Market Quick Take - January 27, 2022

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities experienced another rollercoaster ride yesterday with S&P 500 futures up 2.5% ahead of the FOMC rate decision, but the Fed delivered no surprises and regardless S&P 500 futures gave up all their gains in less than an hour. S&P 500 futures are down 3.2% from the levels before the FOMC rate decision and it seems that we are now in an environment where the market will test where the ‘Fed put’ is by selling lower until the Fed blinks. The 4,200 level in S&P 500 is the next natural support level that will be tested as it lies just below the low from three trading sessions ago.

Hang Seng (HK50.I) trades lower in response to broad post-FOMC market weakness with the Hang Seng Tech Index down 4.9% (Bilibili (9626.HK) -12%, Meituan (3690.HK) -8%, Alibaba (9988.HK) –6%, Xiaomi (1810.HK) -5%). Chinese healthcare stocks were also among the worst performers with Fed Chair Powell’s comments reducing investors' appetite for risks ahead of a long holiday. In mainland China, CSI 300 fell 2% to a 15-month low. With better-than-expected earnings due to strong ASP in 4Q, coal mining companies went up. In the newswire, state-owned AMCs were reported to have convened to explore concerted efforts to acquire distressed real estate assets.

Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Cryptocurrencies were tamed yesterday by the surprisingly hawkish read of the FOMC meeting, with Bitcoin retreating from a feint above 38k to trade near 36k this morning, while Ethereum stumbled badly back below the 2,500 area after squeezing above 2,700 yesterday. Cryptocurrencies have tended to trade as “risky assets” with tight correlation with the equity market, but the narrative of a more hawkish Fed shoring up the credibility of the US dollar as US yields rise does add a “fundamental” pressure on the space, if crypto assets are meant to be an expression of the lack of faith in fiat currencies.

USDCAD – the USDCAD pair is an interesting benchmark for USD strength against the commodity currencies as the Bank of Canada failed to hike as most expected, but kept guidance quite hawkish, keeping BoC hike anticipations still ahead of Fed rate move anticipations despite a significant adjustment to the latter in the wake of the FOMC meeting (more below on both the BoC and FOMC meetings). USDCAD was sharply higher from yesterday’s lows, but this only took it back to the half-way area between the key 1.2500 and 1.3000 pivots. Whether the latter is challenged will depend on whether asset markets are further spooked by the hawkish read of the FOMC meeting.

EURUSD - the EURUSD was sent tumbling as the market felt forced to price in the risk of more Fed hikes this year than originally anticipated and as the entire US yield curve lifted in the wake of the FOMC meeting and Powell presser. Noises from the key ECB sources continue to suggest that the ECB will be slow to adjust policy on the belief that inflation will prove transitory, meanwhile. The price action took EURUSD back to the low 1.1200’s, not far from the cycle low back in November of 1.1186, a break of which would likely shift the focus to the 1.1000 area. Eventually, as central bank expectations rise, a capitulation from the ECB on the need to guide for rate hikes could prove a watershed moment that supports the Euro, but this moment has not yet arrived.

Crude oil (OILUSMAR22 & OILUKMAR22) traded higher following what looked like a mildly bearish weekly stock report with Brent briefly climbing above $90 to a fresh seven-year high before general risk aversion following the FOMC meeting helped trigger some profit taking. While the EIA reported a nationwide increase in crude oil stocks, Cushing saw another drop to the lowest level for this time of year in a decade. The emerging tightness at this key delivery hub for WTI crude oil futures kept prompt spreads elevated and together with continued concerns over Ukraine, the post-FOMC correction has so far been relatively small.

Gold (XAUUSD) and especially silver (XAGUSD) traded lower after Powell backed a March liftoff for rate hikes while not ruling out the Fed could hike at every meeting to bring inflation under control. Treasury yields jumped across the curve while the dollar rose to within striking distance of the late 2021 highs. The news saw gold slump and erased the gains of the year with focus now turning to its ability to find support ahead of $1800. However, some support is likely to emerge soon driven by the focus on non-transitory inflation and a weakening economy as rate hikes and quantitively tightening begins to bite, together with geopolitical tension and a prolonged period of stock market volatility.

What is going on?

