What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities closed near the all-time highs, in the case of the S&P 500 index, where the 4,700 area is the obvious focus for resistance, while the Nasdaq 100 closed a bit further below its all-time highs, perhaps as longer treasury yields edging back higher are acting as a slight headwind there, one that could grow if new cycle highs in yields are realized in coming days.
EURUSD – the euro tumbled aggressively lower against the US dollar yesterday, with euro weakness remaining the dominant driver, with USD strength only contributing modestly to the situation. A new spike higher in natural gas prices (see more below) is likely at the root of the single currency performing so poorly (together with peripheral currencies to Europe, including SEK, HUF and PLN) as investors fear the winter ahead and the risk of power disruptions and an economic train wreck if prices don’t recede. The opening of the Nord Stream 2 pipeline and relations with Russia, whether over the situation in Ukraine and on the border between Poland and Belarus all appear to be part of dilemma facing Europe. As well, a fresh Covid wave is set to limit activity in some countries in the EU.
BTCUSD – Bitcoin and most other cryptocurrencies remain weak, with Bitcoin trading below 60k this morning after dipping below 59k overnight. In overnight news, India announced it is banning crypto for use in payments, while planning to regulate it as an asset.
USDJPY – the stronger US dollar was felt more broadly yesterday, especially versus the JPY, where the focus is clearly on the fresh rise in longer US treasury yields, as the 10-year Treasury benchmark yield, for example, creeps back toward the cycle high of 1.75%. The action has taken the USDJPY pair back to the cusp of 115.00, which hasn’t traded since. A spill over higher in US yields would likely be needed to sustain a significant move above this 115.00 level. Today sees a US 20-year Treasury auction (more below).
Gold’s attempt to extend its rally above $1870 failed yesterday with the market registering a lower low for the first time in eight trading sessions. Continued dollar strength, rising real yields and stronger than expected US economic data helped send the market lower. Speculators loaded up on gold futures ahead of last week’s CPI shocker, and the subsequent break higher is likely to have increased the net long further from the 10-month high reached in the week to November 9. One cautionary note about gold’s ability to move higher has been the lack of buying from ETF investors with less than 0.5 tons added during the past week. Key area of support remains $1830-35.
Crude oil (OILUKJAN22 & OILUSDEC21) remains stuck with mixed signals creating some uncertainty. The downside risk is currently driven by the threat of US and potentially also Chinese measures to curb prices while the IEA in its monthly report, just like EIA last week, have started to talk about the tight market conditions starting to ease next year as supply catches up with strong demand. Also renewed Covid flareups deserves some attention given the short-term risk to mobility and demand, while on the other hand, surging EU and Asian gas prices (see below) will continue to support the gas-to-oil switch. Today’s EIA report is expected to show rising crude stocks and another drop in gasoline stocks. Also focus on production and how much oil left SPR on top of the 12 million barrels already taken out during the past couple of months.
US Treasuries (IEF, TLT). US T-Bills yields with maturity at the end of December soared as US Treasury secretary Janet Yellen said that cash won’t last long past December 3. Today’s 20-year bond auction will be in focus. There is the chance for an ugly 20-year auction driving yields higher in the long part of the yield curve, as the 20y tenor is far less popular than last week’s 10 and 30-years issuances. Adding more pressure, Baxter International sells nearly $8bn bonds in eight tranches. Ten-year yields broke above 1.60%, entering a fast area which could see them either rising quickly towards 1.70% or dropping again below 1.60%. We expect 10-year yields to continue to rise toward 2% till the end of the year, driven by high inflationary pressures, and recovering job numbers.
UK Gilts (IGLT). UK RPI rose to the highest in 30 years hitting 6%. Adding to yesterday’s strong job numbers, it’s a clear bearish sign for Gilts. Ten-year Gilt yields broke above their 50 days MA and they are trending higher towards their next resistance level at 1.04%. Yet, we cannot forget that the market is pricing four interest rate hikes for 2022, and any setback from the rate-hiking narrative could Compress the rise in yields.
German Bunds (IS0L). The Bund yield curve bear steepened the most since November 4 yesterday. We might see the 5s30s continuing to steepen after today’s 30-year Bund auction, which could help to lift also 10-year yields.
What is going on?
