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Market Quick Take - January 13, 2022
Summary: Markets tried to extend their recent rally yesterday even as the US reported the hottest inflation levels in nearly forty years, though much of the gains yesterday were lost by the closing bell, and the mood was generally downbeat in Asia. Despite the hot US CPI data, the US dollar rolled over sharply and EURUSD finally broke out of the range that had capped the action since late November. And with US yields remaining tame, gold jumped toward an important resistance level.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Us technology stocks rallied yesterday led by e-commerce stocks with Nasdaq 100 futures touching 16,000 before retreating lower but ending the session higher. The US 10-year yield has stabilized and did not react to the US CPI figure December showing the highest inflation in 39 years as many market participants are still seeing signs that the inflation rate will begin to trend down again, but with the main question being to what level. US equities are now firmly in a trading range, and we believe it will require significant surprises on earnings (either way) or a breakout in the US 10-year yield to take US equities out of the trading range.
EURUSD - burst through very well-defined resistance at 1.1386 yesterday that had capped the action for the pair since late November as the US dollar weakened sharply in the wake of the December CPI release yesterday, clearly a sign that the bar is high for Fed hawkishness to support the US dollar. The next key resistance area looks like 1.1500-25, the prior range lows before a significant meltdown in November – ironically on a hot US CPI release that triggered a major reassessment of the potential for the Fed to hike more this year.
USDJPY – the pair reversed hard back below 115.00 in what so far looks like a bearish reversal and one that is likely to deepen as it appears difficult to take US yields higher at the long end of the curve after yesterday’s US CPI inflation number failed to boost US yields or the US dollar. If risk sentiment rolls over as well, the JPY could suddenly prove a strong performer across the board. For now, the 115.00 area is now resistance, and the next downside area of note is toward 112.50, near the range lows after the omicron variant outbreak.
Crude oil (OILUKMAR22 & OILUSFEB22) up almost ten percent since the start of the year on tightening supply and temporary disruptions may see some consolidation with data showing road traffic thinning across Asia as the fast-spreading omicron variant sweeps through the region, potentially hurting demand. Special focus on China with its zero-tolerance approach in dealing with outbreaks. Underlying, and longer-term fundamentals, however, remains supportive with an SP Global Platts survey showing 14 out of 18 OPEC+ members struggled to lift production in December, thereby leaving total output some 1.1 million barrels a day below target. Also supportive was the EIA weekly stock report showing a drop in US crude stockpiles to the lowest level since 2018.
Gold (XAUUSD) trades near key resistance in the $1830 area following another day of gains in response to a dollar breaking lower and after US inflation hit 7%, the highest in decades (see above and below comments). The recovery continues without support from real yields, which following last week’s 30 basis point surge remains elevated near a 7-month high. We have recently argued that with four 2022 rate hikes starting from March, and 7% CPI already priced in, the yellow metal has room for an upside surprise. Not least considering some emerging tailwind from silver (XAGUSD) which responded positively to yesterday’s rise in copper prices. In gold a break above $1830 could see it target $1850 ahead of the November peak at $1877.
Iron ore (SCOF2) continues to rise, up 1.7% overnight to a 3-month high at $133.50/t, a weekly gain of 4.9%. The rally was stoked by China announcing or starting 3 trillion yuan ($471 billion) in infrastructure projects and Brazilian iron ore giant, Vale, halting some operations due to heavy rains in a region that represents 40% of Vale’s output. The news helped send the ASX iron ore giants BHP:xlon and RIO:xlon up by about 4%. If iron ore closes above $133, the technical outlook may point to an extension towards to $150-160/t area, further supporting iron ore heavyweights.
US treasuries (IEF, TLT). Yesterday’s market reaction to the CPI readings and 10-year US Treasury auction show that it’s divided between higher rates and an economic slowdown. Yields dropped to 1.71% following the highest CPI read since 1982, indicating that the Federal Reserve might be committing a policy mistake. However, the 10-year auction was not as solid as yesterday’s 3-year note sales despite offering the highest yield since January 2020. It tailed 0.4bps and indirect bidders dropped to 65.5% from 70.5% in the past six auction average. It’s hard to predict how today’s 30-year auction will go, but it’s fair to assume that the long part of the yield curve will continue to remain well bid due to growth concerns. The rise in yields is likely to continue throughout the year, but at a slower pace than what we saw last week.
