Market Quick Take - December 16, 2021
Saxo Strategy Team
Summary: Judging from the reaction in the US treasury market to the FOMC meeting last night, the Fed did exactly what the market expected, as the short end of the curve was completely steady after a brief rise in yields that was then erased. The stock market decided the meeting was an excuse to buy-the-fact of the hawkish shift from the Fed, which had been well flagged in advance of the meeting last night. The USD may have reversed lower for now if the reaction sticks, and the ECB meeting today is a key test of the EURUSD supermajor on that front.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures are up 3.8% since the FOMC statement as the muted reaction (one could say no reaction) in the US 10-year yield was a big relief for equity investors. Nasdaq 100 futures are trading around the 16,420 level which is the previous resistance level on three accounts over the past week, and if Nasdaq 100 pushes through and the US 10-year yield remains muted, then Nasdaq 100 futures could quickly aim for a new record. Yesterday’s FOCM statement will likely be a short-term catalyst for growth and bubble stocks.
EURUSD – the EURUSD supermajor sold off initially as the Fed’s more hawkish shift was made clear in last night’s meeting, and perhaps on the initial news that the Fed itself is forecasting three rate increases for next year rather than two, as many expected. But the reaction wore off and the US dollar actually weakened as the longer term Fed expectations remained completely anchored and even the market’s predictions for the Fed policy rate next year remained rangebound. Today we get a look at the ECB (preview below) where expectations on the hawkish are nil, so it will be difficult for the ECB to surprise dovish. Yesterday’s bullish reversal suggests that the pair may be ready to probe resistance into 1.1350+, although the bigger chart level is 1.1500 for a more structural reversal of the bearish trend to come into view.
AUDUSD – the Australian economy may be the next economy to show signs of a positive output gap (overheating) developing after the stunning November jobs figures overnight (more below). While the RBA has been reluctant to shift away from its very cautious normalization process and says it won’t even consider looking at tapering its QE programme until the February meeting, the market may start more aggressively pricing RBA rate hikes for next year if virus concerns recede and as China has clearly made a shift in favour of stimulating its economy. A clear line of resistance has developed tactically just below 0.7200, while a rally above the 0.7350 area (just above the 61.8% retracement of latest large sell-off wave) would suggest a more structural reversal is unfolding.
Crude oil (OILUKFEB22 & OILUSJAN22) already in recovery mode following a bullish US inventory report received a further boost from the broad relief rally that followed the FOMC announcements, which were seen to fight inflation without damaging growth. However, the upside seems limited for now on short-term omicron-related demand worries in China and elsewhere together with forecasts for a market in surplus during the first months of 2022. US crude stockpiles dropped the most since September as exports surged while demand for US petroleum products hit a record. A break above the 21-DMA at $75.30 in Brent and $72.15 in WTI could signal additional gains in momentum.
Gold (XAUUSD) hit a two-month low at $1754 following the FOMC announcements (see below) before rallying strongly on a combination of less uncertainty on Fed policy and ongoing economic risks from the omicron virus variant. With most of the changes already priced in, bonds and stocks found a bid while the dollar weakened. The lack of selling appetite below $1760 and the swift price recovery may spur some additional short covering, but for now, the 200-day moving average at $1795 remains the key area of resistance.
Copper (COPPERUSMAR22) also experienced some big swings yesterday after a technical breakout below $4.24 triggered weakness to $4.12, a two-month low, before recovering strongly on supply worries from one of Peru’s biggest mines and the general post-FOMC improvement in risk appetite. The 2022 outlook remains clouded as China’s growth slows and its property sector goes through a deleveraging phase. We maintain a positive view with support in the 4-dollar area looking solid together with expectations for global demand from the green transition push, subdued mining supply offsetting any weakness in China.
US Treasuries (IEF, TLT). The federal Reserve matched the market expectations by projecting as many rate hikes as eurodollar futures was showing for 2022 and 2023. The FOMC meeting caused the yield curve bear-steepened slightly but the long part of the yield curve remains compressed signalling that Fed might not not be able to go through its long-term hiking plan. Yet, breakeven rates rose, showing that the central bank tightening plan might not be able to contain sustained inflation. On a separate note, the Fed discussed sequencing on the balance sheet, putting the spotlight on the meeting minutes released on January the 5th. Overall we believe that the long part of the yield curve remains compressed and needs to shift higher. It’s safe to assume more steepening before the yield curve resumes to flatten throughout next year.
European sovereigns (IS0L). The focus is on the ECB meeting today. An announcement of the end of the PEPP program in March 2022 is widely anticipated. What is not clear is whether purchases will be compensated by another scheme, such as the APP. It is likely that the ECB will stall as members are torn between inflation and a new wave of Covid infections. If investors feel the support of the central bank is fading, European yields might resume their rise with the periphery and Italian BTPS leading the way. Yet, the move will be mild as yields will remain compressed by covid concerns. Therefore, we do not expect Bund yields to move in positive territory before yearend.
