What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities started where it left off in 2021 with mega caps driving price action with our mega caps basket rising 3.3% yesterday making it the best performing basket. Our travel and payments baskets were also among the best performers yesterday driven by the positive news flow on Omicron suggesting that the new variant has lower hospitalization risk compared to the Delta variant. S&P 500 futures are trading just below the 4,800 level this morning with our expectation of the index futures pushing above this key level in today’s session.
USDJPY – the long-yield sensitive USDJPY leaped higher with US Treasury yields yesterday, clearing the former highs just above 115.50 that had been posted just ahead of the announcement of the new omicron variant of covid. Even as omicron case numbers spike to incredible levels (more below) higher yields together with strong risk appetite and firm oil prices suggest the market is looking over the horizon to a post-covid spring and USDJPY will likely continue to look higher if this development deepens, possibly focusing on 120.00 or higher if the US 10-year treasury benchmark, for example, clears the cycle highs from early 2021 of around 1.75%, suddenly not far that way after that benchmark surged some 11 basis points yesterday.
Nikkei 225 (JP225.I) - Japanese equities are up 1.7% in today’s session with Nikkei 225 futures pushing through the 29,000 level, the highest level in more than a month. The 30,000 level has been the key resistance level multiple times the past year and traders will likely push towards this level if the JPY continues to weaken, and the macro news flow remains positive.
EURPLN – the Polish National Bank meets today and will announce its policy rate, with consensus expecting a 50 basis point hike to take the rate to 2.25%. The central bank was slow off the mark to hike rates late last year, but eventually moved quickly and signaled a stronger tightening regime with a 75-bp hike in early November and a follow up 50-bp hike in December. EURPLN topped above 4.70 (new 12-year high) in late November and has since turned lower, trading below 4.60 and near two-month lows ahead of today’s decision, where hawkish guidance will be important for further PLN gains after inflation reached 7.8% in November and is expected at 8.2% in December. At the same time, the EU and Poland are embroiled in a conflict over rule-of-law issues that has seen EU recovery package funds withheld from the country until the issue is resolved.
Crude oil trades steady ahead of today’s OPEC+ meeting where the group despite surging omicron cases is widely expected to raise February production by another 400k barrels per day. This after seeing the market fully recover from the November omicron scare with rising prompt spreads (backwardation) in both WTI and Brent signaling a tightening market. Speculators also seems to be reconnecting after boosting their combined crude net long by 12.2% to 454k lots in the week to December 28. Brent’s short-term range between $76.5 and $80.
Gold (XAUUSD), silver (XAGUSD) and platinum (XPTUSD) all took a tumble yesterday as yields and the dollar rose as tightening monetary policy angst became the key focus on the first trading day of the year. The weakness spread to industrial metals which in addition to the stronger dollar also had to worry about the short-term outlook for demand as corona virus cases continue to surge (see below). Gold tumbled straight back down to support around $1800 after starting the year at a six-week high, while platinum saw a 50-dollar top to bottom drop before recovering. These developments clearly highlight what’s on investors' minds as 2022 kicks off and the short-term focus now turns to the release of FOMC minutes and US payroll data later this week.
What is going on?
US yields at the long end of the yield curve surged sharply yesterday (IEF:xnas, TLT:xnas), as the US 10-year and 30-year benchmark treasury yields rose by the most in weeks, suddenly taking the 10-year yield, for example, some 11 basis points higher to 1.63% and within striking distance of the highs of October near 1.70%, with the post-pandemic outbreak high near 1.75% not much higher still. The rise suggests some degree of optimism that the economic outlook is improving on hopes that the omicron variant impact will soon ease, although some of the move could well be linked to the calendar roll to a new trading year after fixed income traders suffered traumatic whiplash late last November on the announcement of the new omicron variant.
Omicron virus case count surging wildly in many countries, but hopes abound on low health impact. The US registered one million cases in a single day yesterday, but the link between case counts and hospitalizations has diverged, suggesting that the end of this particular variant of covid, could soon be in sight as the spread will see significant herd immunity develop quickly.
Freight rates remain elevated and Maersk shares signal more pain. Global container freight prices remain elevated in the new year which will be an important price signal to understand the global supply chains and their impact on the supply side of inflation dynamics this year. Maersk shares rallied 3% yesterday suggesting that investors remain bullish on container freight prices in 2022 which will man higher logistics costs for retailers and industrial companies producing and shipping goods around the world.
Fire at ASML’s Berlin factory could extend semiconductor constraints. Some estimates put the Berlin factory fire at 10% potential cut to global lithography equipment which could extend an already troublesome supply situation in the global semiconductor industry.
What are we watching next?
Italian presidential election process starts today: will it lead to snap elections? The political calendar for the EU is heating up early this year as the Italian parliament and regional representatives are set to elect a new Italian president as outgoing president Sergio Mattarella has resigned. Most expect that current “caretaker” Prime Minister and former ECB chief Mario Draghi, who was appointed PM after the failure of the former government coalition, will win the election, with tomorrow setting the election process in motion for a date likely set for later this month. This could eventually lead to snap elections, with the right populist Brothers of Italy party polling strongly, though any new government would require a number of other parties.
Earnings Watch – today’s focus is Jefferies which is expected to deliver earnings growth of $1.31 up 154% y/y but down from prior quarter. The US based investment bank gets 83% of net revenue from investment banking and capital markets activity so it will be a good indicator of what to expect from JPMorgan Chase next week.
Tuesday: Teledyne Technologies, Jefferies Financial
Wednesday: RPM International
Thursday: Walgreens Boots Alliance, Conagra Brands, Constellation Brands
Economic calendar highlights for today (times GMT)
0745 – France Dec. Flash CPI
0855 – Germany Unemployment Change/Rate
0930 – UK Nov. Mortgage Approvals
0930 – UK Dec. Manufacturing PMI
During the day: Poland Base Rate Announcement
During the day: OPEC+ meeting
1500 – US Dec. ISM Manufacturing
1500 – US Nov. JOLTS Job Openings
1630 – US Fed’s Kashkari (non-Voter) to speak
2130 – API Weekly US Oil Stock report
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