What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities posted an uninspiring session, closing very slightly in the black in the case of the S&P 500 and with a small drop in the Nasdaq 100. It was rather disappointing for the latter that performance was a bit dreary despite US yields dropping all along the curve, especially at the short end where Fed expectations are in operation, as US January retail sales rebounded strongly and the FOMC minutes were (unfairly?) read as benign relative to where the market has priced the Fed to move recently. The key levels remain 14,000-13,700 to the downside in the Nasdaq 100 and 4,354 in the S&P 500 index.
USDJPY and JPY crosses – yields dropped and yield curves steepened as the market has sharply lowered its expectations for where the Fed will take rates this year in recent sessions. This has helped the lowest yielders, including the Japanese yen, to firm. The 115.00 area in USDJPY, almost touched on the previous sell-off, is an interesting possible trigger zone for a capitulation lower if risk sentiment deteriorates further ahead of the weekend and beyond, something that would likely see other JPY crosses selling off even more heavily. Other interesting technical levels in major JPY crosses include the 130.00 area in EURJPY and 81.50 in AUDJPY.
AUDUSD – this pair chopping around after the Australian employment report overnight saw full-time payrolls dropping (only after a blow-out prior month gain – this is a choppy data series) and a risk-off tone capped gains in the Aussie. There is a heavy layer of overhead resistance between 0.7250 and the 0.7314 pivot high from January, followed by the 0.7350-area 200-day moving average. AUD needs a focus back on rising commodity prices and more stable to improving risk sentiment in Asia to sustain a significant rally. To the downside, a failure back through perhaps 0.7100 could bring a test of the massive 0.7000 area once again.
Crude oil (OILUSMAR22 & OILUKAPR22) tried to perk back up yesterday on the latest weekly supply data out of the US showing very low levels, but the price action has faded again into this morning in volatile price action, a possible sign of weakness, given that safe haven assets seem to be bid up again elsewhere, partially in response to the sense that Russia-Ukraine tensions have not materially changed.
Gold (XAUUSD) quickly overcame its steep correction of Tuesday with a snapback rally yesterday as the market has decided that the Russia-Ukraine tensions have not materially improved and as yields dropped, eroding recent gains in real yields. If the price can clear this 1,877 area, the next major resistance is into 1,915+, where the market topped out in the spring of last year and quite near the major 61.8% retracement level of the sell-off from the 2020 highs of 2,075.
US Treasuries (TLT, IEF) - Yesterday’s FOMC contributed to the bull-steepening of the yield curve, with 2-year yields dropping by nearly 6bps and 10-year yields ending the day flat. The minutes didn't provide additional color about the intentions of the Federal Reserve about a 50bps rate hike in March, nor about Quantitative Tapering, leaving a substantial certainty in markets. Before the minutes, the US Treasury saw solid demand at its 20-year bond sales. The auction closed to the screw, at the highest yield in the auction’s history. The focus will be on Fed’s speakers today and Friday, the majority of which are voting members this year. geopolitical tensions in Ukraine will also be in focus and may continue to compress the long part of the yield curve.
UK Gilts (IGLT) - Jobs figures and inflation data showed the BOE might need to be more aggressive in tightening the economy. Yet, yesterday the UK yield curve bull-steepened as markets pared back on rate hike expectations as inflation is still in line with the BOE’s projections. A rally in the long part of the yield curve might continue today, as geopolitical problems in Ukraine continue to cause concerns. Yet, we believe the relief in the front part of the yield curve will be short lived as the BOE will need I be more aggressive in fighting inflation.
What is going on?
US claims Russia continues to build more troops along Ukrainian border, saying that 7,000 more troops were moved into areas close to Ukraine, some as recently as yesterday. Russia has denied that it is escalating the situation or has any invasion plans. NATO general secretary Stoltenberg also said yesterday that there were no signs of a Russian pullback. Overnight, Russia-backed forces in one of the two eastern breakaway territories of Ukraine claimed that Ukrainian forces fired mortar shells in breach of the ongoing ceasefire.
