Summary: Equity markets traded a bit softer on Friday after US Fed Chair Powell said that the time had come to taper QE purchases, but not raise rates, but his comments included language suggesting increasing Fed unease, and rate bets for hikes next year were pulled sharply forward on Thursday and Friday. This helped stabilize the recently weaker US dollar. Elsewhere, crude oil prices start the week at new highs for the cycle after a strong session in Asia.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities measured by the S&P 500 are trading around the 4,542 level, close to all-time highs, in early European trading hours extending an impressive rebound from the lows last month. Despite rising interest rates, China slowing down, and inflation pressures building, equities are shrugging it all off with the VIX sitting below 16 suggesting little nervousness in the market. This week is going to be critical with hundreds of Q3 earnings releases and especially from major US technology companies.
EURUSD – the big EURUSD pair continues to coil around near key resistance in the 1.1650-1.1700 area that is the pivotal for whether the pair can pull back into the higher range or remains in a bear trend – with surging Fed rate hike expectations supporting on the one hand, while indifferent action in the US treasury market at the longer end of the curve and the ability for risk sentiment to remain stable restraining USD upside. This week looks critical for near term direction as the pair will find it tough to not choose a direction after the price action was bottled up in this important area for several sessions.
AUDUSD – the AUDUSD pair traded nearly to 0.7550 late last week before spiking Fed rate hike expectations and perhaps a reversal in copper prices tamed the rise. The highs last week are just short of the 200-day moving average and the 0.7600 area is the bottom of the old range from the first few months of the year, so this area between 0.7450 and 0.7600 looks important for the structural technical view on AUDUSD.
Crude oil (OILUKDEC21 & OILUSDEC21) continued higher in Asia with Brent crude now trading within striking distance of the 2018 high at $86.75 with WTI trading at a fresh seven-year high. The market remains bid with OPEC+ sticking to its cautious production increase approach siting the threat to demand still posed by the pandemic. Thereby ignoring the unfolding energy crisis which according to estimates could see gas-to-oil switching add up to one million barrels of additional oil demand this winter. Focus this week on dwindling US stock levels and China which is facing renewed Covid-19 outbreaks after infections spread to 11 provinces.
Gold (XAUUSD) and silver’s (XAGUSD) recent strong run of gains received a temporary setback on Friday in response to a sudden bout of taper tantrum following comments by Fed chair Powell. At the same time, however he talked down the risk of raising interest rates while also expressing concern over persistently elevated inflation. Focus on dollar which continues to lose momentum and bond yields where the recent yield rise has primarily been driven by a reprising of inflation, thereby keeping real yields deep in negative territory. Resistance at $1814 followed by the big one at $1835.
Grain prices trading higher led by wheat which rallied strongly last week, amid increasing demand for all types of wheat and stockpiles potentially heading for a five-year low at the end of the 2021-22 season. Adding to this surging fertilizer and fuel prices rising costs for farmers and a three-month U.S. weather forecast calling for drought in key growing areas such as Kansas. The benchmark futures contract for soft winter wheat (WHEATDEC21) has returned to $7.63 ahead of $7.86, the eight-year high reached in August.
What is going on?
US Fed Chair Powell’s rhetoric on Friday boosts rate hike expectations - this is somewhat ironic, as the Fed Chair trotted out the view that, while it is time for the Fed to begin tapering, it is not the time to raise rates. However, Powell’s comments that inflation was proving more persistent than expected and his highlighting of the risk of a wage-price spiral suggest that the Fed is on edge and wary of a possible tipping point. Despite Powell’s assurances on rate hikes, the market rapidly pulled forward the expected first Fed rate hike on Thursday and Friday, with about 50% odds of a hike as early as next June.
China’s National Health Commission warns of widening covid outbreak in China – with 11 provinces in China affected and 38 covid infections reported today, half of which were registered in Inner Mongolia. Restrictions on movement are widespread, with travel to Beijing severely restricted after a number of cases were found there from people traveling from the northwestern origin of the outbreak.
