Summary: Risk sentiment rebounded ever so cautiously as many traders are likely sitting on their hands in anticipation of next Tuesday’s US November CPI release and the FOMC meeting the following day, with many likely wanting to close their books on a very volatile year. Ahead of those event risks, US treasury yields and the US dollar are perched near cycle lows as the market anticipates that the Fed “terminal rate” will peak in the first half of next year.
S&P 500 futures rallied 0.7% yesterday on strong economic data and more positive growth optimism tied to China’s reopening trajectory. The 4,000 level is the average level for the trading range since mid-November and thus the likely gravitational point in S&P 500 futures in the short-term. US 10-year yield remains below 3.5% and the VIX Index suggests hibernation is setting in the last couple of weeks of the year. Today’s potential market mover events for US equities are the PPI report for November and later consumer confidence survey from University of Michigan.
Hong Kong’s Hang Seng (HIZ2) and China’s CSI300 (03188:xhkg)
Hang Seng Index rallied 2% on Friday on continued recovery optimism as the country reopening from Covid containment restrictions and more supportive government policies. Premier Li Keqiang said China will strive to achieve steady growth. Defaulted Chinese property developer Sunac said it had reached agreement with creditor to restrict USD9 billions of debts, including swapping $3-4bn of debts into ordinary shares or equity-linked instruments. Reportedly another defaulted mainland developer Evergrande is meeting offshore creditors later today to discuss restructuring proposals. The Chinese authorities are reportedly considering allowing REITs to invest in long-term rental and commercial real estates. Leading mainland Chinese property developers listed in Hong Kong surged 5% -12%. A day after shortening the home isolation period for people infected with Covid-10 to five days from seven days, a Hong Kong health official said the city is considering ending its vaccine pass scheme. Hong Kong local property developers gained 1%-5%. In A-shares, the CSI300 Index rallied 0.8%
US treasury yields are quiet after the 10-year benchmark broke down through the pivotal 3.50% level this week, with the 2-year yield also trading at the lower end of the recent range as the market awaits the incoming Tuesday CPI next week and the refresh of the Fed’s staff economic projections and “dot plot” forecasts of the Fed Funds rate at the December FOMC meeting next Wednesday. Next Monday sees the auction of 3-year and 10-year treasuries, with a 30-year T-bond auction up on Tuesday.
Crude oil is heading for a weekly loss with Brent crude trading below $77 and down more than 11% on the month after spending the week trading within a wide 13-dollar range. A weakening macroeconomic outlook which has seen the US yield curve inversion extend to levels signalling an incoming recession has overshadowed the EU embargo on Russian oil and the prospect of a pickup in demand in China as lockdowns continue to ease. A disruption on the Keystone pipeline temporarily roiled the markets on Thursday giving WTI a temporary boost which sellers took advantage of. Short-term technical traders looking to squeeze existing longs remain in control as the overall level of participation continues to fall ahead of yearend.
The FTC saying that the combination would give Microsoft too large a footprint in the gaming industry. The offer for Activision Blizzard shares was originally 95 dollars, but shares have dipped from hitting above 85 dollars on the announcement of the intended acquisition back in January to near 75 dollars yesterday after a volatile day.
China’s CPI inflation decelerated to 1.6% Y/Y in November from 2.1% Y/Y in October, in line with expectations as food inflation slowed and consumer demand was weak during lockdown. In the PPI, price increases in the raw materials sector decelerated while the price declines in mining and processing sectors slowed in November.
Soybean futures in Chicago (ZSF3) gained more ground on Friday, trading close to their highest since mid-September, as strong demand led by top importer China underpinned the market. While soybeans were likely to post a weekly gain, wheat (ZWH3) was on track for a fifth consecutive weekly decline as export sales continued at a slow pace due to competition from a record Russian production and corn (ZCH3) was down for a second straight week with the fall being cushioned by the strength seen in soybeans. Overall the grain sector now awaits Friday’s monthly crop forecasts (WASDE) from the US Department of Agriculture.
What are we watching next?
Sentiment has rebounded from the lows, according to the survey, although sentiment is still very downbeat after hitting an all-time low of 50.2 in the more than 40-year history of the survey in July. The December reading is expected at 57.0 vs. 56.8. Another focus in the survey could be on longer-term inflation expectations, which have rebounded to 3.0% for the next 5-10 years, according to the survey, close to the high of the range.
. Today’s US earnings focus is Oracle which is expected to report earnings after the US market close with revenue up 16% y/y and EPS up 23% y/y.
Economic calendar highlights for today (times GMT)
0930 – UK Bank of England to release inflation attitudes survey
1330 – US Nov. PPI
1500 – US preliminary University of Michigan Sentiment
1700 – World Agriculture Supply and Demand Estimates
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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