What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures are lingering this morning following an undecided session yesterday. Recent US economic figures suggest a very strong economy and the CBO has estimated that the US economy has closed the output gap which means that the risk of overheating is increasing. The US 10-year yield is trading above the 1.6% level and is the main gauge to track for where US equities go from here in the short-term.
EURUSD – the euro remains extremely weak as the Euro Zone economy is beset with the drag from high energy and power prices and a rising new wave of Covid that is already leading to notable restrictions in some countries. Since breaking below the psychologically important 1.1500 area, the action has headed swiftly lower, with the next level, and arguably last up-trend support in the very big picture the 61.8% retracement of the rally off the post-pandemic outbreak lows last year to the 1.2349 highs at the start of this year, which comes in at 1.1290.
BTCUSD – down almost 5% in today’s session hanging just above the 60,000 in early European trading. The weaker sentiment is subscribed to two events with China announcing again that it stands firm on regulation of the crypto industry contemplating punitive power prices for companies that engage in crypto mining, and secondly the newly signed US infrastructure bill will require new tax requirements of the industry.
AUDUSD – the AUDUSD pair faces an important test of support if it trades lower, with the currency recently held back by a comedown from the huge reaction to the market successfully front-running the RBA’s move away from its yield-curve-control policy. The RBA remains relatively dovish despite abandoning its YCC policy, and very weak iron ore prices are also a fundamental drag. The optimists will hope that the currency can rise again on the opening Australian economy seeing activity spring back to life and inflation – and particularly wage inflation – doing likewise. Australia Q3 wages will be reported tonight (see calendar below). The channel support for AUDUSD is near 0.7250, while the cycle low from August is not until 0.7106.
Crude oil (OILUKJAN22 & OILUSDEC21) has once again managed to bounce with Brent finding support ahead of $80 and its 50-day moving average. Higher gas prices (TTFMZ1) in Europe after Russia’s Gazprom failed to book additional pipeline capacity via Poland and Ukraine for December also supported the market, as it raised the prospect of consumers switching from punitively expensive gas to oil-based fuels. Apart from the risk of US action, potentially triggering a kneejerk downward reaction, the market will also be looking out for IEA’s monthly Oil Market Report on Tuesday and EIA’s weekly stock report on Wednesday.
Arabica coffee (KCH2) reached a nine-year high on Monday at $2.2825 per pound with the supply outlook looking increasingly tight. Following an annus horribilis in Brazil where frost and drought dealt a blow, not only to the latest crop but also potentially the 2022 the on-season, and normally larger crop, the market in addition must deal with lack of shipments, surging fertilizer prices, too much rain in Columbia and recently also the threat of civil war in Ethiopia, the world’s third biggest grower of the Arabica bean. The break above $2.25, the 2014 high may signal a market running towards $3, a record level that was last seen in 2011.
Gold (XAUUSD) continues to trade near $1870 resistance despite seeing the dollar hit a fresh one-year high and real yields trading firmer since yesterday. Gold is showing a great deal of strength considering these major headwinds, but the question remains if the market has enough momentum to break higher towards $1900. Ahead of last week’s CPI shocker, hedge funds had already been loading up on futures exposure with the net long jumping 48% to 146k lots in the week to Nov 9.
US Treasuries (IEF, TLT). The US yield curve is bear steepening consistent with last week’s selloff that central banks will need to tighten the economy earlier amid strong inflationary pressures. The steepening is also growth driven as numbers out of China show a less severe economic slowdown and the Empire factory survey showed growth in the US manufacturing activity. Today’s retail sales and tomorrow’s 20-year auction will be in focus. There is the chance for an ugly 20-year auction driving yields higher in the long part of the yield curve, as this tenor is far less popular than last week’s 10 and 30-years. Ten-year yields broke above 1.60%, entering a fast area which could see them either rising quickly towards 1.70% or dropping again below 1.60% We expect 10-year yields to continue to rise toward 2% till the end of the year, driven by high inflationary pressure, and recovering job numbers.
UK Gilts (IGLT). It is painting to be another volatile week for UK Gilts. This morning UK job numbers came out stronger than expected after the end of the furlough scheme. The central bank indicated that it needs more information on the strength of the UK labor market before hiking rates, and today’s job numbers should give the BOE the greenlight for December. To complete this picture, inflation data will be out on Wednesday, while sales figures will be out on Friday. Ten-year Gilt yields are trending higher, looking to stabilize around 1.04%. Yet, we cannot forget that the market is pricing four interest rate hikes for 2022, and any setback from the rate hiking narrative could still produce a short-lived rally.
What is going on?
Strong UK Employment Change number for September - out just this morning shows the rolling employment change indicator riseing +247k vs. +190k expected and +160k for the September payrolls number alone, with Oct. Jobless Claims falling –14.9k and a big negative revision to the claims change in Sep. To –85.9k from –51.1k originally. Sterling trades more firmly on the news on top of yesterday’s rally.
