Market Quick Take - November 23, 2021

Market Quick Take - November 23, 2021

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Equity markets closed yesterday on a sour note after a volatile session on the news that Biden will nominate Fed Chair Powell to a second term and promote Lael Brainard to Vice Chair. The news took Fed policy expectations sharply higher for next year and two weak US Treasury auctions saw the entire US yield curve lifting, with the USD also trading firmer on the news. This sent the recent gold rally in a deep reversal after its recent attempt to break higher.

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - today and yesterday’s session brought back interest rate sensitivity into technology stocks producing a stunning technical setup in the Nasdaq 100 futures. The index futures traded up 1.2% on yesterday’s intraday high at 16,767, but retreating 2.3% from the high to a close just a tad above the intraday low. The selling pressure has continued this morning with Nasdaq 100 futures trading around the 16,310 level as the US 10-year yield is continuing its march higher sitting at 1.63% in early European trading.

NZDUSD and AUDNZD – An important RBNZ meeting is up tonight as the market watches whether the bank is set to hike 25- or 50 basis points, and as well, whether the bank continues to provide sufficiently hawkish guidance to support the current anticipation of significant further hikes to come next year. The kiwi seems to be finding little support at the moment from the recent rise in yields as NZDUSD has broken back down to the bottom of a rising channel (near 0.6925 - the 2021 price low was 0.6805 in August) while AUDNZD has pulled back above 1.0400 after trading as low as 1.0316 just yesterday.

USDJPY – a big break in USDJPY has unfolded above 115.00 after the pair teased above the resistance level last week as US yields jumped on the news that Powell will be nominated for a second term as Fed Chair. This is the highest level the pair has traded since early 2017. While US Treasury yields are the key coincident indicator and a break above, for example, the cycle high near 1.75% for the 10-year US treasury benchmark is likely needed soon to support a significant extension of this rally, risk sentiment in credit markets in EM and corporate debt could also prove factors in the degree to which the JPY is mostly weak versus the USD or more broadly.

Gold (XAUUSD) dropped below support in the $1830-35 area yesterday with the trigger being Jerome Powell’s renomination which saw Treasury yields and the dollar jump on speculation it could lead to a quicker withdrawal of monetary stimulus. Gold dropped as low as $1802, thereby retracing a full 61.8% of the early November rally. As we highlighted yesterday, gold’s ability to rally further had become threatened by the tripling of futures long held by funds in recent weeks to a 14-month high. The short-term direction will mostly depend on whether yesterday’s washout has seen a big enough reduction of recently established and now loss-making positions.

Crude oil (OILUKJAN22 & OILUSJAN21) trades lower with traders awaiting a US announcement, expected later today, about a coordinated release of crude oil from strategic reserves. However, having already dropped by 10% since the first threat was made, the question is how much lower an announcement can drive the price. Not least considering OPEC+ comments that a release is unjustified, and they may “adjust” future planned production increases at their meeting next week. Into the mix, the market must also deal with a strong dollar and a Covid-19 resurgence, both of which could hurt demand. Downside levels to watch in Brent are $77.85 (July high) and $74 (uptrend from 2020 low).

US treasuries (SHY, IEF, TLT). The 5s30s part of the US yield curve bear flattened after news that Biden renominated Jerome Powell as Chair of the Federal Reserve. The market read it as the anti-inflation choice as Brainard is seen as much more dovish. However, the selloff in Treasuries amplified when Fed Atlanta President Bostic called for a fast tapering that would give the option to hike interest rate hikes earlier if needed, confirming a hawkish tilt within FOMC members. Interest rate hikes expectations advanced with the market now pricing almost three hikes in 2022. Investors will continue to focus on this week’s PCE index and FOMC minutes. Although the 5s30s has already flattened substantially, it is unavoidable to continue to see the 5s30s continue to flatten as hikes expectations advance.

