What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures are slightly up in early trading hours with S&P 500 futures trading around the 4,775 level. The news flow on Omicron is positive with more studies showing that infected people have half the hospitalization risk, and the US 10-year yield remains will anchored around the 1.5% level supporting equities. This year in equities will be all about inflation, operating margin response to rising input costs, and the US interest rate level.
USDJPY – Japan's markets are closed today to mark the New Year, but USDJPY continue to dribble higher after a strong rally into year-end, with the pair trading this morning not far short of the cycle high just above 115.50 that was posted just before the omicron covid variant news broke. Interestingly, USDJPY has managed to continue rallying as US yields at the longer end of the curve, often a key coincident indicator for USDJPY, have generally remained stuck in the mud – still more than 20 basis points south of the 2021 high near 1.75%, in the case of the benchmark US 10-year treasury yield.
USDRUB – the USDRUB pair rose sharply into year-end as tensions remain high on Russia’s military posturing near the Ukraine border and ahead of talks between Russia and NATO in Geneva on Jan. 9-10. In a phone call between US President Joe Biden and Ukraine president Volodymyr Zelenskiy, Biden vowed to support Ukrainian sovereignty and said that the US and its allies “will respond decisively if Russia further invades Ukraine”. USDRUB trades near 75.00 this morning, not fa below the eight-month high of 76.00. EU natural gas prices have tumbled in recent days (more below), after accusations that Russia was strong-arming the EU on the approval and opening of the Nord Stream 2 pipeline.
Crude oil trades higher ahead of tomorrow’s OPEC+ meeting where the group despite current omicron flare ups is widely expected to raise production by another 400k barrels per day. The decision being supported by ongoing problems in Libya which has seen its production fall by around 400k barrels per day to a 14-month. With omicron having a limited impact on demand, the outlook for oil prices in 2022 remain generally supportive, especially during the second half when OPEC+ will have exhausted their ability to increase production further. Brent’s short-term range between $76.5 and $80.
Gold (XAUUSD) trades softer after touching a six-week high in Asia overnight. Overall, the yellow metal saw its biggest annual decline last year since 2015, as it struggled to attract investor interest amid the fear of rising inflation driving interest rates higher, and another strong stock market year reducing demand for diversification and hedges. Analysts are torn on the outlook with rising real yields being the main culprit behind the negative price forecasts while others, we included, see upside potential driven by dollar weakness and a limit to how high real yields can rise.
What is going on?
Tesla smashes estimates for car deliveries in Q4, with 308.6k cars delivered. (TSLA:xnas) This took deliveries for 2021 to some 936,000 cars, a rise of 87% on the tally of the prior year. Analysts were expecting more in the region of 265k deliveries for the quarter. We expect a positive reaction in miners with exposure to lithium carbonate, cobalt, and nickel, and semiconductor manufacturers with exposure to car production. The ramp up in production at Tesla is blistering and increases the probability that Tesla will become a top three global car company in the future on total sales.
SenseTime gains 30% in Hong Kong session. The Chinese AI technology company that had a tumultuous start to its IPO with potential US sanctions, but the company pushed through and IPO’ed on 29 December with its shares up 85% since then and whopping 30% in today’s session alone.
US Federal Reserve’s Reverse Repo facility jumped to record $1.9 trillion on the last weekday of 2021. This figure represents a kind of “stored QE” as the Fed lends out its balance sheet holdings to counterparties, who are seeking a safe harbor for short term cash. This number has spiked to a new high even as the Fed is slowing its asset purchases and is set to stop expanding its balance sheet entirely by mid-March of this year. The reverse repo facility rose from practically nothing to over $500 billion from March to June of last year before ballooning to its current level.
Evergrande shares suspended. Very little has been officially announced but speculation relates it to a demolition order of several buildings by a local government as the building permits were not legally obtained. Other real estate developers such as Sunac and Shimao were down as much as 8% in today’s session. The industry will be under pressure in January with estimated $197bn in bonds, coupons, and trust products so China will potentially start the year on a nervous footing in early 2022.
Alibaba ADR conversions picking up speed. The past month the conversion of its US listed ADRs into Hong Kong shares has picked up speed making some investors nervous as it could sink the price further as it would diminish the US marginal buyers. It is estimated that around 5% of the outstanding shares are held by investors or funds that do not have a mandate to own Hong Kong based shares, so the short-term pressure on Alibaba’s shares could extend until all shares are converted.
EU gas (TTFMG2) slumped by around 65% during the final trading days of December, with a surge in LNG arrivals, increased Russian supplies via Ukraine, and most importantly unseasonal warm temperatures reducing heating demand across Europe. Yet prices remain close to five times above their long-term averages and with the two coldest months of the winter still ahead, deliveries through pipelines and ships need to remain elevated with storage facilities being only 56% full, a level normally not reached until the end of January. In order to facilitate the transition towards a predominantly renewable future, the European Union is planning to allow some natural-gas and nuclear energy projects to be classified as sustainable investments.
What are we watching next?
Italian presidential election process starts tomorrow: will it lead to snap elections? The political calendar for the EU is heating up early this year as the Italian parliament and regional representatives are set to elect a new Italian president as outgoing president Sergio Mattarella has resigned. Most expect that current “caretaker” Prime Minister and former ECB chief Mario Draghi, who was appointed PM after the failure of the former government coalition, will win the election, with tomorrow setting the election process in motion for a date likely set for later this month. This could eventually lead to snap elections, with the right populist Brothers of Italy party polling strongly, though any new government would require a number of other parties. Last week, the Italian parliament approved a EUR 32 billion budget to boost growth in the country, with the funds coming from the EU recovery package agreed in the wake of the pandemic outbreak.
Key elections to watch in 2022:
· Italian presidential election (The complicated election process will start on Jan. 4)
· Portuguese legislative elections (Jan. 30)
· Hungarian parliamentary election (April – exact date to be confirmed)
· French presidential election (Apr. 10)
· French legislative elections (Jun. 12)
· Japan house of councilors election (July 25)
· Brazil general elections (Oct. 2)
· U.S. midterm election (Nov. 8)
Earnings Watch – the new year is starting in a low gear with only seven earnings releases this week, but already next week things are heating up as the Q4 earnings season starts with the first US earnings releases. The key focus will of course be on operating margins which came under pressure in Q3 as rising input costs are eating into revenue.
Tuesday: Teledyne Technologies, Jefferies Financial
Wednesday: RPM International
Thursday: Walgreens Boots Alliance, Conagra Brands, Constellation Brands
Economic calendar highlights for today (times GMT)
0815-0900 – Euro Zone Dec. Final Manufacturing PMI
0900 – Switzerland Weekly Sight Deposits0145 – China Dec. Caixin Manufacturing PMI
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