FOMC minutes – Fed rate expectations for the balance of 2022 were a couple of basis points lower by this morning after last night’s FOMC minutes and have eased over 25 basis points through the December FOMC meeting (currently priced for a policy rate just above 1.60%, or about six 25 bp hikes) since the peak last Friday. The minutes failed to trigger much volatility in the market, as there was no clear new pointed language relative to how aggressively the market has priced Fed movements this year. There is a clear sense of a split among Fed members, with many extremely concerned about current inflation levels, voicing concerns about longer term inflation expectations becoming unanchored and considering the possibility that the Fed may have to remove accommodation more quickly than previously anticipated.
Extremely strong US Jan. Retail Sales came in far stronger than expected, avoiding for now any sense that consumer spending would begin trending weaker after a very weak December. The headline month-on-month increase was a robust +3.8% vs. +2.0% expected, the highest reading since the stimulus check-induced surges in 2020 and 2021, and the ex-Auto-and-Gas reading was likewise +3.8% vs. +1.0% expected. The December numbers were revised somewhat lower (to -2.5%/-3.2% versus the original –1.9%/-2.5%).
Shopify (SHOP:xnys) drops –17% on weak growth outlook – the maker of e-commerce solutions has seen its shares plunge by more than half since last November and the latest outlook from the company was weaker than expected as the end of the pandemic was seen as likely to reduce demand for the company’s products. The company continues to post strong results, as top-line grew 41% in the latest quarter and the earnings beat at $1.36/share vs. 1.26 expected, but with such high growth expectations in the price of the stock, any anticipation of a deceleration in growth can be viciously punished by the market.
Applied Materials (AMAT:xnas) reported better than expected earnings and top-line growth of 21%, beating estimates as the company struggles with its supply chains just as demand for the company’s products is strong as it is the market of foundry equipment for semiconductor production. Forward revenue estimates were slightly disappointing.
Albemarle (ALB:xnys) - a lithium producer (among other products), dropped in post-market trading yesterday after missing expectations for gross profit estimates for next year, as analysts were looking for far more, given extremely high prices for lithium. Analysts were looking for an increase in EBITDA of far more than the 65-85% increase the company forecast.
Nvidia (NVDA:xnas) reported Q4 earnings yesterday, beating analyst expectations and providing a strong outlook for Q1 2022. Nvidia’s data center business rose by 71 %, and gaming business 37 % year-on-year, and Nvidia expects easing of the company’s product supply constraints this year, especially in second half of 2022.
What are we watching next?
Last chance for Fed to surprise market today and tomorrow before March FOMC meeting? With the FOMC minutes of the January meeting out of the way, this might be the last time frame for a surprise Fed rate hike, with the timing certainly right if the Fed thinks that it needs to surprise the market after the last several sessions have seen a significant lowering (over 25 basis points) of where the Fed will take rates by the end of this year.
Russia-Ukraine headlines – where are we? The market reacted this week as if something significant in the direction of de-escalation has happened, but that doesn’t seem to be the case as noted above, and yet the market has only partially priced back in a higher level of concern. This geopolitical issue can remain the source of significant market volatility on fresh developments/headlines, especially ahead of the weekend if tensions are escalating again today or tomorrow.
Earnings Watch. Earnings season rolls on this week, with a number of interesting names set to report today. Will be interesting to focus on supply chain and inflation issues for companies like food-giant Nestle and US retail super-giant Walmart.
- Today: Wesfarmers, Telstra, Airbus, Schneider Electric, Kering, Reckitt Benckiser, Repsol, Nestle, Walmart, Southern, Palantir Technologies, Roku
- Friday: Hermes International, EDF, Allianz, Sika, Deere, Eni
Economic calendar highlights for today (times GMT)
- 0830 – Hungary One Week deposit rate announcement
- 0845 – ECB's De Cos to speak on monetary policy
- 0900 – ECB publishes economic bulletin
- 1100 – Turkey Rate Announcement
- 1330 – US Jan. Housing Starts and Building Permits
- 1330 – Canada Jan. Home Price Index
- 1330 – US Weekly Initial Jobless Claims
- 1330 – US Feb. Philadelphia Fed survey
- 1400 – ECB’s Chief Economist Lane to speak
- 1530 – US Weekly Natural Gas storage change
- 1600 – US Fed’s Bullard (voter) to speak
- 1700 – Norway Norges Bank’s Governor to speak
- 2145 – New Zealand Q4 PPI
- 2200 – US Fed’s Mester (voter) to speak
- 2330 – Japan Jan. CPI
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