UK Gilts (IGLT, IGLS). The BOE might not deliver on a 10bps interest rate hike today as members are divided concerning Covid restrictions. Michael Saunders, one of the most hawkish MPC members, said that he will need to think about it twice before voting for a rate hike. As expectations for interest rate hikes in the UK are the most aggressive among developed economies. It is possible that if the central bank does not hike, the Gilt yield curve will be steeping with short-term Gilts gaining the most as the market pushes back on next year’s rate expectations.
What is going on?
FOMC meeting sees doubling of pace of tapering, forecast of three rate hikes in 2022. All in all, judging from the market reaction, the combination of the new monetary policy statement, the new economic and “dot plot” Fed funds rate forecasts and Fed Chair Powell press conference more or less met the market where it was priced yesterday, judging from the negligible adjustments to forward rate expectations in the wake of yesterday’s meeting. (The market indicating that somewhere between two and three rate hikes were likely for next year, the new Fed forecasts in yesterday’s meeting suggested solid agreement on the three hikes). The new FOMC monetary policy statement for December upgraded the language on the labor market, but still seemed to suggest maximum employment has yet to be reached, and inserted the specific risk of “new variants of the virus” as a forward risk. In the economic forecasts, while the 2022 PCE core inflation forecast was raised to 2.7% from 2.3%, but only raised 0.1% to 2.2% for 2023 and kept steady at 2.1% for 2024. As an FT columnist argued, the Fed still thinks that inflation is transitory even if it isn’t saying it, suggesting that a modest rate hike cycle will tame inflation back to the target range within two years.
Australian employment shows spring-loaded labor market rebound on end of lockdowns. In November, Australian payrolls rose a record 366k vs. 200k expected, and the unemployment rate plummeted 4.6%, close to a 13-year low, after a 5.2% reading in October, and this even as the participation rate jumped back toward cycle highs.
Lennar misses on order outlook. Investors were spooked yesterday when Lennar announced Q1 new orders guidance of 14,800-15,100 vs est. 15,500; shares were down 7% in extended trading. The homebuilder also missed on EPS in Q4 despite revenue being in line suggesting that input costs cannot be fully passed on without destroying demand.
What are we watching next?
ECB and Bank of England Meetings today – more is at stake for the ECB meeting, although the BoE has plenty of room to surprise if they choose to hike rates now rather than next year. For the ECB, the focus is on the latest series of economic forecasts, which will strain credibility if the ECB does not raise inflation forecasts for next year at minimum (currently at 1.9% for 2022 and 1.7% for 2023). In the meantime, the EU is beset by the latest wave of covid and an energy crisis that could trigger a recession, which makes it difficult to manage the need to signal what the central bank plans to do with its QE programme of asset purchases after the emergency PEPP facility runs out in March. For the Bank of England, the market is not expecting a hike at the meeting, but certainty is low after prior missteps in communicating their guidance. The UK November CPI out yesterday was out higher than expected and could be a factor as the core reading rose to 4.0%, a modern era high.
The European Council meets today, and apart from having to deal with Covid-19 and the Russian threat on its eastern borders, the council is also set to decide whether investments in gas and nuclear energy should be labelled climate friendly. The design of the EU green investment classification system is closely watched by investors worldwide and could potentially attract billions of euros in private finance to help the green transition, especially given the need to reduce the usage of coal, the biggest polluter.
Earnings Watch – today the most interesting earnings release is from FedEx which sits in the middle of global logistics and thus is a good window into demand and how the world is stacking up on global supply constraints. Adobe is also reporting before the market opens today and is a high growth and interest rate sensitive stock with revenue expected to grow 19% y/y in FY21 Q4 (ending 30 November).
Today: FedEx, Adobe, Accenture
Economic calendar highlights for today (times GMT)
0815-0900 – Euro Zone Flash Dec. PMIs
0830 – Switzerland SNB Meeting
0830 – Hungary Rate Announcement
0830 – Sweden Nov. Unemployment Rate
0900 – Switzerland SNB’s Jordan Press Conference
0900 – Norway Norges Bank Deposit Rate Announcement
0930 – Norway Norges Bank Press Conference
0930 – UK Flash Dec. PMIs
1100 – Turkey Rate Announcement
1200 – UK Bank of England Rate Announcement
1245 – ECB Rate Announcement
1300 – Poland Nov. CPI core
1330 – ECB Press Conference
1330 – US Weekly Initial Jobless Claims
1330 – US Nov. Housing Starts and Building Permits
1415 – US Nov. Industrial Production and Capacity Utilization
1445 – US Flash Dec. Markit PMIs
1530 – US Weekly Natural Gas Storage
1900 – Mexico Rate Announcement
0000 – New Zealand Dec. ANZ Business Confidence
0001 – UK Dec. GfK Consumer Confidence
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