Russia surprised with larger than expected 0.75% rate hike on Friday – with consensus only expecting a 0.50% hike. The policy rate now stands at 7.50% as the bank doubled down on its fight against rising inflation, with the latest data suggesting CPI rising at a 7.8% rate and household inflation expectations running at a cycle high of 13.6%. The Russian ruble jumped higher and the USDRUB traded to new lows just below 70.00 on Friday before bouncing slightly.
Turkish lira drops to new lows on President Erdogan’s diplomatic spat. USDTRY traded above 9.80 at one point overnight, adding to the aggravated rally last Thursday after the Central Bank of Turkey cut rates more aggressively than expected (by 200 basis points). President Erdogan said that the ambassadors of 10 nations, including the US, France, Germany and other European countries, were no longer welcome in the country after these countries demanded the release of a jailed businessman and philanthropist Osman Kavala. The Turkish foreign ministry has yet to make any official move on the matter.
What are we watching next?
COP26 climate conference – interesting to watch the rhetoric as the COP26 climate conference gets under way Sunday and runs until November 12 in Glasgow, Scotland as nations confront spiking fossil fuel energy prices and recent weak wind production in Europe reminding of the unreliability of some alternative energy sources.
EU Poland showdown escalating - as Poland accuses the EU of making demands on the country with a figurative “gun to the head” as the union threatens to withhold EU recovery aid funds over rule of law accusations against the country. Poland’s Prime minister Morawiecki said that if the European Commission starts a “third world war”, that the country will “defend our rights with any weapons which are at our disposal” - a rather aggressive tone.
UK fall budget announcement on Wednesday – as Uk Chancellor of the Exchequer Rishi Sunak will announce plans for the coming six months. The budget is thought to include modest additional targeted support for areas of the economy affected by the pandemic, but also address longer term initiative linked to the climate and CO2 reduction, the Conservative government’s “levelling up” programme, but perhaps most importantly, how the government plans to float the idea that it can return to fiscal sustainability. Austerity and taxation plans will be watched closely for the forward impact on UK growth.
Earnings Watch – this is the biggest earnings week during the Q3 earnings season with all the major US technology companies reporting. It starts today with Facebook reporting after the market close. Analysts expect EPS of $3.66 up 35% y/y up slightly from the previous quarter and revenue at $29.5bn up 37% y/y. Given the recent whistleblower on Facebook the public sentiment on Facebook has deteriorated and the shares have underperformed the overall technology segment.
Monday: HSBC, Facebook
Tuesday: DSV, Nidec, Canon, Novartis, UBS Group, Microsoft, Alphabet (Google), Visa, Eli Lilly, Texas Instruments, UPS, AMD, General Electric, Raytheon Technologies, S&P Global, 3M, Twitter, Southern Copper,
Wednesday: ANZ, Novozymes, Neste, BASF, Deutsche Bank, Ping An Insurance, Fanuc, Hitachi, GlaxoSmithKline, Heineken, Equinor, Iberdrola, Banco Santander, Assa Abloy, Thermo Fisher Scientific, Coca-Colam McDonald’s Service Now, Bristol-Myers Squibb, Boeing, General Motors, Ford Motor, Twilio, eBay, Spotify, Yandex, Garmin
Thursday: Anheuser-Busch, Shopify, Suncor Energy, Sanofi, Dassault Systems, TotalEnergies, PetroChina, BYD, Agricultural Bank of China, UniCredit, Sony, Keyence, Royal Dutch Shell, Lloyds Banking Group, Hexagon, Apple, Amazon, Mastercard, Comcast, Merck & Co, Linde, Starbucks, Caterpillar, Atlassian, Newmont
Friday: BNP Paribas, Daimler, Merck, China Construction Bank, Bank of China, Eni, Exxon Mobil, Chevron, AbbVie, Colgate-Palmolive
Economic calendar highlights for today (times GMT)
0800 – Germany Oct. IFO Survey
0800 – ECB's de Cos to speak
1230 – US Sep. Chicago Fed National Activity Index
1300 – UK BoE’s Tenreyro to speak
1430 – US Oct. Dallas Fed Manufacturing survey
2300 – South Korea Q3 GDP
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