Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: US equities suffered another rocky session yesterday as oil prices rushed to new multi-new year highs in the wake of an OPEC+ meeting sees no change in modest supply increases already scheduled. In Asia, the Japanese equity rally beginning in early September in anticipation of a snap election and new political leadership has now been entirely reversed with the action overnight, while in Hong Kong, the Hang Seng traded to new cycle lows but rallied later in the session.
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What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - yesterday’s session was ugly with Nasdaq 100 futures breaking firmly below the 100-day moving average as commodity prices continue to weaken sentiment on equities and increases uncertainty over profit margins and economic growth. Growth stocks were in general the hardest hit segments and Nasdaq 100 futures are struggling again this morning in early European trading. The next major support level is around the 14,000 level which happens to be where the 200-day moving average is approaching.
Nikkei 225 (JP225.I) and Hang Seng (HK50.I) - Nikkei 225 futures are down 10% from the peak and has erased the gains since prime minister Suga resigned increasing optimism over the potential for a new more reform-oriented government. South Korean equities are also down 10% from the peak suggesting that the global energy crunch is hurting manufacturing countries hard. Hang Seng futures are awkwardly quiet given the ongoing Evergrande restructuring and energy crunch in China suggesting. The 24,000 level in Hang Seng is important support level with the next big level down at 23,000.
EURUSD – EURUSD consolidated in orderly fashion back above 1.1600 yesterday, never really threatening the key 1.1664 level that was broken on the way down and faded back below 1.1600 overnight as the euro remained one of the weaker currencies against a US dollar that was on its back foot for much of yesterday. The focus remains lower as long as EURUSD trade south of 1.1700, with 1.1500 a major psychological test and 1.1290 a huge Fibonacci level, the 61.8% retracement of the rally wave off the 2020 lows to early January 6 highs.
AUDNZD and NZDUSD – The New Zealand dollar has suffered a setback over the last couple of weeks as crowded positioning was likely reigned on a very rocky backdrop for market sentiment in global equities, and as rate expectations from the RBNZ have been slightly reduced on further extensions of lockdowns in New Zealand’s largest city Auckland, although the country is admitting that its Zero Covid policy is no longer viable and is rushing to vaccinate the population. The RBNZ is expected to hike rates 25 basis points at tonight’s meeting and guidance will be crucial as significant further tightening from the central bank is priced into the forward curve. A hawkish guidance could see AUDNZD probing the sub-1.0300 lows, while the NZDUSD cycle lows south of 0.6900 could be the focus if the RBNZ sounds less committed to fulfilling expectations in the forward curve.
Crude oil (OILUKDEC21 & OILUSNOV21) jumped yesterday after OPEC+ ministers, following a very short meeting, agreed to stick to its plan to increase November output by another 400k b/d. Since their last meeting, the global energy crunch in coal and gas prices have raised the prospect of demand switching to oil products for heating and manufacturing. The lack of urgency alarmed traders who reacted by sending Brent to a three-year and WTI to a near seven-year high. The risk of higher prices is real with demand destruction the next focus, but in the winter months ahead, this level could be substantially higher. Next major Brent target being the 2018 high at $86.75.
Gold (XAUUSD) remains rangebound with traders perplexed about the lack of inflation signal coming from the bond market where 10-year breakeven yields remain stuck around 2.4% with no signs of reacting to the record high commodity prices and the prospect for a winter of elevated energy prices. After failing to find the momentum needed to trade above its 21-day moving average, today at $1767, it has reversed lower today in response to a stronger dollar and firmer treasury yields.
Non-farm payrolls are in focus this week, but the debt ceiling crisis will keep 10-year US Treasury yields rangebound (IEF:xnas, TLT:xnas). A strong jobs report might wake up bears as a tapering announcement is likely to be delivered in November and the recovery of jobs together with elevated inflation may force the hand of the Federal Reserve into hiking interest rate early, resulting in higher yields across the yield curve. However, the debt ceiling crisis is causing significant volatility in money markets, underpinning the long part of the curve as investors fly to safety. Therefore, we expect 10-year yields to trade rangebound between 1.4% and 1.6% until a resolution of the debt ceiling crisis is reached.
Junk in emerging markets is losing value faster than in the developed world due to tighter monetary policy expectations (HYG:arcx, EMHY:bats). Weaker companies in emerging market will be more vulnerable to tighter monetary policies which would see yields rising. Those with hard currency debt are poised to suffer the most, as refinancing existing debt becomes more expensive. To add to fears for more aggressive monetary policies was yesterday OPEC+ meeting which stuck to a gradual oily output provoking oil prices higher. It’s a sign at that inflation will stay elevated for longer and Banks will not be able to afford to remain accommodative any longer.
