What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - a choppy day on Wall Street saw the S&P 500 down 1% to the lowest close since December 1 when the omicron variant news hurt global risk sentiment. The Nasdaq closed at a fresh three-month low but above the 200-day moving average which is offering key support at 15,000 today. This long-term trend indicator has not been broken since April 2020 and will therefore attract a lot attention in the coming days. Bond yields remain elevated but have paused and this supported overnight gains in US futures while possible steps to ease China’s property crunch saw Asian stocks higher following five sessions of losses.
Hang Seng (HK50.I) – rose 2.8% after China’s central bank cut interest rates for the 2nd time in a month, taking the market to a two-month high. The PBOC cut its 1-year loan prime rate by 0.1% (to 3.7%). The five-year loan prime rate was reduced by 0.05% (to 4.6%). It’s important as the loan prime rates affect lending rates for corporates and households with most loans in China taken on the one-year loan prime rate. While the five-year rate influences the price of mortgages. Zooming out, the Heng Seng is up 6% YTD, thereby outperforming other markets after falling 14% last year. China’s rate cuts may support China’s property and infrastructure sector and global iron ore players.
In forex, the Aussie dollar led a small retracement in the dollar after the nation's unemployment rate fell to its lowest level since 2008. The uptrend that started in early December is currently providing support at 0.7190 which also co-insides with the 50-day moving average. The EURUSD trades higher after a three-day selloff met support ahead of €1.1300. Other potential currency moving developments today are rate decisions in Turkey and Norway.
Crude oil (OILUSFEB22 & OILUKMAR22) trades softer after reaching a fresh seven-year high on Wednesday. In his one-year anniversary speech President Biden talked about the need to bring down inflation and that the administration had more options to address available to address surging fuel prices. The API reported a weekly stock build in crude oil, if confirmed by the EIA today in its delayed report, it would be the first gain in eight weeks. Underlying fundamentals remain strong as confirmed by the IEA in their monthly report yesterday, but with technical indicators flashing overbought, a period of consolidation may soon emerge. Support being the recent highs at $86.70 in Brent and $85.50 in WTI.
Gold (XAUUSD) trades near a two-month high after breaking resistance in the $1830-35 area which is now support. The move follows weeks of strength where the yellow metal managed to fend off the negative price impact of surging US real yields and expectations of four rate hikes in 2022 to combat inflation. Renewed demand for inflation hedges as wages and energy continue to climb together with increased stock market volatility and geopolitical concerns all supporting factors. Adding to this strong tail winds from silver (XAGUSD) and platinum (XPTUSD) which led the rally from the front, thereby driving down the gold-silver ratio to a two-month low at 76. Gold will now be looking for support at $1830 and resistance at $1850 followed by the November peak at $1877.
US Treasuries (IEF:xnas, TLT:xnas). US Treasury yields rose to the highest in two years as the market expects the Federal Reserve to prepare for a March rate hike as soon as next week. Ten-year yields rose to 1.895%, flirting with the 1.90% level. Later in the day, yields dropped as geopolitical tensions are escalating with Russia. Yields firmed up further following a solid 20-year auction that stopped through by 1.5bp at 2.21% in yields. Indirect demand was the second highest on record highlighting the fact that the higher yields go the more appealing US Treasuries become for foreign investors. EUR hedged 10-year US Treasuries offer above 100bps for the first time in five years. We expect bonds to remain volatile ahead of the FOMC meeting next week. The focus today will be on the 10-year TIPS auction.
German Bund (IS0L:xetr). Ten-year Bund yields broke above 0% for the first time since May 2019 yesterday. To lift yields up in Europe was the tight correlation that Bunds have with US Treasuries. We expect Bund yields to continue to surge as 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?
Industrial metals are heating up yet again, with nickel rallying to a decade high above $24k while copper (COPPERUSMAR22) following last week’s failed breakout has returned to challenge $4.50, a recent area of resistance. The sector remains supported by dwindling stocks with all major metals traded on the London Metal Exchange in backwardation, a curve structure indicating tight supply. Industrial metals also being supported by developments in China where the central bank has pledged to use more monetary policy tools to spur the economy and drive credit expansion, basically signalling another easing bias to boost markets and confidence.
In US stocks Procter and Gamble (PG:xnys), the company behind Gillette and Braun shavers, Oral B, Olay, Vicks, Metamucil, was one of the best performers; its shares rose 3.3% on reporting stronger than expected quarterly earnings. While, banking giant, Morgan Stanley rose 1.8% and insurance group UnitedHealth rose modestly after reporting better than expected earnings. These developments speak to a broad theme at hand with banks and insurers stand to benefit from rising interest rates.
The concerns on energy consumption from cryptocurrency mining are continuously increasing as they pose a risk to the existing climate change goals. Yesterday the European Securities and Markets Authority (ESMA) raised concerns over the increasing energy consumption, especially in Bitcoin, which is using the energy-heavy proof-of-work mining to run the network. And today in the US the Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce are hosting a hearing on "Cleaning Up Cryptocurrency: The Energy Impacts of Blockchains."
Iron ore futures (SCOF2) in Singapore jumped 2.6% to US$134 supported by China’s second interest rate cut this week. From a technical perspective, a close above $133, could signal a rise towards the next major target at $150, benefitting the world’s biggest iron ore stocks BHP (BHP:xasx), Rio Tinto (RIO:xlon) and Fortescue (FMG:xasx). However, beware, although the iron ore price has been rallying off its two-year low from November last year, Chinese demand will likely slow due to lunar new year, and the Beijing Olympics. However, after March, you could expect iron ore orders to pick up, further supporting shares in iron ore heavyweights.
Australia’s unemployment rate fell more than expected last month, falling from 4.6% to 4.2% (the market expected 4.5%), to the lowest since 2008. It comes as 65,000 Aussies gained jobs in December, almost double what was expected.
What are we watching next?
- Today: Sandvik, Netflix, Union Pacific, Intuitive Surgical, CSX, SVB Financial Group, CSX, Travelers,
- Friday: Investor, Schlumberger, IHS Markit
Economic calendar highlights for today (times GMT)
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
- 0900 – Norges Bank Rate Decision
- 1000 – Eurozone Dec Final CPI
- 1100 – Turkey Rate Decision
- 1230 – ECB Minutes from December Meeting
- 1330 – US Weekly Initial Jobless Claims
- 1330 – US Jan Phili Fed Survey
- 1500 – US Dec Existing Home Sales
- 1530 – EIA Natural Gas Storage Change
- 1600 – DOE's Weekly Crude and Fuel Stock report