mega caps driven by continued weakness in Meta shares. With the US 10-year yield pushing to 1.94% this morning we believe the pressure will continue in US technology stocks with the Nasdaq 100 futures potentially testing the lows from Friday with bubble stocks reversing again leading the declines. The VIX remains above 22 and financial conditions are continuing to tighten with credit spreads moving higher so this should be key to monitor for equity investors.
Hang Seng (HK50.I) traded lower on Tuesday with sentiment being partly affected by the news that the Bureau of Industry and Security of the U.S. Department of Commerce (the “BIS”) had put two subsidiaries of Wuxi Biologics (2269.HK) onto its “unverified list”. Wuxi Biologics fell 23% before it suspended trading. The unverified list is different from the more well-known “entity list” or so called “blacklist”. Being put onto the former means that the BIS has been unable to verify the bona fides through an end-use check. It is less severe that the entity list which means that the entities may allegedly be involved in activities that are sanctioned by the US Government of are contrary to national security or foreign policy interests of the U.S. In A-share markets, lithium EV battery manufacturers were sold off, down 8% to 13% on concerns about higher material costs, changing suppliers by EV makers, and risks of nationalization of lithium mines in Chile.
Cryptocurrencies – have rallied sharply with a big move unfolding over the weekend that took the Bitcoin price back above the key 40k level and Ethereum back above the pivotal 3k level by this morning. The more significant milestones are perhaps the respective 200-day moving averages just south of 50k for Bitcoin and above 3,500 for Ethereum. Perhaps the most interesting aspect of the rally in the crypto space is that it has unfolded independently from any move in speculative equities after a long period of seeming tight correlation between the two markets.
EURUSD – the supermajor exchange rate continues to consolidate after the steep rally off new cycle lows just over a week ago. With a very strong US jobs report Friday unable to inspire a sustained USD rally despite Fed rate expectations getting an additional strong boost, EURUSD bulls will feel emboldened to pick levels to get long, with 1.1400 perhaps the first support and the 38.2% Fibo retracement of the rally off the sub-1.1125 lows coming in just below 1.1350. Resistance is the major pivot high from mid-January just ahead of 1.1500 and likely that big, round number itself, followed by a cluster of levels above 1.1650 and stretching to 1.1700.
USDJPY and JPY crosses– focus is back on the cycle highs in USDJPY as US yields continue to rise all along the curve, although the reluctance of the very longest 30-year US yield to rise as quickly (as the US yield curve continues to flatten) is perhaps keeping USDJPY somewhat anchored below the cycle highs of 116.35 from the beginning of the year. USDJPY and long US yields have a long history of positive correlation. With the US dollar not particularly strong elsewhere, other JPY crosses have received a boost as well, with EURJPY bursting higher in the wake of the ECB and needing to hold perhaps the 130.50 area to keep the focus higher. As Japan’s yields have also been on the move, however, the market may speculate that the Bank of Japan will be the next “shoe to drop” and indicate its own policy tightening, having already drastically slowed its balance sheet expansion.
Crude oil (OILUSMAR22 & OILUKAPR22) trades lower for a second day in response to warmer US weather reducing supply risks and not least Today’s resumption of Iran nuclear talks on speculation US and Iran could be inching towards a deal that could lead to increased production and export from Iran. With US retail gasoline priced 30% above the 5-year avg, a deal with Iran has increasingly been viewed as the lowest hanging fruit that could helped arrest the rally towards $100 per barrel. Libya meanwhile has managed to fully restore production, but geopolitical worries related to Russia remains. Also, in focus today, EIA’s Short-Term Energy Outlook
Gold (XAUUSD) pushed higher yesterday, with geopolitical and inflation concerns as well as bond and stock market volatility more than offsetting another day of dollar and real yield strength. Having broken above $1817 the focus now turns to $1826 as the next major level ahead of the January high at $1854. Strength in industrial metals (see below) supported a bid in silver which outperformed gold, thereby moving further away from an established double bottom and key support at $22.
Iron ore (SCOH2) extended its rebound, rising briefly above $150, which is its highest level since August 2021. The rally was fuelled by optimism that steel orders could rise, with US to announce it will end the 25% tariff on Japanese steel imports (introduced by Trump). From a technical perspective the iron ore price is likely to retract then resume its uptrend toward $170 (the next resistance level to watch). The iron ore price is up 74% from its November low, and as iron ore shipments are expected to continue to claw off their low after Beijing Olympics wrap up, iron ore heavyweight stocks (BHP and RIO) remain in focus.
US Treasury (IEF, TLT). Markets long await Thursday’s CPI numbers. However, today’s trade balance will also be crucial for bond investors. A larger trade deficit requires more foreign investors to buy US assets while more buyers are needed to fund the US budget deficit while the Federal Reserve ends its QT. That could drain demand from upcoming US Treasuries auctions. The US Treasury is selling 3-year notes today, 10-year bonds tomorrow, and 30-year Bonds on Thursday. Bidding metrics could show a deterioration of demand despite higher yields as rates are rising in Europe, too reducing the convenience of US Treasuries. The 10-year auction worries investors holding risky assets, as yields are approaching the 1.95% level, putting them dangerously close to the pivotal 2% level.