What is going on?
The Bloomberg Commodity Spot Index hit a record high yesterday. The index tracks the spot performance of 23 major commodities excluding surging non-US traded gas as well as coal. An overstimulated global economy, a troubled growing season for several farm products, green transformation demand and ESG restrictions on mining and energy production have all helped create a situation where producers are struggling to meet surging demand from consumers. The latest spike has been led by the energy sector and soft commodities, where cotton has reached a ten-year high.
The energy crisis is becoming a major global issue. Yesterday, the Indian government indicated that there is an elevated risk of power crunch in the country as coal stocks reach crisis point. About 80% of domestic coal supply comes from the state-owned Coal India Ltd which is enabled to meet higher domestic demand. The company is dysfunctional and inefficient. In Poland, the country is moving forward with its project to build its first nuclear plan. There are actually two competing projects: one is a private venture and the other one is a public project slated for 2033. This move should slightly reduce the country’s dependence on fossil energy.
Australian RBA keeps policy steady as expected and maintained the February meeting as the target time for a review of the central bank’s policy mix. The bank waxed positive on the outlook for the economy as restrictions will ease soon and vaccinations are proceeding apace. The bank has explicitly linked wage rises to any lift-off in rates, which it still expects won’t be appropriate until 2024. The bank mentioned financial stability risks from the housing market, but merely said that the Council of Financial Regulators is “discussing” the matter and urged that “lending standards are maintained and that loan serviceability buffers are appropriate.”
Fumio Kishida formerly voted in as Japan’s new prime minister, snap elections to be held on October 31. Judging from the action in the equity market, Japanese investors are not inspired by the new leadership, as the Nikkei 225 has reversed all of the gains that materialized in the fuss over the resignation of former Prime Minister Suga. Kishida is seen as an uninspiring candidate of continuity, although there is some room for a surprise in cabinet posts like finance minister, etc.
Turkey inflation skyrocketed to 19.58% YoY in September. This is the highest level since 2019. It is partially explained by a surge in energy costs and a strong increase in food prices which represents about ¼ of the consumer basket (+28.79% YoY). In Istanbul, retail price inflation jumped to 19.77% YoY from 18.89% YoY in August. The central bank of Turkey considers that the food price peak has passed. But it is likely that higher energy prices will remain a headache for the central bank in the coming months. The consensus expects further rate hikes in Q4 this year to stimulate the economic recovery.
U.S August factory orders were out above consensus, at 1.2% MoM versus expected 1.0% and prior 0.4%. New orders were up fifteen of the last sixteen months. Excluding transport, it was out at 0.3% MoM and excluding defense, it was at 2.4% MoM, at the same level as in July. This is a very positive data set about the U.S. economy.
GlobalFoundries files for IPO. The US-based semiconductor manufacturer is sieging the moment with red-hot demand for semiconductors and high equity valuations filing for an IPO. In July, the rumored valuation was set at $30bn. The company lost $1.35bn in 2020.
What are we watching next?
The U.S. nonfarm payrolls September report is out on Friday – In recent weeks, high-profile FOMC members (Chair Jerome Powell and Vice-Chair Lael Brainard, for instance) have lowered the bar for the September job report regarding a QE tapering announcement. They consider the September job report may be weaker and less informative of underlying economic momentum than they had hoped. Therefore, the report should not have many consequences for a QE tapering announcement. We still expect the Fed’s tapering to be announced in November, with an effective start in December. What will really matter is the composition and pace of the tapering, in our view.
US debt ceiling showdown – we were led to believe that a “stop-gap” bill would continue to fund the US government through December third in a process that was completed last week, but this bill apparently only avoided a government shut-down, and did not address the debt ceiling, which still means we theoretically face the risk of a US government default on or around October 18 if the showdown between Senate Democrats and Republicans is not resolved. Democrats will advance a bill that raises the debt ceiling through December of 2022 for a third time, but Republican leadership has vowed to reject it, while telling the Democrats should use the “reconciliation” process since they have a majority. Democrats say this is too time consuming. Who gives way in this absurd brinksmanship?
Facebook regulation talks. The long WSJ series of articles about Facebook and now the latest whistleblower saying the company is putting profits ahead of users’ well-being could be the starting point of major regulation coming to social media platforms in the US. The whistleblower is set to speak in the Senate sharing many key internal documents about Facebook.
Earnings Watch – today’s focus is on PepsiCo which is interesting to watch given its large footprint in consumer goods. Analysts expect FY21 Q3 revenue to be up 7.1% y/y and EPS up 4% y/y as consumer demand remains strong as economies are reopening.
Economic calendar highlights for today (times GMT)
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