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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures fell along with Asian stocks on Friday, thereby extending Thursday late sell off which saw the tech-heavy Nasdaq cut straight through 15k and its 200-day moving average, a technical indicator that has not been broken since April 2020. Slower subscriber growth then saw Netflix slump 20% in after-hours, thereby setting the tone for another nervous session in Asia. However, with risk appetite fading, we may see short covering in US bonds and profit taking in crude oil help provide a bit of comfort to the stock market. A nervous Friday session awaits ahead of next week when the earnings season will gather momentum.
Hang Seng (HK50.I). Hong Kong’s market took a breather, losing 0.5% on Friday, but remained close to a two-month high. China is expecting further rate cuts, which will support Hong Kong’s market, and China’s property stocks, as well as infrastructure and industrial metals, and commodity stocks globally for that matter. On Friday, Alibaba fell over 4%, while HSBC continued to fall from the highs of its cycle and appears to be entering a technical downtrend after China’s bank cut rates.
Crude oil (OILUSMAR22 & OILUKMAR22) trades softer after hitting a seven-year high earlier this week. As warned in recent updates, the market had started to look stretched with several indicators ‘screaming’ overbought. What triggered the weakness, apart from the general loss of risk appetite, was a weekly US inventory report showing the first increase in crude stocks in eight weeks and comments from the White House about accelerating the release of strategic crude oil reserves. Underlying fundamentals remain strong as confirmed by the IEA in their monthly report on Wednesday, but a period of consolidation was long overdue. Brent has several support levels to choose from, with the first couple found at $85.50 and $83.
Gold (XAUUSD) is heading for a second straight weekly gain as it continues to find bids after above $1830. Short covering in the bond market on rising risk adversity in the stock market together with geo-political concerns in Europe supporting the market for now. During the coming quarters we may find additional support for precious metals from the risk a of policy mistake from the US Federal Reserve slamming the brakes too hard on growth. The star performers across the commodity sector this week, however, are silver (XAGUSD) and platinum (XPTUSD), both rising by more than 7% as they play catch up with gold after weeks of underperformance. Gold will now be looking for support at $1830 and resistance at $1850 followed by the November peak at $1877.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) took a big hit overnight as most of the major cryptocurrencies declined by 8-10% overnight, on the night after the Russian central bank’s proposal on a ban on the use and mining of cryptocurrencies on Russian territory. Russia is among top three of the biggest global miners of bitcoin.
US Treasuries (IEF, TLT). Although sentiment in nominal US Treasuries improved following Wednesday’s 20-year bond auction, yesterday’s 10-year TIPS auction gave a different picture over investors’ appetite for inflation protection securities. The auction tailed by 2.6bps, the bid-to-cover was the lowest since July 2020 and indirect bidders were down to 69.3%, the lowest since last May. It shows that investors are not willing to buy inflation protection securities as the Federal Reserve prepares to hike interest rates. Indeed, the more aggressive the Fed is going to be, the faster the acceleration in real rates. Since the beginning of the year 10-year TIPS yields rose from -1% to -0.6%. We expect volatility in risky assets to pick up as real rates break above -0,5%.
European Sovereigns (IS0L, BTP10). Ten-year German bund yields remain negative, but close to 0%. Sentiment in European sovereign bonds improved as Lagarde, and De Cos rejected the possibility of a rate hike this year. To benefit the most, was Italian BTPS, which yields dropped by 4bps on the day. However, the ECB Minutes show that central bank’s officials remain divided over inflation, and that they remain committed to normalizing monetary policy. Today Lagarde will speak again, which might add some more color to this context. Yet, we remain bearish European sovereigns, as a combination of a tight correlation with US Treasuries, less ECB stimulus and more German fiscal spending will move yield higher, sparking volatility in those sovereigns with a high beta such as Italy.
Emerging market sovereigns (PCY:arcx). Sovereign bonds of the weaker emerging markets begin to tumble as refinancing of their Eurodollar bonds becomes more difficult amid rising US Treasury yields. Ghana is an example: the spread of its 2027 Eurodollar bonds widened to 1,000bps as investors have been dumping the credit since the beginning of the year. Emerging markets have issued substantial amounts of Eurodollar debt in the past few years, and we expect Ghana not to be an isolated example.
