Market Quick Take - November 24, 2021

Market Quick Take - November 24, 2021

Macro 6 minutes to read
Saxo Strategy Team

Summary:  US equity markets bounced back from an extension of the sell-off from the highs of Monday, perhaps in part as a firm US 7-year treasury auction saw yields settling back lower, just after that particular benchmark had notched a new high yield for the cycle. Today sees a flurry of US data and the FOMC Minutes all crammed into the last day before the long Thanksgiving weekend in the US, where markets are closed tomorrow and only open for short session on Friday.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 recovered from steep losses late in yesterday’s session which has extended this morning on a positive session in Asia driven by improved sentiment in Chinese equities on good earnings releases. Nasdaq 100 futures are trading 1.4% higher than yesterday’s lows. The key thing to monitor is still the US 10-year yield and the USD for clues of where US equities are going. If Nasdaq 100 futures can extend their momentum today the 16,443 level is the natural gravitational point in this market sitting at the 50% retracement level over the past three trading sessions.

USDJPY – The  USDJPY outlook is predominantly a question of “will it or won’t it sustain a break above 115.00?” And the answer to that question is likely coincident with whether long US treasury yields will rise above the 1.75% highs established earlier this year. After a strong 7-year US treasury auction yesterday, US longer yields dipped from session highs, drawing out the suspense on USDJPY direction here.

AUDNZD – after the RBNZ meeting proved far less hawkish than the market has priced, it feels as if it will be difficult for the momentum in higher RBNZ rate expectations to return as the bank likely waxed a bit cautious overnight (more below) to give itself more time to assess how quickly the tightening in the bag and a few more planned hikes already priced in are affecting the NZ economy. In Australia, meanwhile, the economy is emerging from lockdowns and rate expectations could close the gap, with an additional possible source of support from China, where stimulus may be on the way, and where the anticipation of a rise in steel output has sharply boosted iron ore prices (Australia’s largest export). AUDNZD may have bottomed out now and we watch for whether this sharply rally off the bottom could have legs for at least 1.0600 as AU vs. NZ yield spreads mean revert.

Gold (XAUUSD) trades higher after finding support ahead of $1781. The slump this week below  $1835 area was triggered by rising Treasury yields following the renomination of Jerome Powell as Fed chair. The oversized downside reaction, however, was caused by long liquidation from hedge funds who had been rushing into gold before and after the recent CPI shock. Gold’s short-term ability to bounce will mostly depend on whether the washout has triggered a big enough reduction of recently established and now loss-making positions. A sharp drop in open interest in COMEX gold futures and two days with double the normal trading volume could indicate most of the adjustments have now been executed.

Crude oil (OILUKJAN22 & OILUSJAN21) jumped the most in two weeks yesterday after a US initiated release of strategic reserves underwhelmed in its size and details. Most of the oil being offered to refineries will have to be returned at a later date while international contributions were smaller than expected. Refineries are already processing crude near the seasonal pace so the market doubt how much extra oil they may need. Also, and more important, the OPEC+ alliance called the move unjustified given current conditions and as a result they may opt to reduce future production hikes, currently running near 12 million barrels per month. Ahead of today’s EIA stock report, the API last night reported a 2.3 million barrel increase with stockpiles at Cushing also rising

US treasuries (SHY, IEF, TLT). At the beginning of the day, the yield curve bear flattened with 7-year yields breaking above 1.55% before the 7-year auction. It led many to believe that it could be a catastrophic bond sale as demand for Monday’s 2-year and 5-year Treasuries was weak. Surprisingly, bidding metrics were strong with the bid-to-cover ratio being the highest since September 2020, and the yield stopping through by 1bps at 1.588%. Following the auction, the yield curve steepened slightly amid lower breakeven rates and less aggressive rate hikes for 2022. We expect the bond market to continue to be volatile as the market adjusts expectations for rate hikes next year. Yet, the long part of the yield curve is likely to remain in check until a resolution to the debt ceiling is not found. Todays’ Personal Consumption Expenditures might revive inflation fears reversing gains in the Asia trading session.

