What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures with especially Nasdaq 100 futures are charging ahead trading above the 50% retracement level based on Friday’s price action. The new Covid variant has for now made the market put monetary tightening on pause for a while until we get a better picture of the new variant and its impact. This is supporting US technology stocks as it puts less upward pressure on interest rates.
Stoxx 50 (EU50.I) - European equities were down the most on Friday logically bouncing back the most in today’s session with Stoxx 50 futures trading at the 50% retracement level of Friday’s selloff at the 4,151 level. The next big resistance level on the upside is 4,189. If the new Covid variant ends up restricting mobility and travelling we expect Europe and emerging markets to perform worse than US equities.
USDJPY and JPY crosses – The Friday meltdown in risk sentiment saw the Japanese yen rallying strongly, with a classic risk proxy pairing like the AUDJPY suffering its worst single day draw-down since the pandemic outbreak in March of 2020. While other markets tried to put on a hopeful face at the start of the week in Asia today, it is notable that the JPY strength has actually accelerated, perhaps in part as Japan is taking the remarkable step of banning all inbound travel from foreign destinations starting tomorrow. In USDJPY, we watch the important pivot low of 112.73, a fall through which could set up a challenge of the 111.50-111.00 zone that supports the trend from the lows of early 2021. Speculative positioning is quite short the JPY, so there is considerable potential fuel for an extension of this JPY rally. EURJPY has broken down through the important 128.00 area support overnight.
EURUSD – the squeeze higher in EURUSD on Friday appears linked with the market moving quickly to remove expectations of Fed rate hikes in the wake of the news of the new omicron covid variant, which improves the equation for the euro from a “yield spread” perspective. For EURUSD to trade to new cycle lows from here, we would likely either need to see a return to new highs for the cycle in Fed expectations or some new meltdown in sentiment that would reward the US dollar more as a safe haven. Resistance is perhaps 1.1350-1.1385.
Gold (XAUUSD) failed to attract a strong safe haven bid on Friday to push it through resistance at $1816. This despite multiple tailwinds emerging from the omicron-driven carnage after bond yields slumped while the dollar and the VIX jumped. Instead, a slump across industrial metals spread to silver and platinum, thereby curtailing golds potential upside. Gold trades lower today with other markets making a tentative recovery in the belief Friday’s selloff was overdone. However, until we have more details about the virus (see below) the markets will remain nervous as can be seen in fresh yen strength this Monday (see above). Four failed attempts to break below $1781, a key Fibonacci level, may also offer returning bulls some comfort.
Crude oil (OILUKJAN22 & OILUSJAN21) suffered one of its largest one-day crashes on Black Friday in response to worries the new omicron virus variant could drive renewed demand weakness caused by widespread lockdowns and travel bans. Equally importantly was probably the very bad timing with the news hitting the markets on a low liquidity day after the Thanksgiving holiday. The market traded higher in Asia as buyers concluded the selloff was overdone while also speculating OPEC+ may act to support prices when they meet on Thursday. The group may decide to postpone the January production increase or if necessary, temporary cut production into a period that was already expected to see the return of a balanced market. Ahead of the meeting and until we know more about the new strain and its associated risks, the market will remain very volatile.
US Treasuries (IEF, TLT). The omicron strain will be in the spotlight this week as well as monetary policies expectations and the non-farm payrolls on Friday. Jerome Powell’s speech tomorrow and on Wednesday will be key as the Coronavirus and CARES act will be discussed. It’s likely that rates will remain compressed across the yield curve as there continue to be uncertainties surrounding the omicron strain. Yet, we expect the Federal Reserve to stick to their hawkish agenda and accelerate the pace of tapering in December as inflation will continue to be a concern. It implies, the yield curve will continue to bear flatten, and could even invert as economic expectations dive, pinning down long-term yields. If the White House looks to add more stimulus, that would imply more bond issuance, putting further pressure in the front part of the yield curve.
