What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
S&P 500 futures fell yesterday to close at 3,968 as investors are not following through on the momentum around the ‘peak rates’ narrative. This morning the index futures are trading higher with the 3,964 level being the key level to watch on the downside and 4,000 on the upside. Today’s macro events that can impact the equity market are US housing starts and permits, Philly Fed Business Outlook and initial jobless claims with the latter in focus given the latest mass layoffs in the technology sector.
Hong Kong’s Hang Seng (HSIX2) and China’s CSI300 (03188:xhkg)
Hong Kong and China stocks retreated for the second day in a row, with Hang Seng Index falling around 2% and CSI 300 declining 1%. Tencent (00700:xhkg) fluctuated between small gains and losses after reporting Q3 EPS beating analyst estimates but a 2% Y/Y decline in revenues, being dragged down by online gaming and advertisement. Meituan (03690:xhkg) however fell nearly 8%, following Tencent’s announcement to disburse its 17% stake in Meituan to shareholders. NetEase (0999:xhkg) tumbled 12% after US gaming company Blizzard Entertainment (ATVI:xnas) would not renew its expiring licensing agreement with NetEase. Also weighing on sentiment was the People’s Bank of China’s emphasizes on financial stability and warns against potential inflation risks in the central bank’s Q3 monetary report, as well as news reports about the temporary suspension of redemption in some investment products suffering losses from the recent rise in Chinese bond yields. In addition, new Covid cases surged to 23,132, a new high since April.
FX: GBP focus today as USD stabilizes on very strong October US Retail Sales report
Strong US data is at odds with the recent drumbeat of softer inflation numbers that have helped inspired the recent steep sell-off in the US dollar, and kept the 2-year yields and Fed rate expectations from falling any further yesterday, even if longer US yields dipped to new local lows yesterday. The USD edged higher, with the recent lows the key support for the greenback and with the currency trading more in line with risk sentiment now. The top-tier incoming data won’t arrive until the early-mid December time frame, save perhaps for the PCE data on November 30. The bigger focus today is on GBP as Chancellor Jeremy Hunt is set to deliver the Autumn Budget Statement and a chance for thje market to judge whether the UK is an attractive place to invest in addition to whether the moves ill stabilize the country’s finances as it also risks worsening the depth of the coming recession. 1.2000 appears a key in GBPUSD, while EURGBP is choppy in the 0.8700-0.8800+ range.
Crude oil (CLZ2 & LCOF3)
Crude oil remains on the defensive trading near the lowest levels this month on continued concerns about the demand outlook in the world’s two largest consumers. The US yield curve has inverted the most since the early 1980’s underscoring concerns about the risk of recession next year while China continues to battle with rising covid cases, now nearing the all-time high seen earlier this year. Both developments leading to demand growth for next year being downgraded, thereby offsetting some of the tightness the EU embargo on Russian oil will help create into early 2023. WTI will be looking for support ahead of the recent low at $82 with Brent focusing on the $90-area.
Gold trades lower as the market pauses for breath following a 170-dollar run up in prices from the November 3 low. The metal is currently dealing with mixed signals as elevated recession worries, highlighted by the most inverted yield curve in almost four decades, are being offset by the biggest increase in US retail sales in eight months, indicating Fed tightening has further to run to bring inflation under control. Demand from ETF investors – net sellers for months – picked up a bit on Wednesday, but not enough to signal a change in their behaviour, and with that in mind expect continued consolidation and potentially a recheck of support at $1735. Resistance at $1788, the 38.2% retracement of the 2022 correction and $1804, the 200-day moving average.
Copper (HGH3) and silver (XAGUSD)
Copper and silver both extended their declines following a recent strong run up in prices. Copper ran out of steam ahead of major resistance in the $4/lb area and after breaking back below $3.78 the next line of support now comes in at $3.68. Industrial metal traders are keeping a watchful eye on covid developments in China, the US yield curve signalling an increased risk of a recession next year, extreme volatility in nickel market and in copper specifically, an emerging contango indicating a market with ample supply. currently. Silver meanwhile trades back below its 200-day moving average with the first level of support in the $20.95 area.
US treasuries (TLT, IEF)
US treasuries punched to new local lows again yesterday, supported by a strong 20-year auction result, and despite the strong US Retail Sales news, with the 10-year treasury benchmark dipping below 3.70% and within 20 basis points of the next psychologically important level and pivot high from mid-June near 3.50%, a level that was quickly reached in the context of the market realizing that the FOMC was set for its first 75 basis point rate hike since 1994. The much-watched yield curve inversion between the 2-year and the 10-year widened to 67bps, the most invested since February 1982, and heightened the growth scare among investors. The market has largely priced in a 50bps hike in December and is unwinding some of the post-CPI optimism that the Fed might do less next year, after Fed’s George, Daly, Waller, and Williams pushed back on the notion of pausing.
What is going on?
Strong October US Retail Sales, weak November housing Market survey
After a string of weak reports, the US October Retail Sales report came in far stronger than expected, with a strong +1.3 % MoM rise (vs. +1.0% expected) for the headline and an even more impressive +0.9% MoM rise in the “ex Food and Energy” print, on top of a +0.3% revision to the September data point. Elsewhere, we can see the massive shift higher in US mortgage rates continue to weigh on housing activity, as the November US NAHB Housing Market Index plunged 5 more points to 33, the lowest reading since the very worst month of the pandemic outbreak shock in 2020 and before that since 2012.