Italian BTPS (BTP10). Italian government bonds sold off for the second day in a row as German and French PMI beat expectations, hinting at the inevitable end of the PEPP program. To weaken sentiment in BTPS was also news that President Mattarella is going to vacate his position in January leaving a political vacuum. Parties are pushing Draghi to get that position to get rid of him and go to early elections. If that were to happen, the stability that Italian BTPS enjoyed since Draghi is leading the government will vanish provoking a fast widening of the BTPS-Bund spread.

What is going on?

EU gas prices surged back above $30/MMBtu (€90/GWh) yesterday in response to rising winter demand, low power production from wind farms and increased competition from Asia which is ramping up its LNG imports. The US imposing additional sanctions aimed at Russia’s Nord Strem 2 pipeline also received some unwelcome attention. Sky-high day ahead prices for power adding to the pain with some countries approaching record highs. Power plants are burning more coal which is cheaper and more profitable and it has helped drive the emissions future (CFIZ1) to a new all-time high this week above €70 per tons.

RBNZ hikes only 25 basis points, statement somewhat cautious. The majority of market participants were looking for a 25-basis point hike from the RNBZ overnight, but enough were looking for 50 bps that the 0.25% hike to take the official cash rate to 0.75%  rate triggered a sell-off in the kiwi. But it was the guidance that was a bit more of a surprise than the rate move, as the RBNZ noted that, while further rate rises would be needed, “the Committee expressed uncertainty about the resilience of consumer spending and business investment....(and) also noted that increases in interest rates to households and businesses had already tightened monetary conditions.” The 2-year NZGB yield dropped 14 basis points overnight to 1.94% as the market lowered rate hike expectations out the curve.

Turkish lira descent accelerates – yesterday was a wild day for the TRY, which fell almost 20% in a single day yesterday before stabilizing slightly, on fresh rhetoric from Turkish president Erdogan, who complimented the recent Turkish Central Bank decision to cut rates again and who continues to use belligerent rhetoric against the standard EM playbook for dealing with a devaluing currency (vicious belt tightening via rate hikes, etc.).

Chinese equities are rebounding on good earnings releases. Yesterday’s earnings releases from Xiaomi, Kuaishou Technology, and XPeng  have lifted sentiment in Chinese equities. Kuaishou was a positive surprise given the technology crackdown in China and XPeng overtook NIO in Q3 on EV deliveries showing that the company can ramp up production.

ECB Vice President Luis de Guindos says inflation drivers are becoming more structural. In a speech yesterday in Madrid, the central banker said that “the ECB is continuously pointing out that the inflation rebound is of a transitory nature....However, we have also seen how in recent months these supply factors are becoming more structural, more permanent.” Euribor futures far out into 2024 and 2025 are several ticks lower from recent highs, but also up a few ticks from yesterday’s lows, as the market is only pricing for the ECB to move back to 0% rates by around the beginning of 2025.

What are we watching next?

Busy US Economic Calendar ahead of long holiday weekend - the majority of US office workers take a long weekend that includes Thanksgiving Day tomorrow and the Friday as well, with a lot of the data that normally would have been spread out over the rest of the week all piled up into a heap in early US hours today. The key number to watch today is the October PCE Inflation numbers, where the headline “PCE Deflator” and “PCE Core Deflator” are expected to show year-on-year readings of 5.1%/4.1% respectively vs. 4.4%/3.6% in September, which would mean the hottest pace of inflation since the early 1990’s. Much later in the day we have the FOMC minutes from the November 3 meeting, which should be interesting for whether the debate on whether the Fed needs to tighten policy more quickly is becoming more heated.

Earnings Watch – the rest of the week in terms of earnings will be quite light with today’s focus on Deere which sells equipment to the agricultural sector and thus is a good indicator on this sector.

Wednesday: Deere

Thursday: Adevinta

Friday: Meituan, Pinduoduo

Economic calendar highlights for today (times GMT)

0900 – Germany Nov. IFO Survey

1330 – US Weekly Initial and Continuing Jobless Claims

1330 – US Oct. Advance Goods Trade Balance

1330 – US Q3 GDP Revision

1330 – US Oct. Durable Goods Orders

1430 – UK BoE’s Tenreyro to speak

1500 – US Oct. PCE Inflation

1500 – US Final University of Michigan Sentiment Survey

1500 – US Oct. New Home Sales

1530 – EIA's Weekly Crude and Product Inventory Report

1700 – EIA’s Natural Gas Storage Change

1900 – US FOMC Meeting Minutes

 

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.