What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - equity futures are undecided, with a small tilt to the downside, this morning in European trading as a strong US jobs report on Friday and lower interest rates are weighing on the positive side, while Chinese slowdown and record Covid-19 wave in Europe are negative. Nasdaq 100 futures are hovering around Friday’s low at 16,292 and the next natural support level if risk-off accelerates today is Thursday’s opening print at 16,130. The story that Elon Musk intends to sell 10% of his stake in Tesla could also put downward pressure on technology stocks in today’s session.
EURUSD – the strong US jobs report (at the headline, at least – more below) saw EURUSD testing new lows for 2021 below 1.1525 very briefly before the price action jolted back higher, a possible indication that the attempt to re-establish the downtrend has failed, although that notion would need a follow-up rally back above 1.1600 to further bolster the case that a bottom is in place.
GBPUSD and EURGBP – a big week for sterling last week after the Bank of England surprised the market by not hiking rates and with rather cautious guidance after seeming to indicate at times recently that there was considerable urgency in moving forward with a series of rate hikes. Sterling jerked sharply lower below the key 1.3500 area in GBPUSD though it has not yet challenged the cycle lows at 1.3412. Elsewhere, the US dollar is a bit softer after failing to sustain new highs on Friday. This week will be about establishing whether the range holds on a one-off adjustment to last week’s shock, or whether sterling is set to trend lower. EURGBP is also at a technical crossroads as it interacts with the 200-day moving average around 0.8585, considerable distance below the late September high just above 0.8650.
Crude oil trades higher today, thereby extending the recovery from Friday as the market weighs President Biden’s limited options to bring down prices of crude oil and gasoline. The reasons behind OPEC’s lack of interest in helping to quell the month-long rally was made clear by the Saudi oil minister after he argued that the current energy crisis had been caused by decades of anti-oil policies leading to underinvestment, and it wasn’t the producers' job to fix it. Net selling by hedge funds meanwhile extended into a fourth week with both WTI and Brent being sold. Focus this week on comments from the US administration and not least whether Europe, as promised by Putin, will see increased gas flows. So far it doesn’t look promising with Dutch TTF opening 10% higher on no signs of increased flows, and failure could support gas and oil through increasing switching demand.
Gold (XAUUSD) reached a two-month high in Asia at $1821.6 while silver (XAGUSD) has broken the downtrend to potentially setup another challenge at $25. The extensions follow a strong end of week rally that, despite the stronger dollar, was driven by the dovish FOMC and Bank of England meetings, and a strong US jobs report pointing to increased wage pressures. US ten-year real yields trades lower with focus now turning to US CPI on Wednesday and whether gold can find enough momentum to challenge key resistance at $1835.
US treasuries (TLT, IEF, SHY) This week it’s all about inflation, however, it’s very unlikely that it will disrupt markets even if it exceeds expectations. On Friday, strong nonfarm payrolls failed to move yields higher as the market stuck to the message of the Federal Reserve that interest rates hikes are still distant. Rate hikes expectations for 2022 declined below two. Yields dropped across the whole yield curve with 10-year yields dropping as much as 14bps in two days, the biggest decline since June 2020. We still expect yields to resume their rise by the end of the year, but not this week. Today the US Treasury will sell 3-year bonds, tomorrow 10-year bonds and on Wednesday 30-year bonds following the inflation readings.
What is going on?
US House of Representatives passes infrastructure bill, one with a headline number of $1 trillion, but much of that number contains already planned spending, with a net additional budget of some $550 billion, which will be spread over many years, so the economic impact in the short term is rather limited. The spending priorities in the bill focus on roads, bridges, rail and the conversion to EVs.
China recorded a record trade surplus in October of $84.5 billion, driven by both higher-than-expected export growth and lower than expected import growth, the latter of which points to soft domestic demand. Imports of commodities showed across-the-board weakness, partly due to the current power shortages. Crude oil was down 11% from September to 8.9 million barrels, the lowest since June 2018. Coal was down 18% to a five-month low, soybeans 25%, to a 19-month low). Others like copper (-15%), natural gas (-12%) and iron ore (-4%) also recorded weaker demand.
