What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures were making higher highs for three straight sessions and seems to be firmly pushing above the 4,600 level in early European trading hours on the back of positive news flow on Omicron and stimulus in China. The next big resistance level for S&P 500 futures is at 4,645. Later this week the key event risk for US equities is the November CPI report on Friday which could accelerate further putting the FOMC in a difficult position on their rate decision on 15 December.
Stoxx 50 (EU50.I) - Stoxx 50 futures are fighting this morning to break above the high and close from 1 December which is naturally the upper resistance level for Europe’s benchmark index. The improving Omicron news flow and actions by the Chinese government suggesting it is moving into stimulus mode are of course helping European equities which are much more procyclical than US equities. Stoxx 50 futures are trading around 4,175 and must push towards the 50-day moving average at 4,199 in order to close the gap from that large selloff on 26 November.
USDJPY and JPY crosses – yesterday saw a pivot in risk sentiment back to the upside, one that included a sell-off in US treasuries that is getting the notice of JPY traders, as the JPY weakens again to its lowest level in nearly a week versus the US dollar and has backed off even more sharply in the crosses. As long as this wave of sentiment carries risky assets higher and treasury yields higher, the JPY may ease lower, but the scale of the recent reversal in USDJPY remains a tall wall to climb, as a recovery back above 115.00 would be needed to suggest the JPY rally attempt has been fully neutralized. EURJPY has traded in a pivotal area as well, dipping below the important 128.00 level, only to have rejected that development this week, if somewhat cautiously.
AUDUSD – the Aussie has suddenly emerged as a star this week after closing last week on a sour note, with help from a recovering iron ore price, policy signals from China (see more below) overnight and on a more optimistic RBA, which doesn’t expect the omicron variant to slow Australia’s recovery and sounded more optimistic in its latest statement overnight (also more below on that). The very pivotal 0.7000 area has so far held, with a strong bounce off that level to start the week, in part as risk sentiment has also broadly improved this week. Notably, the Aussie has also leaped higher in the crosses like AUDNZD. Still, the AUDUSD pair has quite a hole to dig itself out of after the long slide from above 0.7500. The first important resistance is perhaps 0.7200-7250 if the 0.7100 area prior low can’t hold back the rally.
Crude oil (OILUKFEB22 & OILUSJAN21) trades higher on optimism the omicron virus may not have the negative impact on mobility and demand as initial feared. Speculators cut bullish oil bets to a one-year low in the week to November 30, and the slimming of positions has left them in a better position to respond to changes in the technical outlook, such as yesterday’s supportive break back above the 200-DMA on both WTI and Brent. China’s oil imports rose 14% in November after refineries were allocated new quotas. Bids for Bidens first SPR tranche was submitted yesterday with the result being announced on December 14. EIA’s monthly Short-Term Energy Outlook on tap today.
Arabica coffee (COFFEENYMAR22) reached a fresh decade high at $2.5085/lb yesterday on continued worries over crop damages in both Brazil and Columbia, the world's top suppliers of the quality bean. Following half a decade of rangebound and weak price action, the commodity has almost doubled this year on track to record its best year since 1994. Prices have surged after the worst drought and frosts in decades decimated Brazilian crops and yield potential for at least two more seasons, and now the fields both in Brazil and Columbia are getting too much rain.
US Treasuries (IEF, TLT). The yield curve bear steepened slightly on Monday with 10-year yields rising 10bps to 1.43%. To foster this trend was the news that omicron is not increasing hospitalizations in South Africa and that China has cut the RRR supporting growth. The move shows how dependent long-term yields are on Covid news and growth expectations, highlighting that as soon covid distortions are eased, long-term yields will rise. However, as winter and the flu season is looming it is safe to expect the yield curve to continue to bear flatten as the Fed becomes more hawkish. Today, the US Treasury sells 3-year notes, and we expect it to go well, as the front part of the yield curve trades rich compared to the long term.
What is going on?
US announces diplomatic boycott of Winter Olympics in Beijing in February, citing concerns about “crimes against humanity” and other human rights issues. The diplomatic boycott only means US government officials will not attend, with athletes free to do so. The US House of Representatives will look at legislation this week on sanctioning China for its treatment of Uyghurs.
China moves to signal support for its economy. After a meeting of the CCP’s Politburo, new measures are thought to include a move to ease restrictions on real estate and a promise to stabilize the economy next year.
The Reserve Bank of Australia stays on its dovish message, but says omicron unlikely to derail the recovery. No real change in message from the RBA, which says it will keep rates at 0.1% until inflation is within the 2-3% target range, but sounded optimistic in predicting that the omicron variant isn’t expected to “derail the recovery”. As the RBA has also firmly focused on wage growth as an important inflationary catalyst, so the expression that "A further pick-up in wages growth is expected as the labour market tightens” also looks optimistic and likely helped AUD get a boost (previous language said wage growth was expected to rise “gradually”. The RBA continues to guide that February will bring a decision on whether to reduce QE purchases of Australian government bonds.
Tesla briefly dips into bear market on SEC probe. The news flow has recently been negative as Elon Musk has sold shares to fund tax liabilities related to recent exercised stock options. The EV-maker has also been hit by a large recall and yesterday the SEC said that it had opened a probe into claims on solar panel defects. After being down 6% yesterday at the lows the stock rebounded and recouped the losses closing above 1,000.
What are we watching next?
US President Biden and Russian President Putin to meet today amid the recent build-up of Russian troops on the Ukrainian border, and now with the US and European allies said to be considering sanctions against Russia’s financial system should Russian invade, including against Russian banks and their ability to transact foreign exchange, as well as possibly limiting investment in Russian debt and even preventing Russian access to the international SWIFT payment system, said to the ultimate option.
This week’s earnings: The earnings season is running on fumes with few important earnings left to watch. The Q3 earnings season has shown that US equities remain the strongest part of the market driven by its high growth technology sector. Today’s earnings release to watch is AutoZone with FY22 Q1 (ending 30 November) revenue growth expected at 7% y/y and lower operating margin.
Tuesday: SentinelOne, AutoZone, Ashtead Group
Wednesday: Huali Industrial Group, GalaxyCore, Kabel Deutschland, Dollarama, Brown-Forman, UiPath, GameStop, RH, Campbell Soup
Thursday: Sekisui House, Hormel Foods, Costco Wholesale, Oracle, Broadcom, Lululemon Athletica, Chewy, Vail Resorts
Friday: Carl Zeiss Meditec
Economic calendar highlights for today (times GMT)
0900 – Norway Nov. Region Survey
1000 – Germany Dec. ZEW Survey
1000 – Euro Zone Dec. ZEW Survey
1330 – US Oct. Trade Balance
1330 – Canada Oct. International Merchandise Trade
1500 – Canada Nov. Ivey PMI
1700 – EIA's Short-Term Energy Outlook (STEO)
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