What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - yesterday’s US equity session was odd given the strong rally before collapsing back closing around the opening print. However, strong earnings from Microsoft, Alphabet, and Visa are the close are helping US equities to extend rally this morning in early European trading hours. In the S&P 500 futures the 4,600 level is within reach in today’s trading session given the strong US earnings and the across-the-board earnings beats in Europe this morning.
EURUSD – the EURUSD continues to trade a bit heavily after rejecting the episode of strength into the pivotal 1.1650+ zone – which is the key hurdle for any switch to a more bullish stance. For now, the 1.1600 area is sticky, with something likely to give over the next seven trading days through key US data next week, including Friday’s jobs and earnings data, as well as the ECB meeting next Thursday. A break of the cycle low near 1.1525 could open up for a test of one of the ultimate trend supports, the 61.8% retracement of the entire rally wave off the lows last year, which comes in just below 1.1300.
AUDUSD – the Aussie got some support from a firmer than expected core CPI reading overnight (see below) and more fundamental support from the market’s reaction to that release, as 2-year AU yields ripped about 20 basis points higher as the market brings forward the anticipated time frame of the first hike from the RBA (starting to creep into the first half of next year versus RBA guidance that it won’t likely see conditions for a hike until 2024). The disconnect in the market’s pricing of rate moves versus the RBA’s ongoing guidance is remarkable, setting up an important next RBA meeting on Tuesday of next week, with the pivotal zone on the AUDUSD chart remaining 0.7500-0.7600 as the boost to pair on the data overnight proved rather modest.
Crude oil (OILUKDEC21 & OILUSDEC21) trades softer despite the risk of $100 per barrel oil and continued focus on very tight market conditions. Potentially a sign the market, despite an overriding bullish outlook, is reaching a consolidation phase with support being the 21-day moving average at $80 in WTI and $83 in Brent. The API report last night was mixed with a 2.3 million barrel overall rise in crude stocks being off-set by a big 3.7 million barrel drop at Cushing, the delivery point for US crude futures, raising concerns that inventories could hit minimum operating levels, thereby supporting the price and widening time spreads. The five oil supermajors will begin reporting quarterly earnings this week, and analysts expect free cash flows will hit $29 billion, the highest since 2008. What they will do with the money may help determine the direction of oil.
Gold (XAUUSD) trades lower in response to broader market optimism and despite another drop in US real yields as inflation expectations continue to rise. With the dollar mostly stable the current performance can best be described as disappointing, similar to the behavior back in late July when gold failed to respond to a yield slump amid surging stocks. Once again, some focus on the 200-day moving area where support has now become resistance, currently at $1793.
What is going on?
Australia Q3 CPI upside surprise at the core - the Aussie traded a bit firmer after the release of the Q3 Australia CPI data overnight. The headline numbers were +0.8% QoQ and +3.0% YoY versus +0.8%/3.1% expected, respectively, but the “Trimmed Mean” received more attention as it came in at +0.7% QoQ and +2.1% YoY vs. +0.5%/+1.8% expected.
US earnings deliver on Q3 but send mixed signal for Q4. Q3 earnings from Microsoft, Alphabet, and Visa were all strong and have lifted earnings q/q into positive for S&P 500 and Nasdaq 100, but the guidance from Visa was a bit weak given the slower pickup in cross-border travel due to less business travelling. Alphabet’s Q3 earnings were strong but investors are a bit concerned over the less than expected growth in the cloud business where its Google business competes with Microsoft that on contrary to Alphabet beat expectations in their cloud business. Robinhood was the big negative surprise last night with a cut to FY revenue guidance to around $1.8bn from previously $2bn and a big miss on Q4 revenue guidance vs estimates.
Strong earnings in Europe. Before the market-open, European companies such as Equinor, Banco Santander, Deutsche Bank, and BASF have all reported better than expected earnings. From an economic perspective the earnings from BASF are the most interesting as the German chemical company is raising their revenue guidance on strong prices eclipsing the rising input costs from among other natural gas. The company also said that most businesses at this point cannot raise prices enough to offset the rising input costs supporting our view that margins will continue to come under pressure.