German Bunds (IS0L) and Italian BTPS (BTP10). This week’s focus will be the Eurozone CPI flash numbers and news concerning Covid lockdowns and restrictions. Friday’s flight to safety provoked yields to drop across the euro area, including among sovereigns with a high beta such as Italy. The reason behind it is that German Bunds are tightly correlated to US Treasuries and that the market was anticipating more accommodative monetary policies from the ECB, which have been benefitting mostly the periphery. Investors should remain cautious. Indeed, inflation remains a big focus and could drive towards less accommodative policies rather than more.
What is going on?
Market is grappling with what to do about the omicron covid variant. The worst impact so far is from the speed with which countries are moving to halt inbound foreign travel, with many countries stopping all flights from South Africa and other countries in the region, while Japan has taken the dramatic step of halting all inbound foreign travel from tomorrow. More hopeful indications from virologists in the virus origin area are anecdotally that this variant is not particularly virulent, although others point out that too little is known about the virus’ effects on more vulnerable patients.
Weak Black Friday spending in the US, particular in-store sales. While up strongly from last year’s virus impacted activity at physical stores, US Black Friday spending in-store was down some 28% from 2019 levels and the online shopping on Friday was at $8.9 billion vs. $9.0 billion in 2019, rather disappointing totals, although some suggest that Americans have brought forward their holiday shopping this year because of widespread fears of shortages of popular products.
What are we watching next?
Whether market can quickly recover from fresh wave of virus concerns. The virus concerns triggered by the new variant were a jarring development, given the prior focus recently on inflation and central banks having to bring forward tightening plans to stave off inflationary risks. US stocks have been the quickest to try to put a brave face on the situation and there is some support for equities as rate hike expectations from the Fed have dropped sharply and long US treasury yields are also sharply lower, but it will take time to learn how transmissible and virulent this new omicron virus strain is, as well as how much damage will be done to growth and sentiment by new limitations on travel and other restrictions. We also have to recall that prior to this news, Europe was the epicenter of the latest wave of the delta variant and was already trading somewhat defensively. US President Biden is set to speak this evening on the new virus variant.
The UN FAO will publish its monthly World Food Price Index on Thursday, and another strong read is expected, although the year-on-year increase look set to ease from 31.3%. November has been another strong month for the grains sector led by wheat due to strong demand and worries about the Australian harvest. Elsewhere Arabica coffee trades near a ten-year high on increased concerns about production in Brazil. Before Friday’s carnage across markets the Bloomberg Agriculture Spot index had reached a 5 ½-year high after rallying by 40% during the past year.
Earnings Watch – earnings this week are light with the key ones to watch being Li Auto, Snowflake, Crowdstrike, Elastic, and DocuSign.
Monday: Sino Biopharmaceutical, China Gas, Acciona, Li Auto
Tuesday: Bank of Nova Scotia, Salesforce, Zscaler, NetApp, HP Enterprise
Wednesday: Trip.com, Royal Bank of Canada, National Bank of Canada, Snowflake, Synopsys, Crowdstrike, Veeva Systems, Okta, Splunk, Elastic, Five Below
Thursday: Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, Cooper Cos, Marvell Technology, DocuSign, Ulta Beauty, Asana, Dollar General, Kroger
Friday: Bank of Montreal
Economic calendar highlights for today (times GMT)
0830 – Sweden Q3 GDP
0830 – ECB's Guindos to speak
0930 – UK Oct. Mortgage Approvals
1000 – Euro Zone Nov. Confidence Surveys
1130 – ECB's Schnabel to speak
1300 – Germany Nov. Flash CPI
1330 – Canada Oct. Industrial Product Prices
1530 – US Nov. Dallas Fed Manufacturing Survey
1715 – ECB President Lagarde to speak
2000 – US Fed’s Williams (voter) to speak
2005 – US Fed Chair Powell gives opening remarks at conference
2350 – Japan Oct. Industrial Production
0030 – Australia Oct. Building Approvals
0100 – China Nov. Manufacturing and Non-manufacturing PMI0200 – Australia RBA’s Debelle to speak
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