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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities bounced higher yesterday led by technology stocks with the Nasdaq 100 futures hitting the 200-day moving average again. We know from client conversations that this level is important on/off switch for many retail investors, so a rejection of this level again today would be negative. The key event risk today is the US CPI report for January which could add pressure to technology stocks which are the most sensitive to higher inflation and interest rates. If we get a negative surprise on CPI and risk sentiment plunges, then the first major test of support in Nasdaq 100 futures is around the 14,811 level.
Hang Seng (HK50.I) traded steady in Asia overnight with some Chinese property names being the notable gainers. Aluminum stocks continued to rally to add on to the gain seen yesterday. In addition to supply deficit globally, domestic alumina supply has been disrupted by the lockdown of the city of Baise in Guangxi due to resurgence of COVID cases. Baise accounts for more than 15% of China’s alumina production capacity. Yum China (09987.HK) announced 4Q results below expectations with rising staff costs and weak sale-store-sales. Its shares however bounced over 8%. In A-shares, the CSI 300 was down 0.53%.
EURUSD – three ECB doves are out speaking today (see times below in calendar highlights), with Chief Economist Lane the most impactful on setting the tone, should he surprise in either direction with comments today. But after consolidating for a week after the seeming “capitulation” from the ECB last week on its need to revisit its stance on inflation and policy in coming meetings, it is likely time for a bit more tactical volatility for EURUSD over the US CPI release today. Tactical downside support at 1.1345, while upside resistance is 1.1500 followed by a heavy layer of overhead resistance between 1.1600 and 1.1700.
USDJPY and JPY crosses – the USDJPY pair has crept higher again as long bond yields moved higher again in Japan, another notch closer to the Bank of Japan’s yield cap on the 10-year JGB at 25 basis points (high overnight was 23 bps) under its yield-curve-control (YCC) policy. The JPY is often very sensitive to US data releases, so bears close watching over the US CPI release later today. If US yields rush higher in the wake of the data, the pressure on the pair will likely be to the upside, with the cycle high of 116.35 not far away now. If the 10-year JGB hits 25 basis points, any further rise in global yields would pile pressure on the JPY to weaken further if the Bank of Japan insists on maintaining its current YCC policy.
Crude oil (OILUSMAR22 & OILUKAPR22) received another injection of bullish news yesterday after the weekly US stock report showed bigger than expected declines in crude and fuel stockpiles. The bounce however did not extend overnight with prices drifting lower as the attention returns to the prospect of reviving the nuclear agreement with Iran. Apart from these talks, the focus today will be on the US CPI print and the Monthly Oil Market Report from OPEC.
Gold (XAUUSD) trades higher for a fourth day, supported by softer yields and focus on today’s US CPI print (see below). Having broken resistance at $1820 the metal could now be targeting $1854 next. Total ETF holdings backed by bullion has jumped to a fresh 4-½-month high with asset managers and investors returning to gold in their search for calmer waters amid the current bond market turbulence while also hedging the risk of central banks failing to get inflation under control during the soon to start interest rate hike cycle. Silver (XAGUSD) also trading higher after establishing a double bottom at $22 with resistance now at $23.35 and $23.67.
Iron ore (SCO) the key steel making ingredient, surged 4.5% on Thursday, holding above $152 a tonne for the first time since August 31, 2021. It comes as China eased its green target for the steel industry, allowing its sector to hit peak emissions by 2030 (instead of five years earlier 2030). Of late President Xi Jinping changed his tone, saying climate targets should not compromise commodity supply to “ensure the normal life of the masses.” The iron ore price has climbed 70% from the November 2021 low, on expectations the iron price will drive higher amid supply deficits, from a labour shortage in Australia, while Chinese industry is ramping up demand after China’s central bank cut rates three times. The world’s biggest miner and iron ore company, BHP will release its full year results and outlook next week, February 15, (Sydney time).
US Treasuries (IEF, TLT). Yesterday’s 10-year US Treasury auction was a complete success. Indirect bidders rose to 77.6% from 65.5% prior leaving dealers only with 7.4%, the lowest on record. The auction stopped through by 2.2bps. The strong auction comes despite the rise in yields in the euro area decreased the convenience of foreign investors to buy US Treasuries. The bond market might be saying that the Fed is ahead of itself in terms of interest rate hikes or that today’s CPI numbers will be a miss. Following today’s CPI numbers, the Treasury will be selling 30-year bonds.
EURPLN plunges below 4.50 for first time in over six months on hawkish National Bank of Poland. After raising rates earlier this week by 50 basis points to bring the policy rate to 2.75%, the National Bank’s Governor Adam Glapinksi held a press conference yesterday in which he said the bank will use everything it can to slow rising inflation and support the Polish currency, with a “wide open” path to take the key policy rate to 4.0%, which would not hurt Poland’s economy. “Almost all of us on the MPC are hawks” said Glapinski.
European Sovereigns (VGEA). Yields in the euro area dropped as Spain attracted strong demand for its 30-year bonds, which saw the biggest ever allocation to non-residents. Italian government bond yields led losses dropping more than 9bps, the most since November. Today the market will be looking at the US CPI figures as a strong number could derail yesterday’s gain. Yet, a miss could add further pressure on the long part of yield curves.
What is going on?
Industrial metal prices maintain a strong bid led by aluminum and nickel with copper also trading higher during the past couple of trading sessions. Aluminum trades near the 2008 record on the LME with production curbs due to high energy prices in Europe and Asia cutting smelter activity. In addition, demand for the lightweight metal remains robust, but being the most energy intensive and polluting metal to produce, has led to output restrictions in China. The risk of further price gains remains with an expected drop in gas prices in Europe potentially not kickstarting smelter activity anytime soon.