Royal Dutch Shell looking to move to London HQ only, drop “Dutch” from its name – a move that comes after poor relations with Dutch regulators and as the company. The CEO of Shell said that “The simplification will normalize our share structure under the tax and legal jurisdictions of a single country and make us more competitive”.
Xi-Biden Summit telephone summit concludes with appeals to avoid deteriorating relations. US President Joe Biden called for not allowing the two countries’ rivalry to “veer into conflict” and on the “need to establish a common-sense guardrail, to be clea and honest when we disagree and work together where our interests intersect...None of this is a favour to either of our countries...it’s just responsible world leadership. China’s President Xi Jinping said he was happy to see “my old friend” Biden, while making similar overtures on the need for a stable relationship, although he did strike a firmer tone on the Taiwan issue, saying that anyone “playing with fire around the Taiwan issue ‘would inevitably burn themselves’.” according to Bloomberg coverage of the summit.
Bank of Canada Governor Macklem says the BoC is ”getting closer” to hiking rates - in an Op-ed for the Financial Times, vowing that the central bank will keep inflation under control and move on policy if high inflation levels persist and their prior expectations on the transitory inflation dynamics are proven wrong, although for now the bank still sees some economic slack that must be absorbed: “we are not there yet, but we are getting closer”. The Canadian dollar was firm yesterday, rising against a strong US dollar as rate hike expectations for next year were taken a few basis points higher on the comments.
UK Bank of England Governor Bailey says he is “very uneasy” about the inflation situation – in testimony to parliament yesterday, although he also said the growth in the economy “has started to flatten out” and that risks to the UK economy are two-sided. The market was burned in expecting a more hawkish BoE at the most recent meeting, as Bailey and company failed to hike rates or signal as much urgency to do so as prior comments from the Governor had suggested. But sterling was quite firm yesterday, particularly against the flailing euro single currency.
What are we watching next?
CEE developments - as the tension remains high at the Poland/Belarus border on the migrant crisis masterminded by Belarussian leader Lukashenko and, US officials have claimed, by Russian President Putin. Poland reports October Core CPI today – expected at 4.5% year-on-year after EURPLN recently touched local highs for the cycle above 4.65. Elsewhere in CEE, Hungary’s central bank is expected to hike 30 basis points after two hikes of only half that size caught the market off-guard and have the market somewhat second-guessing the bank’s intent to get ahead of inflation, with the headline number in Hungary reaching 6.5% in October. EURHUF has traded at post-pandemic outbreak highs above 365 recently ahead of today’s decision.
Who will US President Biden nominate to head the Fed next February? We have written on this extensively before, we will merely keep this short notice as a placeholder reminder that this could generate significate short term volatility on the choice of the nominally more dovish Lael Brainard over current Fed Chair Powell, though we see little difference in the medium-longer term implications for monetary policy, and the Fed is likely to get a prominent new regulatory role either way (under Brainard or someone else if she is nominated to replace Powell).
Earnings Watch – after the two first quarters, the MSCI World lost out in Q3 to the S&P 500 in terms of EPS growth since Q3 2019, underscoring that the US equity market is still the strongest in the world. This week several major Chinese companies in the entertainment and e-commerce industries are reporting crucial earnings that can impact the direction of Chinese equities. The outstanding question remains to what degree Chinese regulation is impacting company earnings on top of the slowing housing market. China-based Meituan should have reported yesterday, but the earnings release has been postponed to next week. Today’s focus is US earnings from Walmart and Home Depot which will give good insights on inflation and consumer demand, and Sea Ltd is part of our bubble basket and thus interesting to follow.
Tuesday: Vodafone, Walmart, Home Depot, Sea Ltd, NetEase
Wednesday: Experian, Nibe Industrier, Nvidia, Cisco, Lowe’s, Target, TJX, Baidu, Copart, Bilibili
Thursday: National Grid, Alibaba, Intuit, Applied Materials, JD.com, Workday, Palo Alto Networks, Ross Stores, Farfetch
Economic calendar highlights for today (times GMT)
1000 – Euro Zone Q3 GDP Estimate
1300 – Poland Oct. Core CPI
1300 – Hungary Central Bank Rate Decision
1315 – Canada Oct. Housing Starts
1330 – US Oct. Retail Sales
1345 – US Fed’s Bullard (non-voter) to speak
1415 – US Oct. Industrial Production/Capacity Utilization
1500 – US Nov. NAHB Housing Market Index
1610 – ECB President Lagarde to speak
1800 – Bank of Canada’s Schembri to speak
2030 – US Fed’s Daly (voter) to speak
2145 – New Zealand Q3 PPI
0030 – Australia Q3 Wage Price Index0700 Wednesday – UK Oct. CPI / PPI / RPI
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