What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - with the US 10-year yield pushing higher today hitting 1.89% in early European trading hours US technology stocks are headed lower with Nasdaq 100 futures trading around the 15,063 level. The 200-day moving average sitting at 14,985 is a major technical focus point today on extended selloff as this long-term trend indicator has not been broken on the downside since April 2020. Given the shear amount of retail investors trading in technology stocks a break of this moving average could cause a lot of renewed selling from retail investors.
Hang Seng (HK50.I) fell for the third straight day, down 0.2% on Wednesday with tech names dragging it lower. Alibaba lost about 2%, struggling near record all-time lows, while shares in camera lens business Sunny Optical, who works with Huawei, fell to a two-month low, with investors continuing to reduce tech stocks exposure ahead of the Fed rising interest rates. Meanwhile, Chinese property stocks jet packed higher again following China’s central bank cutting interest rates. Shares in China’s biggest builder, Country Garden Holdings rose for the second day, up 7%, continuing to rise off its five-year low.
Crude oil (OILUSFEB22 & OILUKMAR22) already up 14% this month amid strong demand not being met by an equal strong supply response, extended its gains to a fresh 2014 high following a temporary pipeline disruption. A rising gap between OPEC+ crude oil quotas and actual production levels together with a minor omicron impact on demand have triggered a severe tightness in the market. One that IEA will try to put a number on in their Oil Market Report for January due later today (see below). With RSI hitting overbought territory, the risk of pullback has rising with focus on support at $86.75 in Brent.
Gold (XAUUSD) trades steady for a second day with headwinds from a 0.5% rise in US ten-year real yields so far this January being offset by rising stock market unease, geopolitical tensions and the risk for a rapid succession of US rate hikes pulling the wheels of the US economy. Yesterday silver (XAGUSD) led the recovery after breaking resistance at $23.30, thereby driving the gold-silver ratio below 77 (ounces of silver to one ounce of gold) for the first time since November. In gold, resistance remains firm in the $1830-35 area while a band of support has been established down towards $1800.
US Treasuries (IEF:xnas, TLT:xnas). The focus today is on the 20-year US Treasury auction, a tenor not loved by investors. Weak demand could cause rates to go further up in the long part of the yield curve. Yesterday, yields moved higher despite the Empire Manufacturing survey showing a contraction. The market keeps focused on the tightening agenda of the Fed, and it is now pricing four interest rate hikes for this year. Ten-year yields rose above 1.85%, aiming at 1.90%. In the meanwhile, the yield curve continues to bear flatten, in particular the 30s5s spread.
German Bund (IS0L:xetr). Ten-year Bund yields broke above 0% for the first time since May 2019. We expect Bund yields to continue to surge as US Treasury yields rise, the ECB withdraws stimulus, and the new German government increases fiscal spending. Bund yields will find weak resistance around 0.05%, before testing 0.1%. Rising Bund yields will increase the volatility of those sovereigns with a high beta such as Italian BTPS.
Emerging market sovereigns (PCY:arcx). Sovereign bonds of the weaker emerging markets begin to tumble as refinancing of their Eurodollar bonds becomes more difficult amid rising US Treasury yields. Ghana is an example: the spread of its 2027 Eurodollar bonds widened to 1,000bps as investors have been dumping the credit since the beginning of the year. Emerging markets have issued substantial amounts of Eurodollar debt in the past few years, and we expect Ghana not to be an isolated example.
What is going on?
China is rumoured to add new technology regulation. The Cyberspace Administration of China will require approval going forward from technology companies with more than 100mn users or CNY 10bn in revenue on issues related to deals. This is part of the policy objective to avoid large technology companies to use their excess profits to gain control in many industries which is seen as anticompetitive behaviour.
ASML guides weakness in Q1 due to supply constraints. ASML reported Q4 revenue slightly below estimates and Q1 revenue of €3.3-3.5bn vs est. €5.4bn driven by supply constraints, a recent fire at its Berlin factory, and finally €2bn of revenue that will be spread over the coming quarters instead of recognized in Q1. The revenue growth guidance for FY22 is around 20% which 2%-points above the current consensus and the company continues to see revenue of around €24-30bn in FY25 and a lot of growth opportunities after that point.
Microsoft bids $69bn for Activision Blizzard; Sony falls 13% on the deal. Yesterday, Microsoft bid $95 per share for Activision Blizzard which is a naturally extension of Microsoft’s reach into the consumer business as software-maker already owns the Xbox and Minecraft franchises. Given the underlying growth and strong profitability of Activision Blizzard we believe the deal is good for Microsoft and will not negatively impact fundamentals. In Japanese trading today Sony is down 13% reacting negatively to this deal, but in our view, it is a bit of an overreaction given the soaring demand for the PlayStation 5 and the lack of overlap in the gaming environment.
ARK Innovation (ARKK:arcx) can’t get a break and yesterday’s close at 76.91 represented a 50.5% decline from the February 2021 peak. Every single major component of the fund is down, many by more than 80%, and Wednesday the ETF saw $352 million exit, the biggest investor withdrawal from Cathie Wood’s main fund since March 2021. The ETF which has come to represent the bubble stock generation continues to suffer as the Federal Reserve prepares to hike rates thereby raising concerns for stocks with little income thriving on cheap funding.
BHP (BHP:xasx) released a jam-packed update overnight. With iron ore production ticking up and with prices off two-year lows, the group swirls on potentially taking over some rivals. Subject to court approvals the group will be axing its UK listing (vote on Jan 20) with unification on January 31. For its 2022 outlook; BHP continues to benefit from record coal prices, but its coal business sales will be completed mid 2022. Meanwhile BHP ramps up its move into fertilizers, with a major potash development 98% complete. As for its metal outlook, nothing change, except BHP drops its copper production target due to a labour shortage and weather disruptions. BHP shares hold 5-month highs, $46.56.
What are we watching next?
The monthly oil market report from the IEA should cast some further light on the current state of the crude oil market. After its head Fatih Birol recently said “Demand dynamics are stronger than many of the market observers had thought” it is safe to assume the Agency, just like the EIA last week, will lower their recent forecast for a 1Q22 surplus of 1.7 million barrels a day and 2 million barrels a day in 2Q22.
Earnings Watch – ASML has already reported earnings this morning (see review above) so the remaining earnings focus today is on Bank of America, Procter & Gamble, and Kinder Morgan. Of these three earnings releases, the Procter & Gamble is the most interesting from gauging inflationary pressures in consumer goods.
- Today: ASML, EQT, UnitedHealth, Bank of America, Procter & Gamble, Morgan Stanley, Charles Schwab, US Bancorp, Kinder Morgan
- Thursday: Sandvik, Netflix, Union Pacific, Intuitive Surgical, CSX, SVB Financial Group, CSX, Travelers,
- Friday: Investor, Schlumberger, IHS Markit
Economic calendar highlights for today (times GMT)
- 0700 – UK Dec COI
- 0700 – Germany Dec CPI
- 0800 – IEA's Monthly Oil Market Report
- 1030 – UK Nov House Price Index
- 1330 – US Dec Housing Starts
- 1330 – US Dec Building Permits
- 1330 – Canada Dec CPI
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