What is going on?
Netflix (NFLX:xnas) slumped as much as 20% to $404.5 in after-hours trading after forecasts for new customers failed to meet market expectations. The company added 50% fewer customers in 2021 compared with the record year prior, and investors are bracing for slower growth ahead with the company expecting to sign up 2.5 million subscribers this quarter, thereby missing Wall Street’s projection for 6.26 million new subscribers.
Peleton (PTON:xnas) another Covid-19 lockdown darling slumped 24% on Thursday on rumors – later denied by its CEO - that the company was halting production of bikes and Treads. The stock has now lost 85% since hitting an all-time high last January.
Rio Tinto (RIO) Serbia vetoed Rio Tinto building a US$2.4 billion lithium mine in Western Serbia, which would have been Europe’s biggest lithium source, powering 1 million electric cars a year. Serbia revoked Rio’s lithium licenses following large scale protests on the potential environmental impacts to the agriculture region. Despite Rio making most of its money from Iron Ore, RIO shares fell over 4% today in Sydney, and sentiment soured in the entire ASX lithium sector as the news highlighted how hard it is to get a lithium project going (despite having appropriate licences). Australia’s biggest lithium miner, Pilbara Minerals hit a new record high, before falling 6%. The lithium benchmark, ETF ACDC fell 1.1%.
BHP (BHP) is a step closer to trading as just one company on the ASX after shareholders voted to unite the ASX and UK listing. Subject to final court approvals, after close of trade Friday January 28, 2022, the ASX indices that include BHP (for example, S&P ASX200) will be rebalanced, so BHP’s weight of the market will grow from being about 6% to 10%. So, expect an increase in trading on the ASX as fund managers increase their holdings of BHP. Next week BHP will also stop trading in the FTSE 100 and the UK will lose its third biggest stock.
Inflation is a hot topic in the eurozone. The annual inflation rate was confirmed at a record high of 5 % in December 2021, up from 4.9 % in November. The energy component was once again the main driver behind the surge in consumer prices. The minutes from the ECB December meeting show the governing council has left the transitory camp. But their inflation forecasts are still overly optimistic in our view. The ECB’s base case scenario foresees inflation to drop below 2 % towards the end of this year. We believe the services component might become another inflation headache for the ECB. This could maintain inflation about the 2 % target longer than expected.
Mixed U.S. data. U.S. weekly jobless claims rose unexpectedly to 286,000 in the latest period from 231,000 in the prior week. The latest number was forecast to improve to 220,000. This is disappointing. This certainly reflects the impact of the Omicron variant on the economy. But this is unlikely to have a significant effect on the path of monetary policy tightening. On the bright side, manufacturing growth was firmer in the Philly Fed district in January. The headline index rose 8 points to 23.2 points versus the expected 20.0. Growth in shipments and new orders was broad-based. Hiring slightly softened. But there is nothing to worry about. Inflation stayed high and supply chains remained stretched. There is nothing new about it.
What are we watching next?
The concerns on energy consumption from cryptocurrency mining are continuously increasing as they pose a risk to the existing climate change goals. On Wednesday, the European Securities and Markets Authority (ESMA) raised concerns over the increasing energy consumption, especially in Bitcoin, which is using the energy-heavy proof-of-work mining to run the network.
Geopolitical tensions are escalating. The stock market tumbled yesterday, and investors flew to safety as news broke out that the US would allow the Baltic States to send arms to Ukraine. The more imminent a standoff with Russia becomes, the more the flight to safe havens, pulling critical support from stocks while underpinning US Treasuries valuations.
Next week’s FOMC meeting is going to be pivotal across assets. The market is pricing four interest rate hikes in 2022 with one coming into play already in March. It will be key to understanding whether the Fed is going to match market expectations or if it is leaning towards implementing rate hikes with balance sheet policies to tighten the economy. That could have an impact on the shape of the yield curve as well as market’s risk appetite.
- Today: Investor, Schlumberger, IHS Markit
Economic calendar highlights for today (times GMT)
- 0700 – UK Dec Retail Sales
- 1230 - ECB’s Lagarde speaks at a virtual panel
- 1330 – Canada Nov Retail Sales
- 1500 – Eurozone Jan Consumer Confidence
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