Financial Markets Today: Quick Take – December 12, 2022 Financial Markets Today: Quick Take – December 12, 2022 Financial Markets Today: Quick Take – December 12, 2022

Financial Markets Today: Quick Take – December 12, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Sentiment is off to a cautious start this week after US treasury yields rebounded on Friday, pressuring equity market sentiment and supporting the US dollar. This week should prove a volatile one, with the November US CPI data point up tomorrow, one that has triggered huge swings in markets nearly every month for the last several months, this time with an FOMC meeting to follow on Wednesday and ECB and other central bank meetings up on Thursday.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

US equity markets rolled over again on Friday after US treasury yields jumped on a hotter-than-expected PPI release on Friday, taking the S&P 500 Index back toward the key support here, which comes in between 3900 and 3900 for the cash index, with the equivalent area around 11,430 in the Nasdaq 100 Index. Markets may be in for a fresh down-draft if US yields rise farther this week, whether due to the CPI release tomorrow, the FOMC meeting on Wednesday, or for any other reason.

Hong Kong’s Hang Seng (HIZ2) and China’s CSI300 (03188:xhkg)

Ahead of two key events, the FOMC meeting in the U.S. and the Central Economic Work Conference (CEWC) in China, investors in Hong Kong and mainland Chinese stocks took profits and saw the Hang Seng Index nearly 2% lower and the CSI300 sliding 0.8%. Meituan (03690:xhkg) declined nearly 7% and Country Garden Services (06098:xhk) plunged almost 17%. The CEWC will set out the blueprint for the macroeconomic policies in China for 2023 but will likely not release specific growth targets which be for the National People’s Conference in March.

USD rebounds slightly as US treasury yields bounce back

The US dollar rebounded on Friday and overnight as US treasury yields bounced back after the release of hotter than expected November PPI data on Friday. USDJPY was one of the bigger movers intraday, rebounding from sub-136.00 levels and trading above 137.00 this morning. EURUSD eased away from the recent cycle high of 1.0595 and was trading near 1.0515 this morning. Markets should be prepared for the risk of significant volatility on the CPI release tomorrow, with the market likely lease prepared for surprisingly firm core CPI readings – the surprisingly soft October CPI data released November 10, for example, triggered some 600 pips of USDJPY downside intraday.

Crude oil (CLF3 & LCOG3) focus on Russia, China Covid cases and US pipeline closure

Crude oil has started the week trading higher after plunging sharply last week on demand concerns from a weakening macro backdrop as well as thin liquidity leaving short sellers in control. No signs yet of calmer conditions ahead of year-end with multiple uncertainties still unresolved: The Keystone pipeline supplying Canadian oil to refiners on the US Gulf Coast remains shut with no date set for a restart. The market awaits news from Russia on whether it will make good on its threat to cut supply to price cap supporters. Meanwhile in China, surging virus case counts are raising concerns about a slowdown in demand. Focus on US CPI, FOMC and oil market reports from OPEC and IEA.

Gold (XAUUSD) trades softer

... ahead of US CPI data on Tuesday and the FOMC rate decision on Wednesday. This after Friday’s stronger than expected US PPI, suggesting inflation is not cooling enough, helped trigger profit taking and another rejection at $1808, a key level of resistance. Ahead of the key data print, the current strength of the market would be tested on a break below $1765, a level where support was found on several occasions last week.

US 10-year treasury benchmark rebounds above 3.50% (TLT:xnas, IEF:xnas, SHY:xnas)

After teasing below the key 3.50% level for a couple of days last week, the 10-year treasury yield benchmark surged back higher to 3.59% Friday after higher-than-expected November PPI data (see more below) before easing a few basis points overnight. The US November CPI print tomorrow data will likely spark considerable volatility all across the curve, especially given the market’s strong expectation that inflation will fall back sharply already by late next year.

What is going on?

Stronger-than-expected US PPI suggests inflation not cooling enough

Headline PPI rose 7.4% in November Y/Y, above the expected 7.2% albeit down from the upwardly revised 8.1% for October. The core (ex-food and energy) Y/Y was also above expectations at 6.2% (exp. 5.9%), but cooler than the prior upwardly revised 6.8%. on a M/M basis, headline rose 0.3% while core was stronger at 0.4%, beating expectations. While the PPI data continued to show a peak in inflation in the Y/Y terms, but the downward surprise remains limited and may not be enough to support the Fed pivot expectations. Attention now turns to the US CPI data on Tuesday to see if a similar inflation story is seen for December ahead of the FOMC rate decision on Wednesday. Preliminary University of Michigan survey for December was also strong across the board, as the headline rose to 59.1 from 56.8, and above the expected 56.9. The headline was supported by current conditions and the forward-looking expectations both lifting to 60.2 (prev. 58.8, exp. 58.0) and 58.4 (prev. 55.6, exp. 56.0), respectively.

