Market Quick Take - February 9, 2022

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities pulled themselves out of the negative drag and posted a positive session led by bubble stocks gaining 5.2% (still down 21% this year). With upward pressure persisting on the US 10-year yield and inflation pressures (from energy) not easing we still see downside risks to equities, and we still urge investors to rebalance their portfolios towards components that can hedge against inflation. These components are commodity sector, cyber security, emerging markets, travel, mega caps, and travel.

Hang Seng (HK50.I) trades up 2% following a 3.9% rally in the NASDAQ Golden Dragon China Index and 12.8% in Pinduoduo (PDD.US) overnight, Chinese e-commerce names surged, with Alibaba (09988.HK) +6.8%, JD.com (9618.HK) +4.4%.  EV maker XPeng (09868.HK) rose 11.47% on the announcement of its inclusion in the Shenzhen-Hong Kong Stock Connect. As predicted in Saxo’s 2022 1Q Outlook, LME aluminum price yesterday rose to a new high since 2008, on growing concerns about low inventory and overall supply deficit. Shares of aluminum producers traded in Hong Kong surged: Aluminum Corp (02600.HK) +13.6%, China Hongqiao (01378.HK) +8.4%, United Co RUSAL (00486.HK) +9.8%.  We reiterate our bullish case for industrial metal producers. In A-shares, CSI 300 was up modestly. China Mobile’s A shares surged to make a post A-share listing high and hit the 10% daily price limit.

Cryptocurrencies – the comeback from the lows lost a bit of steam yesterday as BItcoin challenged the resistance at the former range low near 45,500, the next hurdle for bulls to overcome ahead of the 50k level. For Ethereum, the next major objective is perhaps the 200-day moving average, currently near 3,550 after the rally has stalled a bit after peaking above 3,200 yesterday.

EURUSD – the price action in EURUSD has calmed after its huge leap last week in the wake of the ECB meeting, in which the central bank was seen as likely to capitulate on the need to tightening monetary policy more resolutely after a promise to review policy at the next meeting. The next important event risk for the pair is likely tomorrow’s US January CPI release and its effect on US yields. The pair yesterday tested first support near 1.1400 before bouncing. If another challenge lower unfolds, the next level of interest is the 38.2% retracement of the rally off the lows at 1.1345. The next upside areas are the pivot high from mid-January just ahead of 1.1500 and then the 1.1600-1.1700 zone.

USDJPY and JPY crosses – the Bank of Japan’s intentions are increasingly in focus as Japanese government bond yields have risen together with global bond yields, and sufficiently so that the 10-year JGB is challenging the Bank of Japan’s yield cap under its yield control policy soon at 25 basis points. Overnight, that 10-year JGB traded as high as 22 basis points. The BoJ will soon have to make a statement or take a stand on whether to continue implementing its policies if yields continue to rise elsewhere and the 0.25% level for 10-year JGB’s is challenged. The market may begin to look for a “capitulation” on its policy just as the ECB meeting las week was seen as the breaking point for that bank’s stance on insisting that policy won’t be changed soon. Technically, USDJPY has crawled back higher toward the 116.35 top as US long yields have risen, but traders may be nervous on the BoJ’s stance.

AUDUSD - The Aussie dollar gained strength continuing to rally off January 28 lows, and is now up about 3%, taking the currency pair off the bottom of its two-year lows. The rally may continue if it finds further support from risk sentiment generally and in the commodity space, particularly in metals. Local sentiment improved this week as Australia announced it will reopen international borders for the first time in two years on February 21.  As well, Australian business conditions rebounded in January, from the prior reading’s 17-month low. Business conditions are expected to continue to improve as mobility increases and restrictions ease.

Crude oil (OILUSMAR22 & OILUKAPR22) trades a tad higher following a two-day slide after the API reported an across the board drop in US crude and fuel stockpiles. A 2.5 million drop at Cushing, if confirmed by the EIA later today, would send stocks to a fresh seasonal nine-year low. The EIA in its monthly Short-Term Energy Outlook raised its forecast for US production in both 2022 and 2023 while sticking to its forecast for a global stock build from Q2 and onwards. The size of a potential and long overdue correction in crude oil will depend on the outcome of the Iran nuclear talks, which apparently are making progress and a de-escalation of the Russia-Ukraine standoff. Monthly oil market reports from OPEC Thursday and IEA Friday.

Gold (XAUUSD) trades higher for a third day despite another pop in US treasury yields and a stronger dollar. Total ETF holdings backed by bullion jumped to a fresh 4-½-month high yesterday with asset managers and investors returning to gold  in their search for calmer waters amid elevated inflation with US CPI due Thursday, as well as bond and stock market turbulence. It has clawed back more than 61.8% of the post-FOMC slump with support at $1820 and resistance at the January high at $1854. Silver (XAGUSD) also trading higher after establishing a double bottom at $22 with resistance now at $23.35 and $23.67.

US Treasuries (IEF, TLT). Yesterday’s 3-year US Treasury auction received solid demand with indirect bidders increasing to 68.5% from 61.8% prior. It stopped through by 0.3bps with a yield of 1.592% without a significant impact in the secondary market, with Treasuries holding losses even after the strong auction. Today’s 10-year bond sale will be a more substantial test as data show that the convenience for foreign investors to buy Treasuries has decreased since yields began to rise in the euro area. While just a week ago, investors could lock in more than 100bps over the bund by buying euro-hedged 10-year US Treasuries, now they will be able to lock in only 75bps. Although the pick-up is still considerable, the question is whether investors will be picking duration amid a bond bear market.

EU Sovereigns (VGEA). European sovereign curves bear steepened slightly yesterday, as the market gets ready for several long-term bond issuances, which might steepen curves further. Germany is selling 30-year Bunds through an auction today; the EU is selling 30-year NGEU bonds and Spain has mandated to sell 30-year debt. We continue to believe that it is crucial to monitor the BTPS-Bund spread as it gets close to 200bps, political tensions might arise. Although we are far from that, things can move quickly as volatility remains sustained and rates rise globally.

What is going on?

U.S NFIB business sentiment drops to 11-month low. It was out at 97.10 points in January from 98.90 points in December 2021. Inflation remains a headache for small businesses. This is a top issue for 22 % of owners. Facing higher supply chains, a net 61% of them raised their average selling prices the past month. This is the highest reading since the fourth quarter of 1974. Finally, about 50% of owners raised compensation to try to attract applicants to their positions. This is the highest monthly figure back to 1986.

ECB’s Villeroy says market may have over-reacted to the ECB meeting. The Bank of France head Francois Villeroy said late yesterday that “I think there were perhaps reaction that were very high and too high in recent days.” and said he saw inflation slowing to near 2%.

European earnings this morning. Maersk disappoints on its EBITDA guidance for 2022 at $24bn vs est. $28bn following a strong 2021 with revenue growing 55%. Another logistics firm, DSV, is also reporting this morning doubling its profits from a year ago on booming freight rates and its GIL acquisition; Q4 revenue is coming in at DKK 61.3bn vs est. DKK 55.9bn. Equinor reports better than expected Q4 profits and says that it is focusing on delivering as much gas to Europe as possible; the company is also announcing an extraordinary dividend. The payment giant Adyen is reporting second half net revenue of €557mn vs est. €559mn with processed volume beating estimates by 10%; 2H EBITDA is €357mn vs est. €346mn.

Microsoft is in spending mode again. Following its recent acquisition bid for Activision Blizzard, the company is said to be in talks to buy cyber security firm Mandiant which lifted its shares by 22% and generally our entire cyber security basket by 2.1% yesterday.

Toyota is cutting its production target again. Japan’s largest carmaker now says it will produce 8.5mn cars in this fiscal year compared to 9mn., but maintains its profit target suggesting pricing power is improving amid limited supply.

Peloton extends gains overnight after recent large jump as more of leadership resigns and on takeover speculation. Shares of the home exercise equipment maker were up 52% over the last two session after the CEO resigned and the company announced heavy lay-offs.

What are we watching next?

Monthly WASDE report from the US Department of Agriculture. Soybeans trade near an eight-month high ahead of today’s WASDE report which is expected to show tighter US and global supplies after heat and drought parched growing areas in southern Brazil and Argentina, and a worker shortage in Malaysian plantations curbed supplies of palm oil. US ending stock is expected to drop 10% primarily driven by combined 7.7 million tons downgrade to SouthAm production. Corn stocks are also expected to fall, but by less while a small build in wheat stocks is expected following a successful harvest in Australia.

US January CPI release tomorrow the next key test for the US treasury market. The release is expected to show that  inflation rose

Sweden’s Riksbank the next European central bank to shift its guidance? The Riksbank will announce its latest decision on Thursday this week and will be watched closely for any plans to accelerate the end of its QE programme and/or especially whether it is set to bring forward the time frame of its forecast rate lift-off, currently at an absurdly distant Q4 of 2024, after the "underlying” CPI in Sweden rose to its highest level since the early 1990’s in December at 4.1% year-on-year (although observers expecting little from the bank might point to the official “ex-Energy” CPI, which remains within the range and at only 1.7% year-on-year as of December).

Earnings Watch. Today’s key earnings are A.P. Moller – Maersk, DSV, Adyen, Walt Disney and Uber Technologies. We expect both Maersk and DSV to report solid earnings figures, and Adyen is in the spotlight given the recent fallout in PayPal shares. Uber earnings are also key tonight given yesterday’s miss from Lyft on active riders.

Wednesday: Commonwealth Bank of Australia, Manulife Financial, A.P. Moller – Maersk, DSV, Pandora, Sampo, L’Oreal, Toyota Motor, Honda Motor, GlaxoSmithKline, Adyen, Equinor, DNB Bank, Evolution, Walt Disney, CVS Health, Uber Technologies, Twilio

Thursday: KBC Group, Brookfield Asset Management, Constellation Software, Vestas, Neste, TotalEnergies, Pernod Ricard, Credit Agricole, Societe Generale, Siemens, Semiconductor Manufacturing International, Unilever, AstraZeneca, British American Tobacco, Arcelor Mittal, Heineken, Zurich Insurance, Credit Suisse, Coca-Cola, PepsiCo, Philip Morris, Linde, Duke Energy, Moody’s, Illumina, Datadog, Global Payments, Cloudflare, VeriSign, Twitter

Friday: Enbridge, Dominion Energy, Apollo Global

Economic calendar highlights for today (times GMT)

0900 – Italy Dec. Industrial Production

1200 – Mexico Jan. CPI

1300 –Hungary Central Bank minutes

1310 – Bank of England Chief Economist Huw Pill to speak

1400 – Poland Central Bank Governor Glapinski News Conference

1530 – EIA's Weekly Oil and Fuel Stock Report

1700 – USDA's World Agriculture Supply & Demand Estimates

1700 – Canada Bank of Canada Governor Macklem to speak

1700 – US Fed’s Mester (Voter) to speak

1800 – US 10-year Treasury Auction

0000 – Australia Feb. Consumer Inflation Expectations

0001 – UK Jan. RICS House Price Balance

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