What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures are trading above Friday’s closes in S&P 500 and Nasdaq 100 despite weak PMI figures out of China and short-term interest rate futures pricing in central banks losing control of the inflation narrative. The VIX forward curve remains in steep contango underpinning the chance that equities could continue rally in pure technical buying. Our equity valuation model on S&P 500 updated for October’s figures shows that US equities were very close to print a new all-time high in absolute terms. The 4,600 level in S&P 500 futures is naturally the key support level to watch in today’s trading session.
EURUSD – a crazy finish to last week for EURUSD, which had rallied on Thursday in the wake of the ECB meeting as the market preferred to focus on the repricing of ECB rate expectations, which are now priced to start delivering rate hikes as early as late next year, rather than Lagarde’s protests that the market is getting ahead of itself. Then on Friday, the euro collapsed against the greenback in a sharp bearish reversal that took it back toward the cycle lows near 1.1525. This week looks important for the US dollar outlook, with key US data all week and especially the Wednesday FOMC. A test and close below the important 1.1500 round level would take the focus down to 1.1290, arguably the ultimate trend support for the EURUSD rally of the post-pandemic outbreak lows.
AUDUSD – the huge USD snapback on Friday was somewhat selective, in that pro-cyclical currencies like the Aussie were little impacted, only settling slightly lower. But the recent rally in AUDUSD has seen the pair trading back in the 0.7500-0.7600 zone that is arguably the last resistance are for maintaining a bearish outlook, and last week saw the 200-day moving average just above 0.7557 tested, a tactical level of note. Besides all of the US data points noted above this week and the FOMC meeting on Wednesday, we have an RBA meeting up tonight as previewed below. For the bearish view to get traction, the pair needs to sell off steeply back below the previous pivot high at 0.7478 for a start.
Gold (XAUUSD) dropped the most in two weeks on Friday on elevated swings in US real yields. An example being the ten-year tenor which jumped to –0.9% after reaching –1.15% on Thursday. Surging short-end interest rates have raised concerns central banks are losing control and with this in mind precious metals will be trading nervously ahead of central bank meetings this week from the FED, RBA and BOE, where the market will be focusing on the pace of tapering and any guidance on future rate hikes. From a technical perspective, gold needs to hold above the 21-day moving average at $1777, as a break below could signal further loss of momentum.
US Treasuries (IEF, TLT). This week’s FOMC meeting is going to dominate market sentiment. Investors are expecting the Federal Reserve to begin tapering as early as mid-November. However, the focus is going to be on the timing of interest rate hikes as the inflation threat continues to grow. On the one hand, tapering might lead to a bull flattening of the yield curve as investors fear a slowdown in economic growth. Yet, as investors expect earlier interest rate hikes, it is unlikely that long-term rates will fall. Thus, we might see 10-year yields resuming their rise to test 1.6%.
What is going on?
Japan election: LDP maintains lower house majority - polls suggested the risk that the LDP might no maintain its outright majority in the critical lower house, but it did so handily after elections yesterday, maintaining control of 261 of 465 seats, a drop from the prior level of 276 seats. This strongly buoyed the Japanese stock market overnight. Prime Minister Kishida will focus from here on his agenda of raising wages, lowering inequality and fiscal stimulus, including on defense.
G20 closes with weak climate commitments relative to expectations - as the meeting was somewhat overshadowed on the climate policy front by the ongoing COP26 climate summit in Glasgow that runs through next week.
US, EU agree to remove steel and aluminum tariffs on as much as $10 billion in goods, giving themselves 10 years to put together a more global framework that could include penalties on countries that use carbon-intensive production methods.
Ryanair FY22 Q2 earnings miss estimates. The Irish airliner missed quarterly earnings estimates delivering €225mn vs est. €255mn as pricing and yield factor are still not optimal and will stay challenging during the winter period. The load factor on its planes is reaching 90% in the second half as demand is coming back but the recent Covid-19 wave in Europe is a key risk for Ryanair outlook. The airliner is also contemplating to delist from London Stock Exchange.