Bank of Japan board members continue to differ on timing for ending YCC

All eyes are turning to who could be the possible replacement of Bank of Japan Governor Kuroda in April 2023. One of the contenders, Takehiko Nakao, said that subtle changes in policy framework should be considered as the leadership is changed next year. This comes after board member Naoki Tamura called for a policy review last week and hinted that it may come as early as next year (before Kuroda retires. However, another board member Toyoaki Nakamura said it’s too early to conduct a review now. Likewise, board member Hajime Takata also said it is too soon to start a policy review. While the timing may be uncertain, the open discussions about a possible BOJ policy review at some point is keeping expectations of an eventual BOJ pivot alive.

UK power prices hit a new record on freezing temperatures

The Monday price for UK power surged to a record on Sunday with the Met Office having issued snow and ice warnings throughout the country through to Thursday. The combination of low wind generation and surging demand for heating saw the day-ahead price for power double and reach a record £675/MWh (€785/MWh). The UK power grid operator has ordered two out of three coal-fired plants kept in reserve for emergencies to fire up in case they are needed on Monday.  German day-ahead power prices jumped 33% to €434/MWh, the highest since September 13 while the French contract rose 40% to €465/MWh on Epex Spot.  In the US meanwhile, natural gas prices jumped 12% on the opening today, thereby extending a four-day surge to $7/MMBtu, after a powerful Pacific storm knocked out power to thousands across California and is forecast to deliver heavy snow and blizzard conditions from Montana to Minnesota in coming days.

What are we watching next?

US November CPI data point tomorrow and FOMC meeting Wednesday

The market is aggressively pricing for inflation to drop back sharply this year, with inflation swaps suggesting inflation will be below 2.5% by year-end, even more aggressive than the Fed’s inflation forecast of 2.8% headline and 3.1% core PCE inflation by year-end. This leaves the “surprise side”, as we saw with the Friday US November PPI release, any data that suggests hotter than anticipated inflation, particularly for the core month-on-month ex Food and Energy reading (expected at +0.3%). Meanwhile, due to the market’s anticipation of quickly retreating inflationary pressures and a softening economy, it is pricing the Fed to begin cutting rates as soon as Q4 of this year, something the FOMC forecasts will likely push back against, although the market will likely lean on incoming data more than Fed guidance, which now that the Fed is seen decelerating the pace of hikes to 50 basis points on Wednesday, is only given credence for the next few meetings. Some argue that this could be the Fed’s last rate hike of the cycle, with the “dot-plot” of Fed policy forecasts on Wednesday also likely to push back strongly against that notion with an end-2023 forecast rate of above 5.0% (which would require another 75 basis points of hiking beyond this week’s 50 basis point move, which will take the rate to 4.25-4.50%.

Putin threatening to curb crude exports

Vladimir Putin said Russia may lower crude output in response to the G-7 price-cap and added the country won't sell to price-cap participants. The price of Russian crude in Asia appears to be holding well above the $60 cap as it finds enough shipping and insurance capacity. While the crude oil prices last week have remained in the grip of technical traders and seen little impact from the price cap decision, there could be more volatility in store this week as Russia’s response is awaited which could range from production cuts to retaliatory measures.

In Australia this week the focus will be consumer confidence and employment data

There are a couple of economic read outs that could move the ASX200 (ASXSP200.1) needle this week. Weakening confidence is expected; starting with Consumer Confidence for December (released on Tuesday), followed by Business Confidence for November. Employment reports are due on Thursday for November, with payrolls growth of +17k jobs, down from the rise of 32.2k in October. So focus will be on the AUD and a potential pull back if the data is weaker than expected.

Several central bank meetings this week

The U.S. Federal Reserve (Wednesday), the Bank of England (Thursday) and the European Central Bank (Thursday) are expected to hike interest rates by 50 basis points each this week. Less than two weeks ago, Fed Chairman Jerome Powell said a December rate-hike slowdown is likely. But the hawkish tone should remain based on the latest Non Farm Payroll and Producer Prices reports which indicated that inflation remains high and broad-based. In the eurozone, this is a done-deal that the central bank will hike rates by 50 basis points. Pay attention to the updated economic forecasts (Is a recession the new baseline for 2023?) and to any indication regarding the expected quantitative tightening process. In the United Kingdom, the money market overwhelmingly believes (78%) that the Bank of England will hike its rate by 50 basis points to 3.5% this week. Only a minority (22%) foresees a larger increase, to 3.75%.

Earnings to watch

This is a quiet period in the earnings season, though a couple of interesting names are reporting this week, with former high-flyer Adobe up on Thursday. Adobe has something to prove as the US software company has seen a negative share price reaction on its past five earnings releases. Trip.com, China's leading online travel agency, reports on Wednesday and investors will judge the result on the company's outlook for Q4 and ideally 2023 as China's reopening is raising the expected travel demand in China for 2023. Read more here.

  • Monday: Oracle
  • Tuesday: DiDi Global
  • Wednesday: Lennar, Trip.com, Nordson, Inditex
  • Thursday: Adobe
  • Friday: Accenture, Darden Restaurants

Economic calendar highlights for today (times GMT)

  • 0800 – Czech Nov. CPI
  • 2330 – Australia Nov. Westpac Consumer Confidence Index
  • 0030 – Australia Nov. NAB Business Conditions survey

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

Apple Sportify Soundcloud Stitcher

Disclaimer

The Saxo 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 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 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 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 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 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)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

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 Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

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