German Bunds (IS0L). Germany is to announce a new government this morning, as the coalition Greens-FDP-SPD seems to have been finalized. Ten-year yields rose 4bps yesterday closing at –0.30%, and we can expect them to continue to rise if today’s press conference hints at more fiscal spending ahead. To compress the rise in yields might be news of a continuous surge of Covid-19 infections. Yet, we cannot forget that the perception of inflation is changing among ECB members with Isabel Schnabel last week saying that the central bank will need to be ready to act if inflation proves more durable. Therefore, as we enter in the new year, with a new German government and less collateral shortages, we anticipate spreads to resume their widening.

Italian BTPS (BTP10). Ten-year BTPS yields rose by nearly ten basis points to 0.95% on the news that Mattarella will end his role as President of the Republic in weeks. It opens a political battle to appoint his successor. Political parties are pushing for Draghi to take on this role to bring new election. If that were the case it would be a blow to Italian progress towards debt reduction and European integration provoking a fast widening of the BTP-Bund spread.

What is going on?

US President Biden nominates Powell for second term, will seek to promote Brainard to Vice Chair. The nomination came over the objections of many progressive Democrats and some believe that the nomination is in part an attempt to avoid a lengthy confirmation process. In a statement on the nomination, Biden almost seemed to present Powell and Brainard as equals, although this may have been a bit of spin-doctoring. Other important Fed positions will need filling early next year as well, including the position of Fed Vice Chair in charge of bank supervision. As Powell was considered the less dovish option of the two for the position of Fed Chair, Fed rate hike expectations rose sharply for next year, adding about 10 basis points to the anticipated policy rate toward the end of next year. As well, the scale of the market reaction may be due to the fact that Brainard wasn’t explicitly handed a role that was linked with the banking supervision as some expected.

Iron ore surged back above $100 per ton in Singapore after trading as low as $86 last week. A string of Chinese announcement pointing to potential economic easing measures and more support for its troubled property sector, all driving hopes for a rebound in steel production. Copper jumped to a four-week high in Shanghai as premiums for physical delivery remain elevated, thereby signaling tight market conditions. US and London based copper futures contracts meanwhile trade close to unchanged as both benchmarks struggle to find the momentum to break out of their long-held ranges.  

Zoom Video Q3 result in line with estimates. The video communication company that rose to fame during the pandemic guides Q4 revenue at $1.05bn vs est. $1.02bn, but investors were not impressed sending shares down 6%.

What are we watching next?

How much will the most hawkish G10 central Bank, the RBNZ, hike rates tonight? - The Reserve Bank of New Zealand was one of the quickest central banks to turn hawkish over the summer and abandon QE and was only delayed slightly in hiking rates by New Zealand’s first Covid outbreak in many months over the summer. The central bank chief Adrian Orr has made it clear that the bank is on the path or many more rate hikes to come and the market has priced in a policy rate of 1.50% by the April meeting of next year versus the current 0.50%. Most believe that the central bank will only hike 25 bps but a significant minority believe that the bank will hike 50 bps tonight.

Earnings Watch – the number of important earnings is falling rapidly, but today is the most important day with key earnings from Xiaomi, XPeng and Kuaishou, both important Chinese technology companies. Also on Tuesday, US companies such as Medtronic, Autodesk and Dell Technologies are worth watching.

Tuesday: Xiaomi, Kuaishou Technology, Compass Group, Medtronic, Analog Devices, Autodesk, VMWare, Dell Technologies, XPeng, HP, Best Buy, Dollar Tree

Wednesday: Deere,

Thursday: Adevinta

Friday: Meituan, Pinduoduo

Economic calendar highlights for today (times GMT)

0815-0900 – Euro Zone Nov. Flash Manufacturing and Services PMI

0930 – UK Nov. Flash Manufacturing and Services PMI

1100 – UK Bank of England’s Haskel to speak

1445 – US Nov. Flash Markit Manufacturing and Services PMI

1500 – UK BoE Governor Bailey at House of Lords

1500 – US Nov. Richmond Fed Manufacturing

1730 – ECB's Makhlouf to speak

1800 – Canada Bank of Canada’s Beaudry to speak

2130 – API’s Weekly Petroleum Stock Report

0030 – Japan Nov. Flash Manufacturing and Services PMI

0100 – New Zealand RBNZ Official Cash Rate Announcement 

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