EU Sovereigns (VGEA). Yesterday, the selloff in European sovereigns showed how quickly things can go south as the market expects the ECB to tighten the economy this year. Ten-year Greek government bonds rose by 30bps before Lagarde’s speech. The BTPS-Bund spread widened to 166bps, the most since July 2020. As Lagarde said that there is no rush to adjust monetary policy, European yields adjusted slightly lower. In Europe, investors will continue to focus on ECB speakers with De Cos and Guindos talking today. We believe it’s crucial to monitor the BTPS-Bund spread as it gets close to 200bps, political tensions might arise. Although we are far from that, things can move quickly as volatility remains sustained and rates rise globally.
What is going on?
Putin-Macron talks on Ukraine yield little, US Senators to meet German Chancellor Scholz. French president Emmanuel Macron spoke with Russian president Vladimir Putin in Moscow for more than five hours yesterday, with few headlines emerging on what was proposed, although Putin made diplomatic overtures in thanking Macron for “the efforts France is making to resolve the acute issue of our relations with NATO, to create an environment of stability on the European continent..” and said a “a number of his ideas, proposals...are possible as a basis for further steps.” with no details on what those details might be. Elsewhere, US President Biden said the Nord Stream 2 pipeline could be shut down on any Russian invasion of Ukraine and a number of US senators are set to meet German Chancellor Scholz in Washington at the White House today.
Nvidia takeover of Arm collapses. As a result, SoftBank is now planning an IPO of Arm which holds some key IP in the semiconductor industry. This is a big blow for Nvidia’s master plan.
Yara International Q4 earnings. The Q4 result shows slightly expanding margins but the fertilizer producer has difficulties passing on the full costs of its input costs as higher prices have led to delivery declines across Europe, Africa and Asia highlighting that some areas of the economy experiencing pricing pressures is seeing demand destruction.
Ocado FY EBIYDA in line. The online UK grocery retailer is still constrained on capacity amid strong demand and puts out a guidance on its UK Solutions & Logistics segments with expectations of 30% growth rate.
BP beats on Q4 profit. The UK oil & gas major is also signaling total buybacks of $4.2bn but also increase CAPEX by 40% by 2025. BP’s result underlines the current strength in oil and gas prices and it is encouraging to see BP raising investments.
The industrial metals sector trades up my more than 3% this month, led by strong gains in aluminum (5.7%), nickel (4.5%) and copper (3.3%). The sector is seeing tightening markets with production around the world being impacted by supply chain disruptions from Covid-19 outbreaks in China and punitive high energy prices in Europe reducing output from smelters. Aluminum, the most energy intensive metal to produce, has seen its backwardation on the LME rise to the widest since 2018, and the price is close to the 13-year high at $3229/t reached last October. Copper remains rangebound supported by electrification demand but somewhat held down by China’s property sector woes.
The eurozone Sentix investor confidence index surprises on the upside. In February, it was as out at 16.6 versus 15.15 expected and prior 14.9. The expectations reading is up from 13.5 in January to 14.0 in February. This is the highest reading since July 2021. The stabilisation on the pandemic front is the main driver behind the increase. It seems that concerns about supply bottlenecks have eased too.
What are we watching next?
Sweden’s Riksbank the next European central bank to shift its guidance? The Riksbank will announce its latest decision on Thursday this week and will be watched closely for any plans to accelerate the end of its QE programme and/or especially whether it is set to bring forward the time frame of its forecast rate lift-off, currently at an absurdly distant Q4 of 2024, after the "underlying” CPI in Sweden rose to its highest level since the early 1990’s in December at 4.1% year-on-year (although observers expecting little from the bank might point to the official “ex-Energy” CPI, which remains within the range and at only 1.7% year-on-year as of December).
Earnings Watch. Today’s key earnings are BP, Ocado and Pfizer, with the latter expected to post 107% y/y revenue growth driven by vaccine sales, so the key here is to get guidance on Omicron vaccine and Pfizer’s take on vaccine demand going forward.
Tuesday: Thomson Reuters, Cenovus Energy, BNP Paribas, SoftBank Group, Nissan Motor, BP, Ocado, Yara International, Pfizer, S&P Global, Fiserv, KKR & Co, Chipotle Mexican Grill
Wednesday: Commonwealth Bank of Australia, Manulife Financial, A.P. Moller – Maersk, DSV, Pandora, Sampo, L’Oreal, Toyota Motor, Honda Motor, GlaxoSmithKline, Adyen, Equinor, DNB Bank, Evolution, Walt Disney, CVS Health, Uber Technologies, Twilio
Thursday: KBC Group, Brookfield Asset Management, Constellation Software, Vestas, Neste, TotalEnergies, Pernod Ricard, Credit Agricole, Societe Generale, Siemens, Semiconductor Manufacturing International, Unilever, AstraZeneca, British American Tobacco, Arcelor Mittal, Heineken, Zurich Insurance, Credit Suisse, Coca-Cola, PepsiCo, Philip Morris, Linde, Duke Energy, Moody’s, Illumina, Datadog, Global Payments, Cloudflare, VeriSign, Twitter
Friday: Enbridge, Dominion Energy, Apollo Global
Economic calendar highlights for today (times GMT)
Poland Base Rate Announcement
1100 – US Jan. NFIB Small Business Optimism
1330 – Canada Dec. International Merchandise Trade
1700 – EIA's Short-Term Energy Outlook
1700 – ECB's Villeroy to speak in Paris
1800 – US 3-year Treasury Auction
2130 – API's Weekly Crude and Fuel Stock Report
2330 – Australia Feb. Westpac Consumer Confidence
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