Summary: The US equity market found its feet again yesterday, pulling itself off the lowest levels in over a month and closing approximately unchanged as traders mull whether there is more to wring out of this calendar year before capital is put to work in the New Year. The soaring JPY found resistance ahead of 130.00 in USDJPY, with higher US global yields pushing back against further upside after the big reset higher for the yen. Elsewhere, gold has pulled up to cycle highs.
S&P 500 futures rebounded yesterday from the intraday lows of 3,803 and the rebound has continued this morning with the index futures trading around the 3,867 level. Nike posted stronger than expected earnings and an optimistic outlook for the new year bolstering the view that US consumer spending is still going strong. Tesla is a key stock to watch today as shares were down 8% yesterday despite a positive session suggesting big flows are adjusting the price to the new reality of lower EV demand and demanding prices input materials for batteries.
Hong Kong and China stocks started the session firmer but fizzled out and were about flat at the time of writing. Chinese property developers continued to trade weak after recent rounds of placements and headlines in state-owned media reiterating the “housing is not for speculation” rhetoric. Tech names outperformed with Hang Seng TECH Index climbed 0.6%. In A-shares, consumption, lodging, and banking stocks gained while solar, auto and machinery underperformed.
There is some irony at work here as global yields jumped on the Bank of Japan decision to reset the yield cap on 10-year JGB’s to 0.50% yesterday, in that global yields reset higher. But if the BoJ is seen standing pat with its new policy, any further rise in yields can also serve to push back against follow-on JPY strength after the one-off reset (for now, at least.) that fell short of taking 130.00 to the downside in USDJPY before a significant bounce from yesterday’s lows. Elsewhere, the USD is mixed and not the focus, stuck in a tight range versus the euro, but with EURUSD having run out of upside momentum. Elsewhere in G10, the Aussie rallied against a weak NZD as another New Zealand confidence survey, the ANZ Consumer Confidence, slipped badly to 73.8 versus 80.7 and far and away the worst reading of the survey since its inception in 2004.
... supported by a drop in US crude stocks, data pointing to a notably drop in Russian seaborne oil shipments this month and Saudi Arabia warning that OPEC+ will remain proactive and pre-emptive in managing the global oil market. Having been vindicated in the necessity of their November production cut as demand slowed, the comment from the Saudi oil minister points to a soft floor under the market below which additional cuts could be implemented if necessary to support the price. The risk of large price swings as liquidity dries up ahead of yearend cannot be ignored with focus today on EIA’s stock report. Crude oil prices were slightly higher, with WTI futures above $76/barrel and Brent futures above $80.
... after the Bank of Japan surprised the market by revising its yield-curve-control policy. The move saw the dollar weaken sharply against the Japanese yen while an accompanying rise in bond yields played no role as a potential headwind. Silver reached an eight-month high before running into some profit taking while gold closed saw its highest close since June above $1800. The extent of the move surprised the market and may signal some trigger happy investors not waiting for the new year to get involved amid expectations for an investment metal friendly 2023.
From the Intermediate through the long-maturity Treasuries sold off on the Bank of Japan’s decision to move its cap on 10-year Japanese government yields to 0.5% from 0.25%. Large block selling came in the five-year and 10-year futures contracts. The 10-year yield jumped 10bps to 3.68%, the highest close this month. Yields on the 2-year, anchored by the Fed’s rate path, finished the session unchanged. The 2-10-year yield curve steepened by 9bps to 58bps. The housing data released on Tuesday was mixed. Housing starts shrank by 0.5% M/M, less than the -1.8% expected but housing permits were down 11.2% M/M in November, much weaker than the -2.1% consensus in the Bloomberg survey.
Tesla CEO Elon Musk promised to abide by the results of a Twitter poll to step down as the Twitter CEO, and yet the prospect of fewer distractions for Musk failed to help Tesla’s shares, which stumbled badly yesterday, also as two analysts cut their targets for the company. One could speculate that Elon Musk has engineered an escape route out of Twitter because things are deteriorating fast at Tesla and that Tesla is ultimately more important for his personal wealth and other money losing assets.
Nike reported results from FY23 Q2, that ended on Nov 30, beating analyst estimates on sales and margins. Adjusted EPS came in at $0.85, well above the $0.65 forecasted by analysts. Although inventories increased by 43% y/y, the management attributed the buildup to “abnormally low levels” resulting from supply chain disruption a year earlier. Nike’s management gave an upbeat assessment of the holiday season sales momentum. FedEx reported FY23 Q2 Adjusted EPS at $3.18, beating the $2.8 expected. The positive surprise resulted from a combination of price increases and cost cuts despite a decline in package volume. The logistics giant guided an additional $1bn of projected cost cuts in fiscal 2023.
Housing starts were mostly flat in November (minus 0.5 % month-over-month) while building permits continued to tumble (drop of 11.2 % month-over-month). Permits are now at their lowest level since June 2020. Many analysts consider that such a drop is consistent with an imminent recession. However, there are other signals showing the U.S. economy is still very resilient despite several headwinds (such as widespread inflation, tight labor market and high level of private debt). Nonetheless, we agree that the evolution of the housing market in the coming months will determine the pace of economic activity in the United States in 2023. This is the most important economic sector to monitor at the moment.
This survey of US consumer confidence tends to correlate most closely with the labor market prospects in the US historically, although the impact of the massive inflation spike this year was felt in this survey during the spring and summer months despite the strong jobs market as confidence dropped from 128.9 in late 2021 to as low as 95.3 in July, before stabilizing, perhaps on gasoline prices in the US retreating sharply after June. The November survey came in at 100.2, a four-month low, and is expected flat at 101 for the December release later today.
Today’s US earnings focus is Micron and Carnival. Analysts expect Micron to report FY23 Q1 (ending 30 November) negative revenue growth of 46% y/y and adjusted EPS of $-0.01 down from $2.10 a year ago. The memory chip industry is going a tough period with falling prices and lower demand. Carnival is still cruising the high wave of travel and leisure post the pandemic with FY23 Q4 (ending 30 November) revenue expected to increase 205% y/y but still delivering negative earnings with adjusted EPS expected at $-0.87 improving from $-1.72 a year ago.
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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.
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.
