Summary: US equities closed on a strong note after a brief stumble yesterday as the seasonals are very supportive from here, with softening crude oil prices and bond yields perhaps also behind the improvement in sentiment yesterday. Overnight saw a rare sharp move in the US dollar as the Chinese yuan strengthened through a key level in USDCNH, broadening the US dollar weakness.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities managed to shake off early weakness yesterday and rally to new cycle highs, perhaps aided by oil prices retreating from new cycle highs and treasury yields easing back lower after threatening at new cycle highs on the shorter end of the yield curve. Optimists will note that this is the beginning of the historically strongest seasonal period for equities into year end. With the latest action, the S&P 500 is closing in on the all-time highs, which are less than 2% from yesterday’s close. The pivotal support remains the 4,400-20 area. The Nasdaq 100 rally yesterday was sharper and took the index through major Fibo retracement levels, with the last resistance perhaps around 15,390 ahead of the all-time highs into 15,700.
USDCNH – a big move yesterday for a pair that has been very bogged down in a range in recent weeks as USDCNH dropped down below the clear range low around 6.426 that had defined the range since back in June as the US dollar dropped sharply across the board overnight. The move in this currency pair may be the culprit and if China allows the exchange rate to drop below the cycle low near 6.35 from earlier this year, it could be a signal that the yuan will be allowed to strengthen toward the multi-year low from 2018 close to 6.235.
EURUSD – the US dollar is generally weak, but the key EURUSD rate has yet to back up through key levels. With USD support falling nearly everywhere outside of this pair and USDJPY, the EURUSD pair in particular is influential for establishing whether we are in a broader USD bear market, perhaps driven by a Fed that is seen as too far behind the curve with its current forward guidance. With the overnight rally toward 1.1650, the pair is entering an important zone of resistance that stretches to perhaps 1.1700, above which the odds of a sustained bullish reversal rise. Only a strong rejection of this overnight rally can put the bears back in business tactically.
Copper – industrial metals deserve considerable focus here as copper has traded up against all-time highs near 480 cents/pound yesterday and the London Metals Index has ripped to significant new all-time highs, led by zinc and aluminum and even copper to a degree. Supply challenges are behind much of the recent rise, as spot prices are far beyond what even the very elevated futures prices are showing – with the spread at a 27-year high, according to Bloomberg.
US Treasuries (IEF, TLT). Yield curves are flattening aggressively as central banks and market participants continue to ratchet expectations for rate increases higher, led by huge moves in the anticipated rate hike path for the RBNZ and the BoE this week. US short rates have been slower to react and the long end of the US yield curve still looks pinned below key levels like the 1.75% level in the US 10-year and the 30-year is lifeless well south of the recent 2.17% high in the yield there. Will the end of the debt ceiling stand-off (with recent measures delaying the situation until December 3) finally see these long yields bursting higher or could an improved economic outlook do the same? Otherwise, if short rates continue to rise rapidly, the market is pricing a gloomy forward growth outlook.
What is going on?
US Fed Chair Powell reportedly sold $1-5 million in stocks in October of last year in a transaction that was approved by ethics oversight, but one that casts a further shadow over the Powell Fed in the wake of stock-trading scandals involving two regional Fed presidents and even Richard Clarida of the Fed’s Board of Governors. Odds of Powell being renominated to the Fed are falling and US President Biden is running out of time to make a nomination whether for Powell or Brainard or someone else before Powell’s term ends in February.
Natural gas prices eased again after a significant rally intraday in Europe yesterday, with prices in the US tumbling south of $5 on the outlook for milder weather. Russia’s Gazprom has declared late last week that it is ready to boost production if it can sign long-term ga deals, while overnight, the company said that it had filled the first portion of the Nordstream2 pipeline with gas that makes the pipeline technically ready to deliver gas to Germany if regulators there can make a decision to accept delivery.
Alibaba unveils new server chip – that is based on technology from Softbank-owned Arm and marks an important milestone in China’s aim for self-sufficiency in semiconductors. The chip will reportedly be manufactured using the most advanced 5 nanometer process that arguably only Taiwan’s TSMC can produce.
Apple unveils new MacBook Pros that are based on own chips – this is the first time the company is using its own chips in higher end laptops after using its own M1 chips only in lower end laptops previously. Apple reports Q3 earnings next Thursday.
What are we watching next?
Big USD move lower here? - a more significant US dollar breakdown could accelerate volatility in the FX market and see commodities prices ripping further as commodity markets and the US dollar are often “co-dependent” in major market moves, as was the case in the massive run-up in commodities prices in 2002-08. The Bloomberg spot commodity index has posted record highs this month and a sharply weaker US dollar could aggravate the move and eventually require that the Fed makes a significant course correction if it suddenly realizes it is behind the curve and inflation is accelerating, though that moment could lie significantly farther down the road.
Hungary rate decision today - an interesting one as EURHUF sits at the top of the range and the central bank hiked less than expected the last time around. If guidance is insufficiently hawkish, HUF could break the range and fall further, an outcome the central bank will want to prevent to maintain credibility on inflation which has reached above 5% year-on-year in recent months.
Earnings Watch – an interesting haul of earnings today, as Netflix trades near all-time highs after the success of its Squid Game series, Procter & Gamble’s guidance on costs and supply chain issues ahead of the US open could be revealing (they report before the market open), and Halliburton is one of the largest oil services company, so its guidance on how the boost in oil prices has affected its outlook on investment from oil majors will be in focus.
Today: Netflix, Johnson & Johnson, Procter & Gamble, United Airlines, Halliburton, Kansas City Southern
Wednesday: Tesla, Verizon, IBM, ASML, Lam Research, Biogen, Canadian Pacific Railway
Thursday: Barclays, AT&T, Intel, Union Pacific, Snap, Whirlpool, American Airlines, Southwest Airlines, Freeport-McMoRan, Nucor, Genuine Parts, Tractor Supply
Friday: Honeywell, American Express, Schlumberger
Economic calendar highlights for today (times GMT)
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2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