Crude oil (OILUKJAN22 & OILUSDEC21) has started on the defensive ahead of Thursday’s OPEC+ meeting and after Biden told the group to “pump more oil”. Whether or not that will change the groups 0.4m b/d per month increase remains to be seen, but it has raised speculation it could increase the chances of an Iran nuclear deal. Also, over the weekend China released diesel and gasoline reserves in order to try and curb domestic prices. The market will also watching EU and Asian gas price developments as well as Wednesday’s weekly EIA stock report, where a sharp reduction at Cushing in recent weeks has resulted in elevated WTI time spreads as the market worries about low supplies at this important delivery point. In the week to October 26, specs cut bullish oil bets for a third week, and despite trading near multi-year highs the current 600 million barrels long (WTI & Brent) is now 136 million barrels below the February and June peaks.
What are we watching next?
Australia RBA meeting tonight . Over the last week, the market has tested the Australian Reserve Bank’s supposed commitment to control yields at the short end of the curve (explicitly, its official policy up to now of keeping the April 2024 Australian government bond at 0.10% or lower. Last week, the yield on that bond ripped higher and closed the week at 0.77%). The break of the yield curve control level has not elicited any pushback from the RBA, which tonight must emerge with egg on its face and loosen up its yield curve control policy and its forward guidance if it is to remotely fit with market expectations. The situation in Australia offers perhaps the most profound sense that central banks aren’t particularly in control of the narrative, so it isn’t entirely certain that an RBA adjustment that fits more with the market expectations will have any profound effect on the Aussie.
Key week ahead for USD on FOMC meeting and US data. The US dollar made a steep recovery on Friday as markets have rushed to reprice central banks’ rate hike intentions significantly higher, suggesting that forward guidance from central banks is not working so well anymore. With the Fed seen as badly behind the curve in unwinding its QE and providing an appropriate time frame for eventually hiking rates, it will be interesting to see how far they are willing to make that admission at the meeting on Wednesday, and even if so, whether the market will front-run or second guess their attempt at forward guidance anyway, much as market pricing has made a mockery of ECB and RBA forward guidance last week. On top of that, we have important economic data all week from the US, starting with the October ISM Manufacturing survey today, the October ISM Services survey on Wednesday and the latest jobs report on Friday, with perhaps extra focus on whether earnings are starting to rise more rapidly, feeding anticipation of a wage-price spiral.
The UN Food-price index, already at a decade high, will be updated on Thursday, and the latest print may point to more pain with wheat futures nearing a record due to strong export demand from key buyers in North Africa, Middle East and China. Palm oils at an all-time high as labour shortages curb Malaysian production while corn has moved higher recently on strong ethanol demand and soaring fertilizer and diesel bills for farmers.
Earnings Watch – This week is another busy week on earnings with almost 400 earnings releases among the global universe of companies we track during the earnings season. While last week was about technology stocks this week is more diversified but with some of the largest companies within the green transformation, such as Orsted, Vestas, and Siemens Gamesa, reporting earnings.
Monday: Westpac Banking, ICBC, Nutrien, Coloplast, Ryanair, NXP Semiconductors
Tuesday: Thomson Reuters, Maersk, HelloFresh, Z Holdings, BP, DSM, Pfizer, T-Mobile US, Amgen, Estee Lauder, ConocoPhillips, Mondelez, KKR, Activision Blizzard, Vertex Pharmaceuticals, Global Payments
Wednesday: Novo Nordisk, Orsted, Vestas Wind Systems, BMW, Zalando, Intesa Sanpaolo, Qualcomm, CVS Health, Booking, Marriott International, Roku, Electronic Arts, Etsy, HubSpot
Thursday: Verbund, Barrick Gold, Societe Generale, Siemens Healthineers, Deutsche Post, Vonovia, Enel, Toyota, SoftBank, Nintendo, ING Groep, Credit Suisse, Moderna, Square, Airbnb, Zoetis, Uber Technologies, MercadoLibre, Illumina, Cloudflare, Datadog, Carvana, Pinterest, Peloton Interactive
Friday: Enbridge, TC Energy, Honda Motor, Amadeus IT Group, Siemens Gamesa, DBS Group, Alibaba, EOG Resources, DraftKings
Saturday: Berkshire Hathaway
Economic calendar highlights for today (times GMT)
1345 – US Oct. Final Markit Manufacturing PMI
1400 – US Oct. ISM Manufacturing
1430 – Canada Oct. Markit Manufacturing PMI
1515 – UK Chancellor of the Exchequer Sunak to testify
2300 – South Korea Oct. CPI
0330 – Australia RBA Meeting
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: