Summary: Equity markets rose higher still in the US to close at strong new highs for the cycle, with sentiment after hours and overnight staying positive, particularly in Japan, where the Nikkei in particular posted a strong gain. Elsewhere, gold is making a bid to stay interesting by staying above 1,800 per ounce, while WTI crude oil reversed sharply yesterday from new cycle highs.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities propelled higher yesterday to new highs extending this morning with S&P 500 futures trading around the 4,567 level. The VIX Index remains close to 15 with the forward curve in steep contango suggesting very strong short-term upside sentiment. Nasdaq 100 futures are in focus today with Tesla’s big move yesterday and the positive share price reaction to Facebook earnings, and finally earnings today from Microsoft and Alphabet.
EURUSD – the EURUSD super major pulled away from resistance above 1.1650 even as risk sentiment was strong yesterday and US treasury yields eased lower across the US yield curve despite hawkish comments Friday from Fed Chair Powell. A move below 1.1600 could usher in a test of the 1.1525-area lows as we await an ECB meeting on Thursday with little anticipation of action as the December meeting is seen as more critical (coming after a virtual conference in November and containing the latest economic forecasts).
AUDUSD – the AUDUSD pair has traded up into the key 0.7500-0.7600 area that is the dividing line between a structurally rangebound to bearish chart to one that is rangebound-to-bullish as the old range from the first part of this year was firmly above 0.7600 until the day after the June 16 FOMC meeting. As noted below, Australia is set to release its Q3 CPI tonight, which could trigger significant volatility on a surprise in either direction as the market is already front-running a change of policy guidance to the hawkish side from the RBA.
US natural gas (NATGASUSNOV21), notoriously volatile as we enter the extraction season, surged back above $6/therm yesterday. The 14% rally since Friday’s close was driven by forecasts for cooler early November weather in the Midwest and East at a time when global demand for LNG exports is expected to remain strong given the extreme price difference between the US and the rest of the world. The spread between the March 22 and April 22 contracts, also called the widowmaker, trades $1.49. The 25% difference in price reflects the markets expectations for how tight the gas market will be at the end of the winter.
Crude oil (OILUKDEC21 & OILUSDEC21) ran into resistance yesterday after Brent missed the 2018 high at $86.75 by 4 cents. The price action in WTI meanwhile left the market with a technical shooting star formation which could indicate a short-term peak. Today’s price action will help determine whether this short-term deterioration, potentially driven by the prospect for renewed virus-related restrictions on movements and fresh nuclear talks between Iran and the EU are strong enough to offset strong support from tightening markets, dwindling US stocks, and OPEC+ sticking to its cautious production increase approach. Focus on pricing structures to determine whether
Gold (XAUUSD) trades above $1800, while silver (XAGUSD) trades near a double top at $24.86. Broader market optimism as seen through surging stocks and a stronger dollar has so far only slowed down precious metals recent advance as these developments have been more than offset by a fresh drop in US real yields as inflation expectations (breakeven yields) continue to rise. US ten-year real yields trade at a five-week low at –1.03 percent. Upside levels to watch being $1814 followed by the big one at $1835 while support is centered on the 200-DMA at $1793.
What is going on?
Facebook outlook worse than expected – Q3 earnings were better than feared although operating margin came in lower than expected and pricing power is easing somewhat across Facebook’s platforms. The company is also reducing CAPEX spending for this fiscal year in a sign that the short-term outlook has worsened. Q4 revenue guidance is $31.5-34bn vs est. $34.8bn. On the conference call the CEO Mark Zuckerberg said that he sees a coordinated effort against Facebook and that the company is getting stiff competition from Snapchat while not mentioning TikTok.
Tesla market value surges above $1trn on Hertz order – the rental company Hertz announced yesterday a deal to acquire 100,000 EVs from Tesla in a deal worth $4.2bn. The announcement pushes shares of Hertz and Tesla higher with the latter surpassing the $1trn market value for the first time helping extend the S&P 500 to new all-time highs. At the same time Panasonic, Tesla’s battery supplier outside China, announced a new battery designed to meet the future demand of EVs outside Tesla’s standard models which will feature the cheaper and less energy-dense LFP batteries from Chinese CATL. Panasonic revealed a new 4680 cell battery which is the one Musk talked about on the famous “Battery Day” revealing a path to much cheaper batteries and cars in the future.
New Zealand RBNZ’s Governor warns of faster global inflation - after the RBNZ released a report on climate change, RBNZ chief Adrian Orr linked climate change with the risk of a prolonged period of global inflation, one that would require a policy response from central banks as price shocks in food production in particular are a risk.
