Summary: US equity futures traded lower in Asia led by losses in the Nasdaq index after US ten-year yields jumped to 1.85% while short-end interest rates futures are now pricing in four rate hikes in 2022. Brent crude hit a seven-year high on geopolitical concerns which in part will increase pressure on the Fed to act more quickly to contain price pressures. Stocks in China hung on to gains following Monday’s rate cut on expectations of more policy easing. Focus on earnings with Goldman Sachs reporting before the opening.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - equity markets are back online after yesterday’s holiday in the US with the US 10-year yield pushing to the highest levels since January 2020 weighing down on stocks and in particularly US technology stocks. Nasdaq 100 futures are pushing lower in early European trading hours with Friday’s low at 15,312 as the natural support level to watch today. The 200-day moving average in Nasdaq 100 sits around 14,979 and will become the biggest inflection point for US technology stocks as they have been lower than this trend line since April 2020.
Hang Seng (HK50.I) fell to a five-day low, despite China’s central bank cutting interest rates for the first time in about two years. The market remains one of the strongest performers this year, up 3.1%, however investors are now taking profit in banks, pre-empting banks to pass on the cut on Thursday; with stocks like HSBC Holdings down 1.15% on Tuesday. While tech stocks slipped like Tencent slipped in afternoon trade, expecting the Fed to hike rates in March. Inversely, property stocks were beyond after the PBOC cut rates, with shares in China’s biggest builder, Country Garden Holdings bouncing up off its five-year low.
The dollar strengthened against all FX majors, with Aussie and Kiwi leading the retreat. The JPY traded lower after Bank of Japan maintained its 10-year yield target with Kuroda saying he will keep rates low and stands ready to ease if needed, thereby clearly denying any tightening bias. Last week’s EURUSD jump continues to fade but for now its holding above resistance-turned-support in the €1.1360-80 area.
Crude oil (OILUSFEB22 & OILUKMAR22) broke higher in Asia with Brent climbing to a 2014 high after Houthi drone strikes on the UAE raised additional supply concerns at a time where several OPEC+ producers are struggling to meet their allocated quotas. Goldman Sachs, who has called this rally last year, now sees Brent at $100 by Q3 2022. The physical oil market remains strong, especially in Asia thereby further reducing demand concerns related to the omicron variant. Besides developments in the Middle East, the market focus will turn to monthly Oil Market Reports from OPEC today and IEA on Wednesday for further clues about the current supply and demand situation.
Gold (XAUUSD) trades close to unchanged after managing to shrug off another jump in US ten-year yields to a fresh cycle high at 1.85% as well as a slightly stronger dollar. Surging commodity prices led by crude oil’s jump to a seven-year high supporting the view the US Federal Reserve may have to speed up its rate hike projection, potentially surprising the market with a 50 bp hike in March, a development that will raise concerns about a Fed policy error weighing on the recovery. In addition, geopolitical risks on Europe’s eastern borders and the Houthi attack in the UAE are also providing some support for haven metals. Resistance, however, remains firm in the $1830-35 area while a band of support has been established down towards $1800.
US Treasuries (IEF:xnas, TLT:xnas). US Treasury yields resume their rise after the long weekend, breaking above pivotal levels. Two-year yields broke above 1%, 5-year yields broke above 1.5%, and 10-year yields rose to 1.85% for the first time since January 2020. The yield curve is bear flattening as short-term yields rise faster than long-term yields on expectations of a more aggressive Fed. The swap market is now pricing for interest rate hikes this year, but Christopher Waller last week mentioned even the possibility of five hikes. At this point, it’s hard not to envision the Fed to use balance sheet runoffs to complement interest rates hikes this year, a move that could help to steepen the yield curve and hike less than the market expects. From this point of view, QE purchases are redundant, and the Fed might announce the end of it already next week. Tomorrow’s 20-year auction is in focus, as it is an unloved tenor and could spark further volatility on the long part of the yield curve.
Emerging market sovereigns (PCY:arcx). Sovereign bonds of the weaker emerging markets begin to tumble as refinancing of their Eurodollar bonds becomes more difficult amid rising US Treasury yields. Ghana is an example: the spread of its 2027 Eurodollar bonds widened to 1,000bps as investors have been dumping the credit since the beginning of the year. Emerging markets have issued substantial amounts of Eurodollar debt in the past few years, and we expect Ghana not to be an isolated example.
What is going on?
Rio Tino (RIO:xlon) released a somewhat upbeat quarterly result, while also forecasting higher shipments in 2022. Exports ticked up by 1% in the final three months of 2021 with the miner plagued by staff shortages in Western Australia and delays in starting new mines. As for what’s ahead, Rio says exports are dependent on ‘market conditions’ of course but sees a brighter 2022; with iron ore shipments to rise as much as 4%, copper shipments to rise by as much as 16%, while diamonds shipments are said to shine and jump up as much as 57%. Rio Tinto shares held a 4-month high. BHP rose 1.1%.
Electricity de France SA (EDF:xpar), the state-controlled utility company has slumped 18% since Friday after it was ordered by the government to sell more power at a discount, a move that could cost EDF as much as €8.4 billion. The news comes at a time where the company is struggling with outages at some nuclear plants, thereby forcing them to use more punitively expensive gas to keep the electrical grid running.
Australia’s second biggest lithium stock, and the world’s 5th biggest, Allkem formed by the merger of Orocobre and Galaxy Resources - released its quarterly report, announcing higher overall sales, production and shipments in the quarter, while also expecting the lithium carbonate price to rise 80% on the first half of 2022 (to $20,000/t) due limited supply, while it’s observing ‘very strong demand’. This not only supports Allkem’s stock but also the lithium sector, as higher prices imply higher earnings and higher earnings support share price growth. So, as much most lithium stocks were higher on the ASX with the lithium sector hitting a record high today.
What are we watching next?
Monthly Oil Market reports from OPEC today and IEA on Wednesday should cast some further light on the current state of the market. The IEA is expected to sharply lower its previous projections for Q1 and Q2 surpluses after its head last week said demand had turned out to be stronger than expected, with the physical market booming as buyers look beyond the spread of omicron.
The 1.8% breakout in the US 10-year yield is key focus following Monday’s US holiday. With inflationary pressures looking less and less transitory and Brainard’s hawkish comments last week the 1.8% level in the US 10-year yield is the most critical thing to watch this week. A break above this level will set in motion more portfolio rebalancing and downward pressure on equities.
Earnings Watch – today’s earnings focus is Goldman Sachs which we expect to post mixed Q4 earnings like the rest of financials the past week. Otherwise, the most important earnings releases are ASML, Netflix, and Schlumberger which we covered in Friday’s equity update.
Economic calendar highlights for today (times GMT)
2024: The wasted year
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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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