Democrats propose new minimum tax on particularly profitable companies. In the proposal, any company earning more than $1 billion would be subject to a minimum 15% tax, regardless of whether other loopholes are available to avoid tax. The bills sponsors include Democratic senator Elizabeth Warren and independent senator Angus King, who said the tax would “dovetail” with the global minimum tax proposal circulating in the OECD.
Underinvestment in oil is a “huge concern” according to Aramco's CEO Nasser who says crude oil production capacity is dwindling globally, and more investments in new production are needed urgently. Bloomberg which carried out the interview also noted that oil and gas traders have leveled criticism at governments and activist organizations for calling for an end to new oil and gas exploration, warning this would lead to an energy shortage during the next ten years. As many as 1485 institutional investors have so far pledged to divest from fossil fuels. The latest being EU’s biggest pension fund, ABP of the Netherlands, saying it will dump $17 billion in fossil fuels investments by early 2023.
What are we watching next?
UK fall budget announcement today – as UK Chancellor of the Exchequer Rishi Sunak will announce plans for the coming six months. The budget is thought to include modest additional targeted support for the most vulnerable households affected by the energy price crunch and areas of the economy still impacted by the pandemic, as well as addressing longer term initiatives linked to the climate and CO2 reduction, the Conservative government’s “levelling up” programme. But perhaps most importantly, how the government plans to float the idea that it can return to fiscal sustainability. Austerity and taxation plans will be watched closely for the forward impact on UK growth and the currency, with fiscal austerity classically currency-negative.
Bank of Canada meeting later today - this meeting will feature a new set of forecasts for the economy, including inflation, and a press conference with Governor Macklem. No rate hike expected as the guidance at the previous meeting repeated the July policy assessment, which anticipated that the Canadian economy still has significant excess capacity and that the time frame for hiking rates won’t arrive until the second half of next year. But the time frame of the rate hike guidance could be shifted forward (hawkish) with the market already predicting a hike as early as the March or April meeting, so a repeat of the “second half of 2022” time frame would be nominally dovish.
Significant Brazil rate hike anticipated tonight – the exploding Brazilian budget deficit, likely not coincidentally ahead of an election set for October of next year, together with much higher than expected inflation (October CPI reported at over 10% year-on-year) has the market anticipating a large rate hike of some 150 basis points to 7.75%. The Brazilian real has weakened toward the range high this year in USDBRL near 5.80 before a slight strengthening as the Brazilian Central Bank is under pressure to defend the value of the currency.
Earnings Watch – this is the biggest earnings week during the Q3 earnings season with all the major US technology companies reporting. Today’s key focus is on earnings from eBay, Twilio, General Motors, Ford Motor, and Spotify.
Wednesday: ANZ, Novozymes, Neste, BASF, Deutsche Bank, Ping An Insurance, Fanuc, Hitachi, GlaxoSmithKline, Heineken, Equinor, Iberdrola, Banco Santander, Assa Abloy, Thermo Fisher Scientific, Coca-Cola, McDonald’s Service Now, Bristol-Myers Squibb, Boeing, General Motors, Ford Motor, Twilio, eBay, Spotify, Yandex, Garmin
Thursday: Anheuser-Busch, Shopify, Suncor Energy, Sanofi, Dassault Systems, TotalEnergies, PetroChina, BYD, Agricultural Bank of China, UniCredit, Sony, Keyence, Royal Dutch Shell, Lloyds Banking Group, Hexagon, Apple, Amazon, Mastercard, Comcast, Merck & Co, Linde, Starbucks, Caterpillar, Atlassian, Newmont, Volkswagen
Friday: BNP Paribas, Daimler, Merck, China Construction Bank, Bank of China, Eni, Exxon Mobil, Chevron, AbbVie, Colgate-Palmolive
Economic calendar highlights for today (times GMT)
1130 – UK Chancellor Sunak to deliver Budget Statement
1230 – US Sep. Advance Goods Trade Balance
1230 – US Sep. Preliminary Durable Goods Orders
1400 – Canada Bank of Canada Rate Decision
1430 – US Weekly DoE Crude Oil and Product Inventories
1500 – Canada Bank of Canada Governor Macklem Press Conference
2130 – Brazil Selic Rate Announcement
2340 – Australia RBA speakers Debelle, Bullock
2350 – Japan Sep. Retail Sales
Japan Bank of Japan Meeting
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