Isabel Schnabel, Member of the Executive Board of the ECB, joined a Q&A on Twitter yesterday (#AskECB). She embraced a dovish stance. She indicated that raising rates will not lower energy prices. This is true. But she also acknowledged the ECB must be vigilant that high current inflation does not lead to a de-anchoring of inflation expectations. For the moment, long-term inflation looks well-anchored in the eurozone, even including adjusting for the term premia. On the downside, she mentioned that high housing prices is a key hawkish risk. If the ECB decides to include housing inflation (or owner-occupied housing data) to the HIPC, it could increase inflation by at least 20 to 30 basis points.
European earnings from Unilever, Siemens, Vestas, and ArcelorMittal. Good earnings this morning in Europe with notably Siemens standing out with EPS pf €2.05 vs est. €1.57 driven by semiconductor demand and its software push. Siemens' revenue was €16.5bn vs est. €15.9bn. Siemens’ CEO says that global supply chain issues may last into 2023. Unilever delivers a small beat on operating profit driven by higher-than-expected revenue growth and announces a shares buyback programme. Input cost inflation is significant in first half of 2022 of over €2bn which translate into an increase of around 7% of cost of goods sold, lower than current revenue growth.
US earnings recap. Walt Disney and Uber both surprised on earnings after the US market close seeing its shares rise 10% and 5% respectively in extended trading. Disney reported Disney+ subscriber figures of 129.8mn vs est. 125.1mn and ESPN subscriber figures of 21.3mn vs est. 18.8mn. Disney’s outlook is strong for the current fiscal year and is a clear reopening winner as Omicron has alleviated a lot of the pressure from the pandemic on the physical entertainment industry. Uber surprised with Q4 adj. EBITDA of $86mn vs est. $64mn and Q4 revenue of $5.8bn vs est. $5.4bn. The CEO talked on the conference call about delivery costs per trip coming down substantially improving operating income and gross bookings developing rapidly in Q1.
Italian industrial production increased at a slower pace in December 2021. It was out at 4.4 % year-over-year versus expected 5.0 % and prior 6.6 %. Among the main industrial groupings, industrial production increased more in energy (+8.9 %) and consumer goods output (+10.4 %).
What are we watching next?
U.S. January CPI release today is the marquee risk of the week. The median forecast is at 7.3 % year-over-year versus 7.0 % in December 2021 for the headline and +5.9% ex Food and Energy vs. 5.5% in December. Both of those would be new highs since the early 1980’s (The month-on-month figures are expected at +0.4%/+0.5% ex Food and Energy). Several forecasters expect inflation could even be higher (up to 7.6 %). Volatility will be back on the U.S. bond market today and, given the long string of shocks that have taken Fed rate expectations sharply higher for this year, the slightest “miss” to the downside could have more impact than a modest upside surprise.
European Commission set to release inflation forecasts today. Bloomberg reports that a draft of the forecasts see inflation at 3.5% for this year and dropping to 1.7% in 2023. Members of the ECB Governing Council clearly hold a wide variety of views on inflation risks and the March ECB meeting will see a reassessment of the bank’s guidance on inflation and policy that is highly anticipated after the ECB meeting last week finally showed cracks in the former conviction that inflation would prove transitory.
Sweden’s Riksbank the next European central bank to shift its guidance? The Riksbank will announce its latest decision this morning and will be watched closely for any plans to accelerate the end of its QE programme and/or especially whether it is set to bring forward the time frame of its forecast rate lift-off, currently at a rather distant Q4 of 2024, after the "underlying” CPI in Sweden rose to its highest level since the early 1990’s in December at 4.1% year-on-year (although observers expecting little from the bank might point to the official “ex-Energy” CPI, which remains within the range and at only 1.7% year-on-year as of December). Those expecting less urgency from the Riksbank will suggest that they would like to see the ECB make the first move before shifting their own guidance.
Earnings Watch. Many European companies have already reported this morning (see above), but later in the US session investors will watch Coca-Cola and PepsiCo due to their size in consumer markets and later technology watchers will focus on Datadog, Global Payments, Cloudflare, VeriSign, and then Twitter with latter being cut by Ark Invest ahead of its earnings given the overall softness in social media.
Thursday: KBC Group, Brookfield Asset Management, Constellation Software, Vestas, Neste, TotalEnergies, Pernod Ricard, Credit Agricole, Societe Generale, Siemens, Semiconductor Manufacturing International, Unilever, AstraZeneca, British American Tobacco, Arcelor Mittal, Heineken, Zurich Insurance, Credit Suisse, Coca-Cola, PepsiCo, Philip Morris, Linde, Duke Energy, Moody’s, Illumina, Datadog, Global Payments, Cloudflare, VeriSign, Twitter
Friday: Enbridge, Dominion Energy, Apollo Global
Economic calendar highlights for today (times GMT)
0830 – Sweden Riksbank Interest Rate Decision
1200 – ECB’s Guindos to speak
1230 – ECB's Villeroy to speak
1300 – Poland National Bank of Poland meeting minutes
1315 – ECB's Lane to Speak
1330 – US Weekly Initial Jobless Claims
1330 – US Jan. CPI
1700 – UK Bank of England Governor Bailey to speak
1800 – US 30-year T-Bond Auction
1900 – Mexico Central Bank Overnight Rate
2230 – Australia RBA Governor Lowe testimony
0000 – US Fed’s Barkin (non-voter) to speak FX market webinar hosted by John J. Hardy. Sign up at www.webinars.saxo
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