Summary: Chinese shares climbed overnight after the PBOC cut rates and a fourth-quarter GDP beat helped offset weaker than expected retail sales. Futures on the S&P 5000 and Nasdaq drifted lower with Friday’s renewed advance in sovereign bond yields weighing on markets. US stock and bond markets are closed today for a holiday. Brent crude oil trades near a seven-year high despite omicron and China weakness while copper has stabilised following Friday’s setback.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - last Friday was another nail-biting session for US equities pushing well below the 15,500 level in Nasdaq 100 futures before staging an impressive rebound with the index futures closing at 15,595. With the US 10-year yield pushing significantly higher on Friday to 1.78% sentiment in equities could be under pressure with especially high duration parts of the market such as Nasdaq 100 (large technology companies) and the more speculative part of the market such as the Ark Innovation ETF. The key level to watch is whether the 10-year yield breaks higher and closes above the 1.8% level.
Hang Seng (HK50.I) - despite the Chinese central bank cutting the key interest rate to support the economy shares were 0.8% lower in Hong Kong trading with the next critical support level in Hang Seng futures being the 24,000 level which happens to be where the 50-day moving average is sitting.
EURUSD and AUDUSD - the big EURUSD pair broke free of sub-1.1400 resistance last week but so far, the rally has halted ahead of the next layers of resistance in 1.1500-25 area. AUDUSD needs to maintain 0.72 support to keep the focus on the upside.
Crude oil (OILUSFEB22 & OILUKMAR22) trades higher with Brent crude oil briefly challenging the double-top at $86.75, a seven-year high, before having a rethink as China GDP and retail sales slowed amid ongoing measures to curb the spreading of the omicron variant. The prompt spreads in WTI and Brent remain elevated at 63 and 74 cents per barrel, thereby signaling rising tightness. Later this week monthly Oil Market Reports from OPEC on Tuesday and IEA on Wednesday will shed some further light on the current situation. Speculators, a little late to the recent rally, boosted bullish oil bets in WTI and Brent bets by the most in 14 months last week.
Copper (COPPERMAR22) slid the most in seven weeks on Friday as weaker-than-expected U.S. economic data (see below) together with weakness in China added to concerns that global growth may slowing amid rising inflation and the spreading virus. High Grade’s drop back below $4.50 triggered some stop loss selling from recently established longs before stabilizing overnight after China, the world’s top consumer, cut rates to support its economy. The worry over tight supplies, however, has not gone away and should cushion any short-term weakness.
Gold (XAUUSD) remains resilient despite Friday’s renewed surge in bond yields as the market continues to price in the prospect of rising US interest rates, potentially at a more aggressive pace than previously expected. Support continues to build in the $1800-area while a break above $1830 could see it target $1850 ahead of the November peak at $1877.
US Treasuries (UST, TLT). Today the market is shut for the Martin Luther King holiday in the US, but investors still look at Friday’s close wondering what’s next. Ten-year yields closed at 1.78% aiming once again for resistance at 1.8%. To provoke the rise, was the US Treasury’s quarterly survey of primary dealers asking how a runoff of the balance sheet would affect its funding needs and issuing decisions proving that such measure could arrive sooner than the market forecasts. The focus this week is going to be on the busy economic calendar, and Wednesday’s 20-year auction.
What is going on?
China cuts two key policy interest rates ahead of a report showing growth slowed last quarter to 4% year-on-year. In addition, retails sales disappointed after rising by just 1.7% year-on-year in December versus an estimate of 3.8%. The rate cuts were seen as measures to bolster the economy which has been losing momentum in the face of repeated virus outbreaks and a slow-moving housing and property crisis. Further curbs are expected ahead of the winter Olympics after Beijing recorded its first omicron case over the weekend. The rate cut helped drive a 1% increase in mainland stocks while the Hang Seng suffered a 1% loss.
Disappointing U.S. data. Retail sales were much weaker in December at minus 1.9% versus expected minus 0.1% and prior 0.2% (after revision). Eleven of the thirteen major categories posted one-month losses. The biggest came from non-store retail and furniture stores. The control group – which is used for GDP calculation purposes – came well below the estimate of 0.1%, at minus 3.1%. December industrial production contracted too (minus 0.1% versus estimated 0.2% and prior 0.5%). Finally, the University of Michigan consumer sentiment index is down to 68.8 in the preliminary January report after 70.6 in December. This seems to confirm the U.S. economy is already slowing down. It will be quite complicated to raise interest rates in this situation.
Inflation is hot in the eurozone. Spain December final CPI was out at 6.5% year-over-year versus first estimate at 6.7%. This is still too high. It is the fastest annual inflation pace in Spain since 1990. In France, inflationary pressures are more limited due to a higher share of nuclear energy in energy production. France December final CPI was out at 2.8% - aligned with the first estimate.
Germany GDP disappoints. The economic activity shrank in the fourth quarter and GDP recovered just 2.7% in 2021. Germany’s economic recovery has lagged many of its peers, including the United States, France and the United Kingdom. This can be partially explained by a strong exposure to international trade but also structural issues within the economy (Germany is behind on tech and digitalisation, for instance).
Shipping companies see 2022 profits topping 2021. In a survey the Danish shipping industry has said that it expects profits to increase in 2022 from already high levels suggesting that logistics costs will remain high during all of 2022 and is a positive signal for our broader logistics theme basket.
UK GDP for November was encouraging. It was up 0.9% month-over-month (versus 0.2% in October). The rebound is likely related to signs of Christmas consumption. In addition, UK industrial production was up at 1.0% versus prior 0.5%. It is reassuring that underlying growth in Q4 had not stalled ahead of Omicron.
What are we watching next?
Monthly Oil Market reports from OPEC on Tuesday and IEA on Wednesday should cast some further light on the current state of the market. The IEA is expected to sharply lower its previous projections for Q1 and Q2 surpluses after its head last week said demand had turned out to be stronger than expected, with the physical market booming as buyers look beyond the spread of omicron.
The 1.8% breakout in the US 10-year yield is key focus. With inflationary pressures looking less and less transitory and Brainard’s hawkish comments last week the 1.8% level in the US 10-year yield is the most critical thing to watch this week. A break above this level will set in motion more portfolio rebalancing and downward pressure on equities.
Earnings Watch – while the majority of Q4 earnings have surprised to the upside the reactions last week were more muted as investors are weighing rising interest rates, a more hawkish Fed and inflationary pressures persisting which will hit companies very differently. This week the number of earnings will go up with the most important earnings releases being ASML, Netflix, and Schlumberger which we covered in Friday’s equity update.
Economic calendar highlights for today (times GMT)
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