Siemens Q4 results beat estimates
The German industrial giant reports FY22 Q4 (ending 30 September) revenue of €20.6bn vs est. €19.3bn and orders of €21.8bn vs est. €20.4bn. In addition, the company says that it sees higher operating margins in three divisions and that downside risks from Russia are minimal now.
Target reports earnings miss and downgrades sales guidance
Target’s Q3 adjusted EPS fell to $1.54, nearly 30% below the median of analyst estimates. The retailer is predicting a drop in comparable sales for the first time in five years and estimating operating margins will shrink to about 3%, which is half of its previous forecast. This indicates that the substitution effect is increasing as the consumer is increasingly under more pressure. Target is looking to reduce $3bn in costs but says there will be no mass layoffs.
Nvidia earnings beat
Software graphics giant Nvidia (NVDA) reported revenue for the third quarter that beat analyst estimates. Revenue fell 17% y/y to $5.9bn, beating the expected drop of 18% y/y to $5.8bn. NVIDIA’s outlook for the fourth quarter was vague citing revenue is expected to hit $6.0bn, plus or minus 2%, which will translate into a 20% drop in revenue in the important holiday quarter. Nvidia also said Microsoft will use its graphics chips, networking products, and software in Microsoft’s new AI products. The slowdown in demand for GPUs is driven by less profitable crypto mining and as a result GPU pricing is plummeting and inventories on the balance sheet rising to $4.45bn up from $2.23bn a year ago. EPS was $0.28 down 73% y/y.
Australia’s unemployment falls, employment rises more than expected in October
Australia’s jobless rate unexpectedly fell to 3.4%, from 3.5% last month, which now supports the RBA continuing to raise rates, and not pause on hikes at their next meeting in December (market priced at 50-50 odds of a 25-bp hike). Australian employment rose by 32,200 month-on-month in October, almost double the 15,000 jobs expected to be added to the economy. The AUDUSD is staying range bound for now after its recent sharp rally, consolidating a bit on weak risk sentiment in Asia overnight. The RBA has said it expects the jobless rate to rise.
US Fed’s Waller, noted Fed hawk, says he is “more comfortable” with smaller hike
It appears that Fed consensus is settling on lowering the pace of rate increases at the December FOMC meeting after one of the more hawkish FOMC voters, Governor Christopher Waller said he is “more comfortable” with a smaller hike in December after the Fed’s four 75-basis points moves since the June FOMC meeting, although he still declared the move is data-dependent.
What are we watching next?
UK Autumn Budget Statement to be announced today
Ahead of the speech, the UK’s Office for Budget Responsibility told the treasury that by 2026-27, the budget deficit could grow to £100 billion from earlier projections of £32 billion. Several moves by Chancellor Jeremy Hunt have already been made to reverse the original budget laid out by former Chancellor Kwarteng under PM Truss’ leadership, including a shortening of the energy bill cap scheme to just six months. Corporate taxes are also set to be raised to 25 percent from 19 percent, and windfall taxes on electricity and oil and gas firms, together with more income earners set to pay tax at the top 45% rate and taxes on capitali gains and dividends set to rise. Still, the pension benefit will be set to rise at September’s 10.1% CPI rate in April of next year. Critics might suggest that much of the tax implementation will be “back-loaded” to beyond the 2024 election to avoid a further hit to Tory popularity. This statement will be critical for the direction of sterling from here.
Earnings to watch
In today’s US earnings focus we expect Applied Materials to report revenue growth of 4% y/y and lower operating margin from a year ago following the signs we observe in the semiconductors industry. In the cyber security industry, Palo Alto Networks is also reporting today with revenue growth expected to 24% y/y and EBITDA of $349mn up from $-8.8mn a year ago. The Chinese technology and consumer sectors have faced a lot of headwinds over the past year and Tencent’s result yesterday was not rosy either, so there might be a downside risk to Alibaba’s result today. Analysts expect Alibaba to report revenue growth of 4% y/y and EPS of CNY 11.21 up 65% y/y.
- Today: Siemens, Alibaba, Applied Materials, Palo Alto Networks, NetEase
- Friday: JD.com
Economic calendar highlights for today (times GMT)
- 0955 – UK Chancellor Jeremy Hunt presents Autumn Budget Statement
- 1000 – Eurozone Oct. Final CPI
- 1230 – UK Bank of England Chief Economist Pill to speak
- 1300 – US Fed’s Bullard (voter 2022) to speak
- 1330 – US Oct. Housing Starts and Building Permits
- 1330 – US Oct. Philadelphia Fed
- 1330 – US Weekly Initial Jobless Claims
- 1440 – US Fed’s Mester (Voter 2022) to speak
- 1530 – EIA's Weekly Natural Gas Storage Change
- 1540 – US Fed’s Jefferson and Kashkari (voter 2023) to speak
- 1600 – US Nov. Kansas City Fed Manufacturing Activity
- 1845 – US Fed’s Kashkari (voter 2023) to speak
- 2330 – Japan Oct. National CPI
- 0001 – UK Nov. GfK Consumer Confidence
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