What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US technology and growth stocks were under pressure again yesterday but ended the session unchanged and looking to continue its pressure this morning in early European trading. If the market continues to shred growth stocks, we could go down and test the 15,500 level which was the latest support level during the December decline. The US 10-year yield continues to make higher lows and if the upward trend continues it will add headwind for US equities. The big event coming up for equities is the Q4 earnings season starting next week with US financials but the key earnings to watch are from technology released in a couple of weeks' time.
EURUSD - since late November, the EURUSD supermajor has traded within the tight 1.1222 to 1.386 range as traders scratch their heads on which direction the price action will break. Interestingly, the pair hardly reacted to a nominally very supportive development for the US dollar this week in the form of a far more hawkish FOMC Minutes than expected, which saw US treasury all along the yield curve jumping higher. The next test for the pair and its chart levels arrives with today’s US December jobs report.
EURGBP – sterling has worked its way stronger over the last three weeks, perhaps on its hands-off approach on the spread of the omicron variant relative to the responses elsewhere, particularly in mainland Europe, where gatherings and activity have been severely limited in many cases. Still, EU-UK yield spreads at the front of the curve have not shifted notably over the last two weeks. The EURGBP pair has traded below the prior cycle low near 0.8380, leaving only the major range support back since the Brexit vote of late 2016 near 0.8275 as the next focus.
Cryptocurrencies – continued to stumble as the price action in Bitcoin pushed toward the next key chart area into 40k, and with Ethereum also continuing to lose altitude. One theory for the weakness in price action this week is that the shutdown of the internet in Kazakhstan due to protests has pulled as much as 15% of the bitcoin mining network off-line. With the country declaring that order has been restored, the eventual renewal of internet access there will be important for establishing the attribution to the price action from this source.
Crude oil (OILUKMAR22 & OILUSFEB22) as well as EU gas (TTFMG2) are some of the best performing commodities this week. Tight supply being the main theme supporting both markets. In oil, rising front month spreads are signaling growing supply tightness driven by disruptions in Libya and geopolitical risks associated with rising fuel protests in Kazakhstan, a 1.9 million barrels a day producer. Together with signs OPEC+ will struggle to implement its 0.4m b/d increase has helped off-set any short-term demand worries related to surging virus cases around the world. Not least in China, where its zero-tolerance policy means any outbreak is met with strong containment measures stifling mobility and consumer spending. Brent resistance at $83 followed by $85.50.
Gold (XAUUSD) and especially silver (XAGUSD) have had a challenging start to 2022, and just like last year the selling has been driven by surging bond yields. This time in response to stronger economic data and signs the Federal Reserve could move to tighten faster. However, considering US ten-year real yields has spiked higher by 30 basis points to –0.80%, the highest since last June, the 2% sell-off in gold has been relatively small, being partly offset by a softer dollar and cryptocurrencies as well as virus and geopolitical risks. The now established triple top at $1830 has weakened the technical outlook with support at $1783 preventing an even deeper selloff. Today’s focus squarely on the US job report (see below).
US 10-year Treasuries and German Bunds - The FOMC minutes provoked yields higher on both sides of the Atlantic as, by surprise, Federal Reserve’s members discussed the winding down of the Fed’s balance sheet. Yesterday, ten-year yields approached the pivotal level of 1.75%. If they break above this level, they could rise fast to test 1.80%. Yet, we cannot forget that an increasingly aggressive Federal Reserve will undermine growth keeping long-term yields compressed. Thus, the rise in yields might slow down in the coming weeks. We continue to see the potential for a bear-flattening of the yield curve. In Germany, Bunds rose to –0.03% aiming to test resistance at 0%.
What is going on?
China set for imminent easing? - a report in the Chinese Securities Journal, an operation run by China's official Xinhua News Agency, suggests that the first quarter of this year may be a “key window” for China to ease monetary policy before the US begins its rate cycle. This could include both cuts to banks’ reserve requirement ratio and cutting the policy rate.
US President Biden places primary blame for January 6th riots on Capitol Hill last year on Trump, saying that the former president’s “bruised ego matters more to him than our democracy or our Constitution. He can’t accept he lost”. Some suggest Biden may seek to use the speech as a launch point for the mid-term elections in November of this year, campaigning with Democrats on accusations that Republicans are guilty of voter suppression and even gun control. Biden’s approval ratings are near the lowest they have been in his presidency.
Bed Bath & Beyond sees buying from “meme traders” despite revenue guidance cut. The company reduced its fiscal outlook for revenue of low inventory levels due to global supply constraints and narrowed the upper end of its operating margin expectations guidance, which is most investor books would have been negative, but Bed Bath & Beyond is part of the meme-stocks complex and shares were brought regardless showing the disconnection in some pockets of the market between reality and sentiment.
Walgreens dropped 3% on disappointing earnings outlook. Despite beating estimates on EPS in the last quarter, which was driven by selling millions of Covid shots and tests administrated, the outlook for the entire fiscal year guidance below estimates disappointed investors.
What are we watching next?
US December jobs report up later today – watching payroll growth and average hourly earnings. The nonfarm payrolls change number today is expected out at about +450 after a tepid +210k in November, although the “two-month net revision” number bears watching, as the US Bureau of Labor Statistics has had difficulty collecting data over the last year and has consistently underestimated the pace of jobs growth, with every month since July seeing growing positive revisions, from a +119k revision in August to a +235k revision in November. As well, the Average Hourly Earnings data deserves watching, with the market looking for +0.4% month-on-month growth and a sharp drop to +4.2% year-on-year due to the basing effect of a significant surge in December 2020. The official unemployment rate is based on an entirely different “household survey” and its plunge to 4.2% in November from 4.6% in October, together with a labor force participation rate that has not normalized to pre-pandemic levels, tells its own story of labor market tightness. Analysts suggest that the generous benefits and spectacular portfolio gains since the pandemic outbreak have taken millions of older workers near retirement out of the work force, never to come back. In the pre-pandemic cycle, it took a full two years for the unemployment rate to drop from 5.0% to 4.2%, a feat that was accomplished in three months last year.
The annual rebalancing of the world’s two biggest commodity indexes, the energy heavy S&P GSCI and the broader Bloomberg Commodities Index (BCOM) will start today, and over a five-day period the indexes, followed by billions in assets, will reset their positions based on how the individual commodities performed in 2021, production levels and overall trading volumes. However, while creating a great deal of attention, the general market impact should be limited with the changes being well flagged in advance.
Earnings Watch – no earnings today but the Q4 earnings season starts next week with the following earnings releases.
Tuesday: Yaskawa Electric, Acciona Energias Renovables, Albertsons, TD Synnex
Wednesday: Aeon, Abiomed, Jefferies, Shaw Communications
Thursday: Fast Retailing, IHS Markit, Delta Air Lines, Seven & I, Chr Hansen
Friday: Wells Fargo, BlackRock, First Republic Bank, JPMorgan Chase, Citigroup
Economic calendar highlights for today (times GMT)
0800 – Czech National Bank meeting minutes
0930 – UK Dec. Construction PMI
1000 – Euro Zone Dec. CPI Estimate
1200 – Mexico Dec. CPI
1330 – US Dec. Change in Nonfarm Payrolls
1330 – US Dec. Unemployment Rate
1330 – US Dec. Average Hourly Earnings
1330 – Canada Dec. Net Change in Employment / Unemployment Rate
1500 – Canada Dec. Ivey PMI
1500 – US Fed’s Daly (Non-voter) to speak
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