BoE dove Tenreyro says the Bank of England can wait on hiking rates – in a long speech on trade, supply chains and monetary policy, BoE MPC member Silvana Tenreyro said that the Bank of England should wait before hiking the policy rate as inflationary pressures are likely to ease, with most inflationary pressures coming from supply chain disruptions that are likely to eventually ease, with the risk that moving too quickly to tighten policy could tilt the risks back toward disinflation. Sterling didn’t seem too impressed with the speech, as EURGBP slipped back toward the cycle lows even as bets have eased significantly over the past week on the odds of a hike at next Thursday’s BoE meeting – currently priced at just over 50/50 odds in favour.
Turkish lira recovers some of losses on Erdogan climbing down from diplomatic spat. After saying that the ambassador from ten nations, including the US, Germany and France were no longer welcome in the country after on their charge that a notable critic of the Erdogan government is being kept imprisoned on political grounds, President Erdogan retracted his position, claiming that the nations had undone their “slander” in a statement. This helped the lira recover sharply yesterday, though it still trades far weaker than a week ago after last Thursday’s surprisingly large rate cut from the Central Bank of Turkey.
What are we watching next?
Australia Q3 CPI release tonight - and whether this triggers a reassessment of the potential for the RBA to hike rates far before its guidance has suggested, with the anticipated 2024 time frame looking so far out of touch with the outlook elsewhere that the market has already priced in lift-off from the RBA for Q3 of next year.
UK fall budget announcement tomorrow – as Uk Chancellor of the Exchequer Rishi Sunak will announce plans for the coming six months. The budget is thought to include modest additional targeted support for the most vulnerable households affected by the energy price crunch and areas of the economy affected by the pandemic, as well as addressing longer term initiatives linked to the climate and CO2 reduction, the Conservative government’s “levelling up” programme. But perhaps most importantly, how the government plans to float the idea that it can return to fiscal sustainability. Austerity and taxation plans will be watched closely for the forward impact on UK growth and the currency, with fiscal austerity classically currency-negative.
Bank of Canada meeting tomorrow - the meeting is not expected to bring any move from the Bank of Canada, as the guidance at the previous meeting repeated the July policy assessment, which anticipated that the Canadian economy still has significant excess capacity and that the time frame for hiking rates won’t arrive until the second half of next year, with the market a bit ahead of that, pricing a hike as early as the March or April meeting. The meeting this week will produce the latest update to the Bank’s outlook for the economy and inflation as well as a new policy statement.
Watching German coalition shaping up for shape of the future of Europe – the German “stoplight” coalition talks and who will become finance minister will an important next step for Europe, especially if the liberal LDP party’s Lindner is appointed to the post, as this is likely a choice that will more quickly lead the EU back into trouble on the lack of fiscal largesse, fiscal coordination and more generous solutions to dealing with legacy EU sovereign debt. The coalition is a rather awkward mix of centre-left parties that want to invest big and address inequalities (SPD and Greens) and the liberal LDP, which is fiscally conservative and tends to favour only supply-side solutions.
Earnings Watch – this is the biggest earnings week during the Q3 earnings season with all the major US technology companies reporting. Today’s key focus are on earnings from Microsoft, Alphabet, and Visa which are all heavyweights in the US equity indices. We expect strong earnings these three companies supporting the current strong sentiment in equities.
Tuesday: DSV, Nidec, Canon, Novartis, UBS Group, Microsoft, Alphabet (Google), Visa, Eli Lilly, Texas Instruments, UPS, AMD, General Electric, Raytheon Technologies, S&P Global, 3M, Twitter, Southern Copper
Wednesday: ANZ, Novozymes, Neste, BASF, Deutsche Bank, Ping An Insurance, Fanuc, Hitachi, GlaxoSmithKline, Heineken, Equinor, Iberdrola, Banco Santander, Assa Abloy, Thermo Fisher Scientific, Coca-Colam McDonald’s Service Now, Bristol-Myers Squibb, Boeing, General Motors, Ford Motor, Twilio, eBay, Spotify, Yandex, Garmin
Thursday: Anheuser-Busch, Shopify, Suncor Energy, Sanofi, Dassault Systems, TotalEnergies, PetroChina, BYD, Agricultural Bank of China, UniCredit, Sony, Keyence, Royal Dutch Shell, Lloyds Banking Group, Hexagon, Apple, Amazon, Mastercard, Comcast, Merck & Co, Linde, Starbucks, Caterpillar, Atlassian, Newmont, Volkswagen
Friday: BNP Paribas, Daimler, Merck, China Construction Bank, Bank of China, Eni, Exxon Mobil, Chevron, AbbVie, Colgate-Palmolive
Economic calendar highlights for today (times GMT)
1300 – US Aug. S&P CoreLogic Home Price Index
1400 – US Sep. New Home Sales
1400 – US Oct. Consumer Confidence
2030 – API's Weekly Crude Oil and Product Stock Report
2145 – New Zealand Sep. Trade Balance
0030 – Australia Q3 CPI
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2024: The wasted year
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.
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.
