Summary: US equities posted another weak session to close the week after the December US jobs report was seen as inflationary due to a plummeting unemployment rate and a faster than expected rise in earnings. The US dollar failed to register any strength despite US yields rising to new highs since prior to the pandemic outbreak. Today and this week, one key focus besides the beginning of earnings season will be the talks between the US and NATO and Russia over Ukraine.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities were bleeding going into the weekend with Nasdaq 100 futures almost touching the 15,500 level, which was the key support level back in December, and touching these levels again this morning before bouncing higher. This week will likely evolve around the interest rate sensitivity and speculative growth pockets in equities, and the earnings season will not pick up speed until next week. As we explained last week in our daily equity updates, we think there could be a “buy-the-dip" moment in the equity pockets that have been sold off the most as investors bet these companies will deliver high growth against expectations.
EURUSD – the US December jobs report (more below) saw US yields rise sharply and yet the US dollar failed to reap any benefit from this development, an interesting sign when something so obviously fundamentally positive for the US dollar fails to inspire a rally. Still, the strong close in EURUSD late Friday, perhaps from short-term traders taken aback and flushed out of positions on the lack of follow-on selling interest, was already cut in half in the Asian session, taking the price action back around mid-range in an impossibly rangebound chart that has persisted since late November.
USDRUB – the ruble fell to new lows since the spring of last year last week, but ended Friday on a strong note, as USDRUB traded back below the November pivot high near 75.90 after shooting above 77.00 on Thursday. The ruble will likely prove quite volatile this week and beyond as multiple talks are on the schedule this week, beginning with talks between US and Russian officials today.
Crude oil (OILUKMAR22 & OILUSFEB22) trades steady with focus on robust demand and so far, a limited fallout from the omicron surge, together with the prospect for OPEC+ struggling to deliver the promised production hikes as several producers have started to hit their limit, some due to lack of investments. Countering the short-term threat of even higher prices are easing supply disruptions in both Libya and Kazakhstan, but overall, demand remains robust as signaled in the six-month futures spread in Brent which has more than doubled since the December, omicron demand worry low point. Focus this week on EIA’s STEO and US CPI, as well as omicron developments, especially in China where the zero-tolerance approach may hurt demand through lockdowns.
Gold (XAUUSD) had a relatively strong first week of trading with the massive 30 bp surge in US ten-year real yields to a six-month high at –0.78% being partly offset by a softer dollar and stocks as well as geopolitical risks, and rising inflation as seen through higher wage pressures in Friday’s US job report. Yields have climbed further overnight with the market starting to price in four Fed rate hikes in 2022, starting as early as March. Silver (XAGUSD) meanwhile continues to find support around $22 ahead of the key double bottom at $21.42 while resistance can be found at $22.65. Gold remains challenged as long it stays below the triple top at $1830 and so far, $1783 has prevented an even deeper selloff.
US Treasuries (IEF, TLT). US Treasuries fell 1.6% last week, the largest drop since February 2021. Ten-year yields broke above their resistance at 1.75% and approached 1.79% on Friday afternoon. There is the possibility that yields will continue to rise amid Wednesday’s CPI numbers, which are forecasted to show an inflation increase of 7% YoY. However, the upcoming 10-year and 30-year US Treasury auctions might slow down the rise in yields. Indeed, as yields soar, demand for Treasuries should increase, partially offsetting the bearish sentiment spurred by aggressive monetary policy expectations.
European sovereigns (IS0L, BTP10). While demand might return for US Treasuries, it is going to be hard to convince European investors to buy into negative-yielding German Bunds amid a less supportive ECB this year. Ten-year Bund yields are close to testing the pivotal 0% level and could break above it soon. European sovereign syndications are slow this week, leaving room for yields to remain in check unless yields across the Atlantic continue to rise at the same pace as last week. Yet, as governments begin to refinance their debt, investors’ appetite will be put at test.
What is going on?
Community spread of omicron seen in Tianjin, China and covid case counts rising across Asia. - one of China’s largest cities, Tianjin, has recorded the nation’s first known community spread of the omicron covid variant, raising fears that the virus could cause significant further disruptions as long as the country continues to pursue its “zero tolerance” strategy. Any resident leaving the city must have a PCR test within the last 48 hours. Elsewhere in Asia, including in Vietnam and the Philippines, case counts are rising rapidly, possibly triggering new restrictions.
US December US jobs report recap: full employment more or less here? The official December US nonfarm payrolls change number came in at a nominally disappointing +199k, although revisions for the prior two months were once again positive, this time +141k. But the household survey showing the unemployment rate dropping once again at a strong pace – to 3.9% from 4.2% in November and 4.5% in October - and stronger than expected gains in average hourly earnings (+0.6% month-on-month in December), suggest that the US is more or less at full employment
US Senator Joe Manchin is no longer willing to sign a $1.8 trillion version of BBB spending bill, according to the Washington Post. This version of the bill was one he himself proposed as a counter-offer to the even larger originally proposed bill. Manchin’s vote is an absolute must to pass any version of President Biden’s Build Back Better social spending plan if the Senate votes on pure party lines as would be expected.
French-based Atos is down 10% in pre-mkt trading. The company is issuing a preliminary fiscal year warning on operating profit but says most of the items impacting the result are non-recurring, but also that the company will carry out a reorganization.
EU natural gas has opened lower, thereby extending Friday’s 9% loss on news the Netherlands may boost production from its soon to be closed Groningen field. Together with continued mild winter weather reducing demand for heating, strong arrivals of LNG gas as well as the biggest drop in industrial demand since the early pandemic days, as the cost burden reach record highs, have all helped partly offset reduced flows from Russia’s Gazprom. The March/April TTF gas spread (winter to spring) trades at levels that no longer indicates lack of gas towards the end of the winter season, and together with relatively mild weather it should support a continued deflation of the extreme volatility seen recently.
What are we watching next?
US-Russia talks today and Russia-NATO and OSCE talks later this week. Significant geopolitical concerns this week as Russia has marked out clear demands that it says must be met for de-escalating its posture at the Ukrainian border, with most seeing those demands as unacceptable to the US and its NATO allies. With talks today between US and Russian officials and talks on Wednesday between Russia and NATO, we could have a sense whether the situation is moving towards any kind of de-escalation this week or the opposite.
Earnings Watch – the Q4 earnings season starts officially this week with the most important earnings releases on Friday from large US commercial and investment banks such as Wells Fargo, JPMorgan Chase, and Citigroup. Today earnings from Yaskawa Electric will give clues about demand and economic activity in China and Acciona Energias is the first renewable energy company to report earnings and given the recent weakness in this part of the market this earnings release is important to watch.
Tuesday: Yaskawa Electric, Acciona Energias Renovables, Albertsons, TD Synnex
Wednesday: Aeon, Abiomed, Jefferies, Shaw Communications
Thursday: Fast Retailing, IHS Markit, Delta Air Lines, Seven & I, Chr Hansen
Friday: Wells Fargo, BlackRock, First Republic Bank, JPMorgan Chase, Citigroup
Economic calendar highlights for today (times GMT)
US and Russian officials to talk on Ukraine today
0830 – Sweden Nov. Industrial Orders / Household Consumption / GDP Indicator
1000 – Euro zone Nov. Unemployment Rate
0030 – Australia Nov. Trade Balance
0030 – Australia Nov. Retail Sales
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