What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
Bad news is good news in the US with lower than estimated PMI figures for November suggesting the US economy continues to slow down bolstering bets that US interest rates have peaked, and the Fed pivot is alive. The FOMC Minutes also suggested that the pace of interest rate hikes will be lowered going forward. P 500 futures rallied 0.5% to close at 4,030 getting closer to the falling 200-day moving average at 4,058. In addition to yesterday’s US news, China’s State Council (see below) issued a memo advising the PBOC to use monetary instruments to safeguard and kickstart the Chinese economy. In a time with falling economic growth in the US and Europe, an accelerating Chinese economy would balance the global economy and soften the recessionary dynamics. It is Thanksgiving in the US today so cash equity markets will close at 1300 ET today.
Hong Kong’s Hang Seng (HISX2) and China’s CSI300 (03188:xhkg)
After a meeting on Wednesday, China’s State Council issued a memo calling on the People’s Bank of China (PBOC) to use monetary tools including a cut in the reserve requirement ratio (RRR) at an appropriate time to support the real economy. According to historical observations, the PBOC will do what the State Council says and cut the RRR in the coming days or weeks. The news helped lift market sentiment which was however tempered by the rise of daily Covid cases to an all-time high of 31,444 in mainland China. Hang Seng Index edged up 0.3% while CSI 300 declined 0.5%. Shares of leading Chinese developers surged by 5% to 12% after several large Chinese banks agreed to provide more than RMB 200bn in total in credit facilities to a number of private enterprise developers.
EURUSD above 1.04 and USDJPY falls below 140 amid broad-based dollar weakness
The dovish read of the FOMC minutes from the November 2 meeting is hardly a surprise, given the key message has been around a downshift in the pace of rate hikes as expected. But together with weaker than expected flash PMIs for November (read below) suggesting demand slowdown concerns are starting to pick up pace, and a higher-than-expected jobless claims print sending some early warning signals on the labor market, the focus has somewhat shifted away from inflation concerns which remain persistent. Market pricing of the Fed December meeting tilted further towards 50bps, and that resulted in a broad-based dollar sell-off which extended in the Asian session. EURUSD is now attempting a break above 1.0450 while USDJPY slid below 139.00. Japan’s Tokyo CPI for October is due tomorrow and may inch higher again, further fuelling pressure for BOJ to tweak its zero-rate policy and supporting a recovery in the yen even as global yields start to get capped.
Crude oil (CLF3 & LCOF3)
Crude oil fell again on Wednesday thereby extending what has already been a very volatile week. The FOMC minutes driving a weaker dollar did not add much support with the market instead focusing on a challenged demand outlook in China as Covid cases continue to spread, and a 50% risk of a recession in the US next year. In addition, a price cap on Russian oil in the $65-$70 area currently being discussed by EU officials is far higher than expected and would probably not have a major impact on supply given that Russia is already selling its Urals crude at a 25-dollar discount to Brent. The negative sentiment was also reflected by the markets negative response to an otherwise price-supportive EIA stock report.
Gold (XAUUSD) and silver (XAGUSD)
Gold and silver both rose in response to weaker US economic data (see below) and after the FOMC minutes talked about moderating the pace of interest rate hike soon. The Bloomberg dollar index dropped to the lowest level since August while US government bonds rallied to send yields lower. Gold was already encouraged by the speed with which it recovered after briefly breaking below support in the $1735 area reached $1756 overnight with silver trading at $21.60 after showing some renewed relative strength against gold this week. With no signs yet of a pick up in demand for ETFs from longer-term focused investors, a further extension will likely require further declines in yields and the US dollar or some other catalyst that sees a run to safety. Resistance at $1757 and $1765.
EU gas (TTFMZ2)
EU gas jumped 8.3% on Wednesday to close near a one-month high at €130 with weather forecasts pointing to a cold beginning to December and Gazprom threatening to reduced supplies through Ukraine, one of just two remaining pipelines in operation. The Sudzha line is currently sending 42 million cubic meters per day to Europe and while the dispute only relates to part of the 5 mcm/day that goes to Moldova, the market clearly worry that this could lead to a complete closure of the line. However, with Russia’s pipeline flow to Europe already down 79% YoY, the ability to shock the system has been much reduced, hence the limited reaction in the peak winter contract of February which only trades €7/MWh above December
US treasuries (TLT:xnas, IEF:xnas, SHY:xnas) yields fell after the Fed minutes
The minutes for the Nov 1-2 FOMC meeting have a dovish cast, saying “a substantial majority of participants judged that a slowing in the pace of increase would soon be appropriate” and some FOMC members had a concern about rate hikes might ultimately “exceed what was required to bring inflation back”. Yields declined across the curve with buying particularly strong on the long end. The 2-year yield dropped by 4bps to 4.48% and the 10-year yield finished the session 6bps richer at 3.69%. The 2-10-year part of the curve became yet more inverted at minus 79, thereby strengthening the prospects for a recession sometime next year.
What is going on?
FOMC Minutes signal a smaller pace of rate hikes
The FOMC minutes from the November 2 meeting were released on Wednesday, and the general tone of the members confirmed that the committee was leaning towards moving away from jumbo (75bps) rate hikes to a smaller pace. At the same time, "various" officials noted that the peak rate will be "somewhat higher" than previously expected. The minutes saw participants agree there were very few signs of inflation pressures abating (minutes were pre-October CPI) and they generally noted inflation outlook risks remain tilted to the upside. There were also some concerns about the strength of the labour market, where a few participants said ongoing tightness in the labour market could lead to an emergence of a wage-price spiral, even though one had not yet developed. The message remained less hawkish than what the Fed potentially needs to deliver at this point given the considerable easing in financial conditions.
US PMIs disappointed, jobless claims rose
US S&P flash PMIs for November disappointed, as manufacturing printed 47.6 (exp. 50.0, prev. 50.4) and services fell to 46.1 (exp. 47.9, exp. 47.8), while the composite dropped to 46.3 (prev. 48.2). New orders fell to 46.4, the lowest since May 2020, while employment saw a slight uptick to 50.8 from 50.4. The only good news is that both input and output prices dipped further, offering further positive signals on inflation. The PMIs indicated how concerns are shifting from the supply side to the demand side, with better news on supply chains but demand concerns from weakening new orders. Initial Jobless claims rose more than expected to 240k from 223k and above expectations of 225k, the highest print since August, suggesting that we continue to watch for further signals on whether the tight labor market may be starting to weaken.
Deere shares up 5% on strong results
The US agricultural equipment maker delivered better than expected revenue and net income in its Q4 fiscal quarter (ending 31 October) and issued a FY23 net income guidance of $8-8.5bn vs est. $7.8bn. Order books are full into fiscal Q3 next year (ending 31 July) and the company sees an extended replacement cycle indicating that the best years are still ahead of the company.
Better eurozone flash Composite PMI for November
This was unexpected. The consensus forecasted that the EZ flash Composite PMI would fall to 47.0 in November from 47.3 in October, it actually improved a bit to 47.8. The increase mostly results from a better-than-expected Manufacturing PMI (out at 47.3 versus prior 46.4 and forecast at 46.0) while the services sector remains stable. There is another positive news. Price pressures are easing quite fast. The PMI price gauge fell to its lowest levels in two years due to a collapse in input prices. On a flip note, the flash Composite PMI Output Index for the United Kingdom (UK) ticked up to 48.3 in November. Surprisingly, the UK seems to hold up better than the eurozone and especially Germany. The jump in the PMI is still consistent with a recession in the eurozone and in the UK but it may be shallow, and its steepness will mostly depend from country to country on the impact of the energy shock and fiscal measures taken to mitigate it.
What are we watching next?
Earnings to watch
Today’s earnings focus is Meituan and Pinduoduo. Chinese earnings in Q3 have been mixed and the technology sector continues to experience headwinds from both the economy and regulation. Analysts expect Pinduoduo, which has so far navigated the environment flawlessly, to deliver revenue growth of 44% y/y and EPS of CNY 4.75 up 288% y/y.
- Friday: Meituan, Pinduoduo
Economic calendar highlights for today (times GMT)
- US cash markets closed for Thanksgiving. Early closes in some futures markets.
- 0900 – German IFO for November
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