Summary: Risk sentiment stabilized yesterday after a very ugly start to the week as the market nervously awaits both further geopolitical developments linked to the situation in Ukraine and the message from the important FOMC meeting tonight. The scale of the recent sell-off in equity markets has the market looking for the Powell Fed to ease up on the hawkish guidance, even if the Fed is expected to hike at the March meeting.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - another negative session yesterday although the Nasdaq 100 did not post a new lower low. Today’s big event for US equities is the FOMC tonight where equity investors are hoping for a small dovish tilt from the Fed given the recent selloff in equities, but the objective for the Fed right now is to control inflation so equities might become disappointed tonight. We expect yesterday’s trading range in Nasdaq 100 futures from 13,890 to 14,500 is the natural range today as well.
Hang Seng (HK50.I) trades unchanged after opening higher. Hydrogen and solar names (up 3% to 13%) were among the best performers while education stocks again being sold (down 2% to over 20%). Baidu’s smart car brand “Jidu” announced that it had completed US$400 million Series A financing from Baidu (9888.HK; +1.7% mid-day) and Geely Auto (175.HK; -1.9% mid-day). A-Shares spent the morning trading sideways while the CSI 300 briefly traded below its 6-month low before rebounding to trade higher. Before the long holiday in Hong Kong and mainland China next week, all eyes are on tonight’s FOMC meeting (see below).
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Cryptocurrencies continue to attempt a recovery, but have their work cut out from them to establish a healthy technical reversal, as Bitcoin needs to pull above 40,000 to do so, and the Ethereum comeback attempt has looked feebler as the price action has remained below, 2500 since the beginning of the week and the 3,000 area is the first major upside hurdle. To the downside, the 30,000 level in Bitcoin looms as a major chart level.
USDCAD – will be one to watch as both the Bank of Canada (preview below) and the US FOMC meetings are up today, with the market rather evenly split on whether the BoC is set to move now or not until a coming meeting, while the Fed is expected to guide for a hike at the March FOMC meeting (more in FOMC preview below). The US dollar has weakened slightly coming into today’s meeting and the Canadian dollar has weakened more on the softness in risk sentiment and a consolidation in the oil price. The closest level of note is to the downside, where the pivotal 1.2500 level (also the 200-day moving average) has supported on multiple occasions after many intraday attempts at a break lower.
USDJPY and JPY crosses - the JPY rally consolidated gently yesterday as some cautious signs of dip-buying in equity markets were in evidence and as safe haven sovereign bonds failed to rally further, but USDJPY remains poised near pivotal levels – the twice-tested 113.50 pivot low of this year remains the downside focus, with the longer term 112.50 pivot low in focus not much further to the downside, and the prior major high above 111.50 from mid-2021 now coinciding with the 200-day moving average. Long US yields are likely to remain an important coincident indicator in the wake of the FOMC decision today.
Wheat (WHEATMAR22) and corn (CORNMAR22) prices have, just like EU gas (TTFMG2) seen the biggest upside impact of the crisis in Ukraine on fears that Black Sea grain exports could be disrupted, either through military action or through sanctions on Russia. The two countries' supplies 30 percent of global wheat while Ukraine is a top three exporter of corn. The risk to global supplies comes at a time where rough weather conditions have reduced the outlook for winter wheat in the US as well as corn and soybeans in South America. For now, however, there are no restrictions on exports and long positions will be quick to exit on signs of stabilization.
Crude oil (OILUSMAR22 & OILUKMAR22) trades near last week’s cycle high with focus on the Ukraine crisis and its potential impact on crude supplies as well as the weekly stockpile report from the EIA. Last night the American Petroleum Institute reported a 0.9-million-barrel drop in US crude inventories, and the continued tightness can be seen in timespreads which continue to widen, especially in WTI where the March-April spread trades at a very elevated $1.2 per barrel. Also focus on today’s FOMC given its potential impact on the general level of risk appetite across markets.
Gold (XAUUSD) trades near a two-month high and despite the January surge in real yields the metal has managed a small rise on the month. In our opinion the reasons are: 1) Asset managers turned buyers as stocks tumble and volatility jumps, 2) Stock market weakness potentially forcing the FOMC to adopt a less hawkish tone (see below), 3) Geopolitical risk, 4) A succession of US rate hikes hurting growth without bringing down inflation, and finally 5) short-covering from funds getting the rising real yield impact wrong. It is however also clear that some of these mentioned tailwinds can disappear, especially if the stock market starts to recover. Support at $1830 and resistance the November peak at $1877.
What is going on?
Better German data than expected. The headline German IFO business climate index unexpectedly jumped to 95.7 in January versus prior 94.7 and expected 94.7. In addition, the IFO expectations index – indicating firms' projections for the next six months, rose to 95.2 versus prior 92.6. Firms reported that raw materials and preliminary products supply issues have eased. This is encouraging. On the downside, the current economic assessment dropped to 95.7 this month versus prior 96.9.
Another announcement from Vestas and another cut to guidance. Following the footsteps of Siemens Gamesa, the Danish wind turbine maker Vestas is out this morning with preliminary fiscal figures. The company expects FY22 revenue of €15-16.5bn against estimates of €16.6bn.
Microsoft shows robust growth with a little hiccup in the cloud. FY22 Q2 (ending 31 Dec) figures were strong last night showing revenue of $51.7bn vs est. $50.9bn and EPS of $2.48 vs est. $2.03, and the software maker is putting out a strong forecast for the year and beyond.
Spain’s producer price index is at pain level. It reached 39.5 % YoY in December versus prior 32.2 %. This is mostly due to higher energy prices. Spanish companies are facing quite a challenge.
What are we watching next?
US FOMC Meeting this evening - the consensus going into tonight’s FOMC meeting is that financial conditions, including the steep correction in US equity markets, have now tightened sufficiently for the Fed to ease up on its hawkish guidance after a long string of hawkish surprises in recent months. Market expectations for the Fed funds rate by the end of this year have fallen about 10 basis points from the peak last week, so the market will need some evidence in today’s monetary policy statement and the Fed Chair Powell press conference that the Fed recognizes the impact it is having on markets and financial conditions. A sufficiently large deceleration in hawkish guidance could even trigger a significant, if tactical, short squeeze. On the flipside, any indication that a 50-basis point rate increase in March could be in the cards would likely upset markets.
Bank of Canada monetary policy meeting today. At its last meeting in December, the Committee left rates unchanged at its all-time low of 0.25 % and mentioned it does not see a rate hike until mid-2022. But things have changed. The labor market is very tight (+153,700 jobs added in November and +54,000 in December) and inflation remains uncomfortably high (4.8 % YoY in December). This could push the Bank of Canada to accelerate the tightening process, according to some analysts. As of today, the markets are pricing in over a 60 % chance of a rate hike at today’s meeting. We believe the Bank of Canada will maintain the monetary policy status quo, for the moment.
Earnings Watch. Earnings figures are now growing in numbers, and we are slowly beginning to see a picture of better relative earnings for the Nasdaq 100 vs S&P 500 and that the latter index is showing the biggest margin pressure for now. Today’s key earnings report is from Tesla which is expected to deliver strong earnings given their high growth rate in deliveries in Q4.
Economic calendar highlights for today (times GMT)
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Global Head of Macro Strategy
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Chief Investment Strategist
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Global Head of Investment Strategy
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Head of Commodity Strategy
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Global Head of Macro Strategy
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Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Global Head of Macro Strategy
Quarterly Outlook
Head of Fixed Income Strategy