Summary: A weak session around the world for equities as an attempt yesterday in the US to rally back toward recent highs was beaten back and the major averages closed sharply lower for the second straight session, with the mood staying downbeat in the Asian session overnight. Crude oil prices posted new highs for the cycle yesterday though prices pulled back late.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities are continuning lower with Nasdaq 100 futures sitting around the 14,630 level in early European trading. The growth outlook is increasingly getting worse due to the energy crisis putting upward pressure on inflation and interest rates. The VIX futures curve is still in contango, but if it flips to backwardation on this new leg down, then the selloff could quickly turn ugly. S&P 500 futures are also headed lower with the 4,300 level being the next obvious major support level.
Hang Seng (HSI.I) - the rebound in Chinese equities is reversing as the flooding of a key mining region is causing coal prices to rise for the second straight session. Hang Seng futures are down 1.5% and the growth outlook is deteriorating due to galloping energy prices as factories are getting temporarily closed to save energy. If Hang Seng futures are closing yesterday’s rebound the next price level to watch is around the 24,500 level.
GBPUSD and EURGBP – sterling has been receiving the maximum conceivable support recently from Bank of England expectations, as 2-year rates in the UK have vaulted over 20 basis points over the last week, with a strong surge yesterday after weekend comments. Some sterling bears may argue that higher rates will crash the UK economy. Yesterday seemed to show that sterling remains vulnerable when general risk sentiment is on the defensive. GBPUSD was pushed back lower after poking to new local highs and the upper reaches of the 1.3600-50 resistance. Likewise, EURGBP pulled off the lows yesterday after recently dipping into the last bit of range since Brexit below 0.8500. The technical situation remains pivotal for sterling pairs.
USDJPY – JPY crosses ripped higher as the double whammy of higher yields and higher energy prices weighed on the JPY and after the key USDJPY pair rose above the recent 112.00 range highs. The action took the pair has high as 113.50 as the chart area toward 114.50 has been opened up on this move. A test of that level and beyond would likely require a further rise in US long treasury yields, as we watch the 10-year US benchmark yield and whether the 2021 high near 1.75% falls.
Crude oil (OILUKDEC21 & OILUSNOV21) pulled back late yesterday after posting new highs for the cycle, as a key driver of late has been substitution on soaring prices/short supplies of coal and natural gas. The key European natural gas contract for 1-month delivery closed yesterday near the lows of the three day range, but at 84 EUR/MWh remains more than twice the multi-year highs prior to 2021 below 30.0. This price will need to fall considerably, and OPEC+ may need to signal further willingness to add supply to slow crude oil’s ascent.
US treasuries. A key couple of days ahead for US treasuries, not only as we have reached new highs in yield in the belly of the curve, but with a key sentiment test ahead in the form of the US September CPI release tomorrow, as well as the latest FOMC minutes. For the 5-year US benchmark yield, the focus is on whether the move above 1.00%, while the 10-year benchmark is at local highs, but still below the cycle highs from the end of Q1 near 1.75%.
What is going on?
Thermal coal prices in China reach a new record after flooding affected a second key mining region, frustrating efforts to boost production and rebuild supplies ahead of winter. Coal futures in China traded at CNY 1,680/ton as of this writing versus about CNY 1,100 about a week ago and versus the range of CNY 470-770 in the 2017-2020 time frame.
Turkish lira sharply lower on Turkish president Erdogan threats against Syria: The USDTRY rate edged above 9.00 late yesterday after Turkish president Erdogan warned of a confrontation with perceived threats inside Syria “either through forces that are active there, or by our own means”.
Irish border issue remains contentious for EU And UK – as the two sides face off over the Northern Ireland Protocol that was agreed prior to Brexit but that the UK now finds unacceptable. The UK side wants to reform the arrangement, especially the oversight of the EU’s top court, and is threatening a destabilization if the agreement isn’t changed.
Australia: Sydney lockdown ends after 107 days, while the latest Australia September NAB Business survey showed conditions lower at 5 vs. 14 in August, though confidence rose to 13 from –6, the highest level in four months. AUDUSD has surged well above the important tactical level around 0.7300 - next major focus there on the pivot high from early September at 0.7478.
What are we watching next?
Next US macro data and FOMC minutes this week – after the market realized that the September jobs (and especially earnings) report wasn’t necessarily as negative as the initial headlines suggested, we have more interesting macro data from the US this week, including the latest JOLTS job openings survey that has lately shown a record number of job openings, September CPI and the FOMC minutes on Wednesday and September Retail Sales on Friday.
Earnings Watch – The Q3 earnings season starts this week with US financials taking the lead. We wrote a preview of this week’s earnings releases on Friday with a focus on Delta Air Lines, JPMorgan Chase, Bank of America, and Citigroup which are the most important earnings to move the market. Today’s focus is Fastenal which is expected to see pressure on their margin due to rising transportation and labour costs. Analysts expect Fastenal to deliver 9% revenue growth y/y in Q3 and EPS at $0.42 up 9.7% y/y.
Tuesday: Fastenal
Wednesday: Delta Air Lines, JPMorgan Chase, BlackRock, First Republic Bank
Thursday: Fast Retailing, Bank of America, Wells Fargo, Walgreens Boots Alliance, Morgan Stanley, Citigroup, UnitedHealth, US Bancorp, Progressive, Domino’s Pizza
Friday: Zijin Mining, BOC Hong Kong, PNC Financial Services, Goldman Sachs, Charles Schwab, Truist Financial
Economic calendar highlights for today (times GMT)
0900 – Germany Oct. ZEW Survey
0900 – Euro Zone Oct. ZEW Survey
1000 – US Sep. NFIB Small Business Optimism
1130-1300 – Multiple ECB speakers, including Lane and Lagarde
1400 – US Aug. JOLTS Job Openings
1515 – US Fed Vice Chair Clarida to speak with Q&A
1630 – US Fed’s Bostic (Voter) to speak on inflation
2200 – US Fed’s Barkin (Voter) to speak
2330 – Australia Oct. Westpac Consumer Confidence
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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.
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