China will ease funding limitations for property developers - which will now be able to resume issuing asset-backed securities after a three-month freeze on the practice. Limits on the size of debt issuance will also be lifted for “high quality” lenders.
US Oct. Retail Sales come in strong, with the headline up a robust 1.7% month-on-month versus 1.4% expected and the core, ex Auto and Gas number up an impressive 1.4% vs. 0.7% expected. One factor that could be bringing forward some of the normal holiday spending in November and December may be the widespread knowledge that supply chain snarls could mean supplies of popular products may be short. Whether this affects the overall holiday season won’t be known until the November and December data cycles.
Rivian, the EV vehicle maker that has yet to sell a single vehicle, now worth more than Volkswagen. Rivian is backed by Amazon and Ford. The Rivian share price rose 15% yesterday, with the company now valued at more than $150 billion.
Walmart and Home Depot reported earnings with very different market reactions. Walmart fell over 2% yesterday, the most since early this year, after its earnings report clearly showed pressure on margins from supply chain difficulties. Sales were stronger than expected and same store sales rose 9.2% on the prior year versus 7% expected and the company raised its profit forecast. Home Depot rose more than 5% to new all-time highs on its earnings report as it showed that it is able to pass on rising costs to customers.
What are we watching next?
Who will US President Biden nominate to head the Fed next February? This is an urgent issue hanging over the markets, with oddsmakers now slightly favouring President Biden nominating Lael Brainard over renominating Jerome Powell (his term ends in early February). One uncertainty in his doing so is the potential difficulty of having her nomination approved by the Senate. The nomination news could generate significant short-term volatility on the choice of the nominally more dovish Lael Brainard over current Fed Chair Powell, though we see little difference in the medium-longer term implications for monetary policy, and the Fed is likely to get a prominent new regulatory role either way (under Brainard or someone else if she is nominated to replace Powell).
The global gas market remains a key focus, after EU TTF benchmark gas' two-day surge to a four-week high at €99.5 ($33/MMBtu). Worries about early winter supplies rose after German regulators suspended Nord Stream 2 certification, thereby signaling another delay. The operator has been forced to set up a German subsidiary and until assets and people has been transferred to the new unit, the green light to start up will not be given. Prices of gas, power and emissions all jumped on the prospect of more coal being burned to make up a potential shortfall. Meanwhile in the US, the Henry Hub natural gas contract dropped 1% to $5.1/MMBtu on ample supply and industrial users curbing consumption.
Earnings Watch – after the two first quarters, the MSCI World lost out in Q3 to the S&P 500 in terms of EPS growth since Q3 2019, underscoring that the US equity market is still the strongest in the world. This week several major Chinese companies in the entertainment and e-commerce industries are reporting crucial earnings that can impact the direction of Chinese equities. The outstanding question remains to what degree Chinese regulation is impacting company earnings on top of the slowing housing market. Today’s focus is on earnings from NVIDIA, on its eye-popping performance recently, in part on speculation that it will drive the graphics for the coming "Metaverse". More big US retail names are also reporting, like Target and Lowe’s, the hardware/DIY chain
Wednesday: Experian, Nibe Industrier, Nvidia, Cisco, Lowe’s, Target, TJX, Baidu, Copart, Bilibili
Thursday: National Grid, Alibaba, Intuit, Applied Materials, JD.com, Workday, Palo Alto Networks, Ross Stores, Farfetch
Economic calendar highlights for today (times GMT)
0800 - Norway Norges Bank Governor Olsen to speak
0800 – South Africa CPI
0900 – ECB to publish Financial Stability Review
1000 – Euro Zone Oct. Final CPI
1330 – US Oct. Housing Starts and Building Permits
1330 – Canada Oct. CPI
1330 – Canada Oct. Teranet/National Bank Home Price Index
1400 – UK Bank of England’s Mann to speak
1400 – ECB's Schnabel to speak
1410 – US Fed’s William (voter) to speak
1530 – US Weekly Crude Oil and Product Inventories
1620 – US Fed’s Mester (voter in 2022) to speak
1740 – US Fed’s Ddaly (voter) to speak
2105 – US Fed’s Evans (non-voter) to speak
2110 – US Fed’s Bostic (voter) to speak
0200 – New Zealand Q4 2-year inflation expectation survey
0400 – Australia RBA’s Ellis to speak
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