FOMC meeting sees Powell Fed reluctant to provide forward guidance. The basic outline of the FOMC statement was little changed as the Fed remains on track to wind down its purchases ahead of the March FOMC meeting and is clearly set to hike in March as the. The Fed issued a separate statement titled Principles for Reducing the Size of the Federal Reserve's Balance Sheet that clearly indicates that Fed will look at quantitative tightening sometime after its first rate hike. In the question-and-answer portion of the FOMC press conference, Chair Powell refused to provide clear guidance on the pace or number of expected hikes or any schedule for the start or pace of eventual quantitative tightening, but did wax more hawkish than the market was priced on the Fed’s potential to hike at a rapid pace, when asked whether it was possible for the Fed to hike at consecutive meetings: “I think there’s quite a bit of room to raise interest rates without threatening the labor market.” The lack of clear guidance is likely behind the USD, Fed rate expectations and US yields rocketing higher during and in the wake of Powell’s presser, with the September EuroDollar future adding nearly 20 basis points of expected hikes to expectations by year-end (a full 100 basis points of hikes in 2022 now priced), while the entire yield curve lifted, perhaps on the fear that quantitative tightening will also lift longer rates. The US 10-year Treasury yield benchmark is some 8 basis points higher this morning, only a few basis points from the cycle highs.

Bank of Canada neglects to hike, but future expectations steady as this was a “setup meeting” for future rate moves. The Bank of Canada was favored to hike yesterday, according to Bloomberg rate expectations, but failed to do so, resulting in a far weaker Canadian dollar versus the US dollar by the end of the session, though most of that was down to the market response to the FOMC meeting (see above). The Bank of Canada did issue a new statement indicating an end to its “exceptional forward guidance” and expressing the belief that "overall economic slack is now absorbed”. After a brief dip in forward rate expectations, short yields rose again as this statement was seen as providing no change to the Bank’s intent to eventually hike rates even more quickly than the Fed this year. Nonetheless, BoC governor Tiff Macklem waxed cautious on the short-term macroeconomic outlook: “Reopening the economy has proven complicated (…) We are going to learn more about Omicron in the coming weeks”. The BoC has downgraded its overall GDP forecast for 2022 significantly, too. GDP growth is expected at 4.6 % instead of 5.1 %. Consumption will likely remain the key driver of economic activity while housing and net exports will remain drags.

Tesla delivered strong Q4 earnings as expected. Tesla had already released Q4 deliveries, so investors were prepared for strong earnings. Q4 adj. EPS was $2.54 vs est. $2.36 with free cash flow at $2.8bn vs est. $1.7bn driven by higher than expected gross margin of 30.6%. The carmaker still sees 50% annual increases in deliveries over the coming years despite being limited on semiconductors into 2023. The company does not plan to introduce new models this year and expects software sales to increase over the coming years. Shares were a bit lower in extended trading.

Samsung expects to outspend TSMC. Samsung reported operating profit a bit below consensus and says demand remains strong across all business lines. The company expects to outspend TSMC going forward as Samsung takes up the fight in semiconductors.

What are we watching next?

Q4 2021 U.S. GDP is released today. The economist consensus expects real GDP to rose 5.6 % QoQ annualized in Q4, up from 2.3 % in Q3. Final domestic demand is likely to be weaker after December retail sales disappointed. Inventories should make a large positive contribution to economic activity. The U.S. economy is still in a very good shape despite the high level of inflation and the impact of the Omicron variant.

Hungary set to hike rates again today? The market is looking for another 30 basis points of tightening from the Hungarian central bank today, to take the one-week deposit rate to 4.30%. Contrast this with the –0.50% cash rate in Europe and carry traders have quite an interesting proposition. Of course, Hungary’s headline inflation number hit 7.4% in December and gross wages rose 10.1% year-on-year in that month, suggesting that the central bank may have more work cut out for it in getting ahead of inflation. HUF started this year on a strong note as EURHUF was impressed by the central bank’s determination, dropping from above 370 to below 355, but the rate has backed up to 360 ahead of today’s meeting.

Earnings Watch. Today is the most important day in terms of earnings this week with Apple, LVHM, SAP and Visa being the key earnings to watch. Analysts expect Apple to show 7% revenue growth as even the world’s largest technology company is being constrained by semiconductors.

• Today: LVMH, STMicroelectronics, Sartorius, SAP, Deutsche Bank, Unicredit, Diageo, Apple, Visa, Mastercard, McDonald’s
• Friday: Volvo, H&M, Givaudan, Chevron, Caterpillar, Colgate-Palmolive

Economic calendar highlights for today (times GMT)

• 0830 – Hungary One-week Deposit Rate
• South Africa Reserve Bank Interest Rate Announcement
• 1330 – US Weekly Initial Jobless Claims
• 1330 – US Preliminary Dec. Durable Goods Orders
• 1330 – US Q4 GDP Estimate
• 1530 - US Weekly Natural Gas Storage Change
• 0030 – Australia Q4 PPI