German Bunds (IS0L). European sovereigns rose together with US Treasury yields yesterday. However, 10-year yields remain close to 0%. The 30-year Bund auction was priced with a yield of 0.28%, and a bid-to-cover of 1.12x after the DMO closed the auction without selling the full tendered amount. It shows that demand for the safe haven continues to lag at current yield levels and that, as the ECB halves its stimulus this year, less support for Bunds will contribute to higher yields particularly after the PEPP ends in March.
What is going on?
US December CPI registers highest headline inflation in nearly forty years. The year-on-year headline figure was out at 7.0% as expected and vs. 6.8% in November, while the Ex. Food and Energy measure topped expectations by 0.1% at 5.5% year-on-year versus 4.9% in November. Both measures were higher than expected on a month-on-month basis at +0.5%/+0.6% vs. +0.4%/+0.5% expected, respectively.
US St. Louis Fed President and FOMC voter Bullard sees four Fed rate hikes this year and said in comments yesterday that it is important for the Fed to start hiking “sooner rather than later”. The market has priced a Fed funds rate of just under 1.00% through the December meeting of this year, so approximately three and a half hikes.
The industrial metal sector has, just like crude oil, has started 2022 with strong gains led by nickel and aluminum, and following months of sideways trading, copper (COPPERUSMAR22) is also breaking higher, and if successful in defending the breakout above $4.47 per pound, only $4.56, the 61.8% retracement of the October to December selloff stands in the way for a renewed upside attempt, initially towards the October high at $4.82/lb. The prospects for rising electrical vehicle demand, tight supplies and signs China are stepping up its policy response to a slowing economy have all helped reduce some of the macro risks that has weighed on the market in recent months, especially those stemming from China’s beleaguered property sector.
Chr Hansen reports better than expected Q1 earnings. The Danish-based producer of cultures and enzymes reports Q1 (ending 30 November) revenue of €268mn vs est. €257mn and adjusted EBIT of € 65mn vs est. €64mn, with the company seeing organic revenue growth of 5-8% in the current fiscal year.
Fast Retailing (parent company of Uniqlo) operating profit in Q1 beats estimates. Despite lower revenue and foot traffic due to Omicron the company surpassed expectations on operating profit, but it was not enough to please investors sending shares 2% lower in the Japanese session.
Jefferies fixed-income trading disappoints in Q4. The fixed-income trading revenue tumbled 50% due to lower volumes and subdued volatility. The result sent shares 10% lower and shares of Goldman Sachs and Morgan Stanley were also lower.
Hungary widens price controls on basic goods ahead of early April elections. Prime Minister Orban had previously ordered a cap on fuel prices and mortgage rates, but yesterday added caps on prices for basic foods, including sugar, flour, chicken breast, pork leg and some milk. This move comes ahead of elections in which a united opposition is polling only a few points below with Orban’s Fidesz party. The April 3 parliamentary election will include a referendum on LGBTQ rights.
What are we watching next?
US Fed Vice Chair nominee Lael Brainard to testify in hearings before US Senate today. Economist Lael Brainard has been on the Board of Governors at the Fed since 2014, heading four committees, including those for financial stability and consumer and community affairs. Long seen as one of the more dovish members of the Fed, she surprised many in highlighting inflation as the most significant challenge the Fed faces in her acceptance speech when nominated for the position of Vice Chair. The emphasis on fighting inflation is also at the top of her prepared remarks that she will deliver later today: “We are seeing the strongest rebound in growth and decline in unemployment of any recovery in the past five decades.....But inflation is too high and working people around the country are concerned about how far their paychecks will go.” She will replace Vice Chair Richard Clarida, who is retiring a week early in somewhat disgraceful fashion on accusations of inappropriate trading ahead of key Fed policy moves in 2020.
Earnings Watch – today’s earnings focus is on Delta Air Lines which is expected to deliver Q4 revenue of $8.5bn up 113% y/y and EBITDA of $990mn showing a healthy EBITDA margin of 10.5% despite Omicron impacting travelling in the US.
Thursday: Fast Retailing, IHS Markit, Delta Air Lines, Seven & I, Chr Hansen
Friday: Wells Fargo, BlackRock, First Republic Bank, JPMorgan Chase, Citigroup
Economic calendar highlights for today (times GMT)
0845 – UK Bank of England’s Mann to speak
1030 – ECB's Guindos to speak
1330 – US Dec. PPI
1330 – US Weekly Initial Jobless Claims
1500 – US Fed's Lael Brainard in nomination hearing for position as Fed Vice Chair
1530 – US Weekly Natural Gas Storage Change
1700 – US Fed’s Barkin (non-voter) to speak
1800 – US Fed’s Evans (non-voter) to speak
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