US October employment report recap: strong payrolls growth, earnings growth meets expectations. The October non-farm payrolls change was a robust +531k vs. +450k expected, and the prior two months’ data was revised a strong +235k higher, but other parts of the report were somewhat less strong: the participation rate failed to rise as was expected, and while Average Hourly earnings did rise +0.4% month-on-month and +4.9% year-on-year as expected, this was on the basis of the “Average Weekly Hours” statistic dropping 0.1 hours.
SoftBank Group posts record quarterly loss. Declines in holdings such as Coupang and Didi Global drove combined losses in the Vision Funds of JPY 825bn vs 236bn of profits in Q1. In addition, the company does no longer has positions in Amazon, TSMC, and PayPal. Many of the companies the Vision Fund has brought to the market has been loss-making and long to move towards break-even with South Korean e-commerce giant Coupang being the latest example.
Amazon backed EV maker Rivian Automotive raises IPO price range. The EV maker is seeing strong demand for its shares and is raising its IPO price range from previously $57-62 to $72-74 and is now seeing to raise $10bn in the IPO. The EV maker will at these prices get a market capitalization of $63bn and $71.3bn on a fully diluted basis. Tesla’s recent gains have been driven by strong news flow, options flow, but also the fact that it is still the only meaningful pure play on EVs, so with Rivian entering the game, some of that demand could be pulled out of Tesla.
Elon Musk polls Twitter on selling a stake in Tesla. On Saturday, Elon Musk polled Twitter on whether to sell 10% of his ownership or not with 58% out of 3.5 million votes saying he should. Selling 10% of his stake in Tesla would be worth around $21bn as of the market price on Friday. In his polling tweet he states that there has been enough talk about billionaires hiding behind unrealized gains. The tactic of preemptively asking the public is smart as a traditional move with a block trade announced with the stock exchange could have been a negative story for Tesla. This move can remove that negative surprise and allow Elon Musk to liquidate some of his holdings at Tesla.
What are we watching next?
USD direction after action last week - looks important across markets, especially commodities, after the rather dovish FOMC meeting last week and a strong jobs report on Friday failed to sustain the USD rally into the close of trading on Friday. The reversal was modest, but so many USD pairs are near pivotal levels that this week can’t avoid establishing whether the USD is set for a more significant pushback to the downside or rallies again after an initial failure on Friday to attack key levels like 1.1500 in EURUSD. US treasury yields dropping sharply at the long end of the yield curve certainly don’t look like a strong backdrop for a USD rally as this development has not coincided with weak risk appetite.
Earnings Watch – the Q3 earnings season is moving into its secondary phase with little overall impact on global equities, but instead selected impact on industries or country equity indices. Today’s focus is on PayPal that recently walked away from acquiring Pinterest and will likely post a growth slowdown in Q3 like many other e-commerce and payments companies as the tailwind from the pandemic has eased somewhat.
Monday: SoftBank Group, PayPal, Roblox, Trade Desk, Tencent Music Entertainment
Tuesday: National Australia Bank, Bayer, Munich Re, Alcon, Coinbase, NIO, DoorDash, BioNTech, Palantir, Unity, DR Horton, Upstart, Plug Power
Wednesday: Genmab, Credit Agricole, EDF, Alstom, Allianz, adidas, Infineon Technologies, E.ON, Tencent, NTT, Walt Disney, SoFi Technologies
Thursday: Brookfield Asset Management, Siemens, Merck KGaA, Deutsche Telekom, Hapag-Lloyd, Semiconductor Manufacturing, Generali, Nexi, ArcelorMittal, Coupang
Friday: KBC Group, AstraZeneca, Richemont, Pinduoduo, Li Auto
Economic calendar highlights for today (times GMT)
0900 – Poland National Bank to publish inflation report
1000 – ECB's Makhlouf to speak
1310 – Euro Zone ECB Chief Economist Lane to speak
1400 – US Fed Vice Chair Clarida to speak on monetary policy
1530 – US Fed Chair Powell to make opening remarks at conference on diversity
1700 – US Fed’s Harker/Bowman out speaking (neither is an FOMC voter in Dec.)
1700 – UK Bank of England Governor Bailey to speak
1800 – US 3-year Treasury Auction
1850 – US Fed’s Evans (voter) to speak.
2030 – Australia Oct. NAB Business Conditions/Confidence0500 – Japan Oct. Eco Watchers Survey
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: