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Financial Markets Today: Quick Take – November 18, 2022

Financial Markets Today: Quick Take – November 18, 2022

Macro 5 minutes to read
Saxo Be Invested
Saxo Strategy Team

Summary:  Market sentiment managed to bounce mid-session yesterday in the US and was steady overnight, with the USD back lower but still very range bound and US treasury yields rising off their lows, with a new extreme for the cycle in the yield-curve inversion, suggesting the market remains worried that the Fed’s tightening will lead to recession. The market shrugged off yesterday’s budget statement from UK Chancellor Jeremy Hunt as most of the measures were flagged ahead of his speech.

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

S&P 500 futures extended their declines yesterday to the 100-day moving average at around the 3,916 level driven by comments from Fed’s Bullard saying the sufficiently restrictive zone on policy rate was in the range 5-7% spooking markets. It is obvious, that the Fed is out trying to dampen expectations following the rally on the lower than estimated US October inflation print. S&P 500 futures are bounced back after the initial shock but closing lower for the session and this morning they are trading around the 3,950 level.


Hong Kong’s Hang Seng (HSIX2) and China’s CSI300 (03188:xhkg)

Hang Seng Index snapped a two-day decline and bounced about 0.3% as of writing. China interest stocks led the charge higher following Alibaba reporting earnings beating expectations and adding to its share repurchase programme. The Chinese authorities’ grant of a new round of 70 online game licences to firms including Tencent and NetEase also help the market sentiment. Hang Sent Tech Index climbed 2%. In mainland bourses, healthcare shares gained as new Covid cases surged to above 25,000, a new high since April. Online gaming stocks rose on the new game license approval. Financials however continued to trade weak as investors are troubled by recent incidents of retail investment products losing heavily as bond yields rising in China. CSI 300 gained 0.2%.


FX: USD rally eases on risk sentiment bounce of the lows yesterday

The US dollar eased lower after a bout of weak risk sentiment was turned mid-session yesterday in New York and despite US treasury yields lifting all along the curve (with a new multi-decade low in the yield curve inversion suggesting the market remains concerned that the Fed’s tightening regime will lead to a recession. After the very sharp move lower off the back of the October CPI data, the USD has traded in a rather tight range in most places, with EURUSD bottled up near the 200-day moving average (currently 1.0414) and GBPUSD still hugging the 1.1900 area after the market shrugged off the autumn budget statement yesterday. Next week has the Thanksgiving holiday in the US, which usually sees light trading from Wednesday through Friday and the first key data is not up until the week after, so upcoming catalysts are not readily evident.


Crude oil (CLZ2 & LCOF3)

Crude dropped sharply yesterday to multi-week lows, trading as low as 89.53 in January Brent and 81.40 in December WTI. Concerns of weakening demand in China are purportedly behind some of the weakness yesterday, but with a new extreme in the yield curve inversion yesterday, rising market anticipation of an incoming recession is likely weighing on sentiment in oil. For the December WTI contract, the 81.30 level is the last significant pivot low ahead of the 75.70 September low for that contract. For January Brent, the  87.52 level is the last pivot low ahead of the 80.94 September low for that contract.


Gold (XAUUSD)

Pushed a bit lower yesterday on the rise in US treasury yields, trading above 1,760 this morning after the 1,786 high earlier this week. The 200-day moving average is near the important 1,800+ area. An extension of the recent rally likely requires further declines in yields and the US dollar or some other catalyst that sees a run to safety.


US treasuries (TLT, IEF)

US yields surged across the entire yield curve with yields rising the most in the front end. The 2-year yield jumped 10bps to 4.45% and the 10-year climbed 8bps to 4.77%. The 2-10 year spread inverted further hitting a new low of minus 71bps. Selling concentrated on the front end as St. Louis Fed President James Bullard referred to the “sufficiently restrictive level” being “5% to 5.25%” and “that’s a minimum”. In addition, Bullard showed a chart that suggested a range of terminal rates from 5% to 7%. Meanwhile, Minneapolis Fed President Kashkari said the Fed is “not there yet” to pause and it is an open question of how far the Fed needs to go.


What is going on?

Japan’s CPI increased more than expected in October

Japan released its national CPI data which came in hotter than expected. Headline CPI grew 3.7% Y/Y (consensus: 3.6%, Sep: 3.0%). CPI excluding Fresh Food was 3.6% higher than last year (consensus: 3.5%, Sep: 3.0%) and CPI excluding Fresh Food and Energy increased 2.5% Y/Y in October (consensus: 2.4%, Sep: 1.8%).


UK budget statement sees little market reaction, but huge Gilt issuance set for next year

The mix of measures was more or less as anticipated, with many of the specific larger moves well flagged ahead of yesterday’s speech on the budget from UK Chancellor Jeremy Hunt. After a strong surge in UK gilts (sovereign bonds), UK yields rose yesterday, as the Debt Management Office in the UK project that issuance of gilts in the 2023-24 financial year will rise almost 50% to £305 billion, with net issuance at £255 billion, almost double the previous high from 2011. Near term issuance to the end of the current fiscal year to April is expected somewhat lower than prior estimates.


China urges local authorities to strike a better balance in pandemic control measures

China’s National Health Commission urged local authorities to avoid “irresponsible loosening” of pandemic control measures. In a press briefing, health officials said local authorities “must continue to rectify the practice of excessive measures such as lockdowns and oppose the irresponsibility of evading a solution by loosening up”.

The world’s second biggest lithium producer, SQM, sees lithium prices staying higher in 2023.

SQM sees the Chinese electric vehicle market showing strong growth, buttressing solid demand for lithium. In its third quarter result, SQM’s income beat analyst estimates, rising by more than 10 times to $1.1 billion. The surge was fueled by the lithium price more than tripling over the past year, and rallying over 1,200% since 2020, amid tight supply and rising demand from EV makers. SQM sees the lithium market staying tight and higher prices for the rest of 2022 and into 2023.


BHP (BHP) raised its takeover offer for copper giant, Oz Minerals (OZL)

The offer was raised to $6.4 billion as global miners are hungry to boost copper production. Copper is a vital metal in electricity networks, electric vehicles, housing and renewable energy. BHP currently makes about 48.7% of its revenue from iron ore, 26.7% from copper, and 24.6% from thermal coal.

What are we watching next?


Earnings to watch today: JD.com

Today’s earnings calendar is light with only the Chinese e-commerce giant JD.com reporting results. Analysts expect revenue growth of 11% y/y and EPS of $4.46 up 194% y/y on expanding EBITDA margin, but given the results from other Chinese companies we find it a bit unlikely that JD.com can deliver those types of results.

Options expiry today in US to hit new record

Options expire today on a notional $2.1 trillion in underlying instruments today as this month looks likely to set the record for options volume, with 46 million contracts in daily trading on average, up 12% from last month. Increasingly popular are contracts that expire within 24 hours, a phenomenon that may have driven the extreme volatility around the Thursday October CPI release last week.

Economic calendar highlights for today (times GMT)

  • 0830 – ECB President Lagarde to speak
  • 1315 – UK Bank of England’s Catherine Mann to speak
  • 1330 – Canada Oct. Home Price Index
  • 1340 – US Fed’s Collins (non-voter) to speak
  • 1500 – US Oct. Existing Home Sales
  • 1500 – US Oct. Leading Index

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