Summary: Equities rebounded strongly on Friday, keeping the pivotal 4,000 area in the S&P 500 index in play ahead of the blast of earnings reports this week from many of the largest US companies. Treasury yields have also rebounded as housing and jobless claims data late last week were stronger than expected. Tomorrow, we get a look at Eurozone flash January PMI figures, with some signs pointing to a resilient Eurozone economy. Much of Asia is off-line at the start of this week for holiday celebrations.
US equities regained some of their lost territory on Friday as US technology stocks rallied with Nasdaq 100 futures gaining 2.8% as the market is betting on an improving outlook. US technology companies have aggressively been pursuing layoffs which so far, the market has rewarded with a positive change in sentiment. The Q4 earnings releases this week from Microsoft, Tesla, and Intel will dictate the price action and sentiment in the overall market and in particularly technology stocks.
The Bank of Japan announced a large extension of JPY 1 trillion of 5-year loans to banks on Tuesday as part of its operation to control the yield curve. The loan auction was three times oversubscribed. This is part of an extension of a lending facility announced at its meeting last week and is a kind of de facto quantitative easing (and helps lower yields in the part of the curve between the BoJ’s -0.10% policy rate and its cap on 10-year yields at +0.50%) at a time when other central banks like the US Fed are doing the opposite or actively rolling out plans to shrink their balance sheets. The JPY fell sharply across the board late last week and extended weaker still overnight, even against a weak USD as much of Asia is out on holiday for the start of the week. Elsewhere, the US dollar was also weak on strong risk sentiment Friday, with EURUSD trading to new cycle highs and hitting 1.0900 overnight, while cycle lows are nearby in other USD pairs.
Crude oil prices traded steady near a six-week high overnight with focus on China’s reopening, a softer dollar and the introduction of curbs on Russian fuel sales from February 5 impacting availability. In its latest outlook, the International Energy Agency said Russia will shut in about 1.6 million barrels a day of production by the end of this quarter compared with pre-invasion levels. National holidays across Asia, especially in China and Singapore kept trading to a minimum. The strong rebound in recent weeks triggered the strongest buying response from hedge funds since April 2020. A combined 81k lots of WTI and Brent were bought in the week to January 17, in Brent most of that below $85. Above $87.85 traders will be looking for $90 next while support is in the $84 area.
Gold trades softer in early trading after failing for a third time in three days to break resistance around $1935 as continued and supportive dollar weakness being are being offset by a strong rebound in US treasury yields (see below). Since the November low point, gold has rallied by around 320 dollars with corrections during these times becoming smaller and smaller, with buyers taking any setback as an opportunity to accumulate or get involved. Sooner or later the metal will be facing a bigger pullback, but for the now the trend remains firm with key support below at $1895 followed by the 21-day moving average, currently at $1866. While ETF holdings remain flat near a two-year low, speculators have been strong futures buyers for the past seven weeks, most recently in the week to January 17 when the net long rose by 11k contracts to 93.3k contracts, a nine-month high.
Copper trades near the highest level since last June, having rallied by more than 12% this month on expectations China will increase buying after the Luna New Year holiday. The rally received additional support last week on supply concerns related to protests in Peru threatened nearly 2% of the global supply. During a two-week period to January 17 hedge funds bought copper at the strongest pace since October 2021 lifting the net long to a nine-month high at 35.2 contracts. In thin overnight trading the iron ore futures (SCOA) price hit a new six-month high at $129,45 after gaining 9% so far this month, also on expectations that China will increase buying of steel-making ingredient next week after Lunar New Year holidays end
Treasuries jumped back higher on Friday, rebounding after having dropped to a new cycle low below 3.40% in the case of the 10-year yield benchmark and closing the weak closer to 3.50%, setting an important low water mark. Significantly stronger than expected jobless claims data last Thursday and stronger than expected housing-activity related data on Thursday and Friday didn’t fit with the weak retail sales and other data that recently helped drive the drop in yields. The US economic calendar is rather thin this week in the US until the Friday release of December PCE inflation data.
The weekly Commitment of Traders reports from the CFTC and ICE Exchange Europe covering hedge funds positioning and changes made in the week to January 17 showed strong demand for crude oil and fuel products as well as copper on continued optimism demand from China, the world’s biggest consumer of raw materials, will increase as focus switch from lockdowns to recovery. In crude oil, the buying of 81k contracts in WTI and Brent was the biggest weekly jump since April 2020. In addition, dollar and yield softness added continued support to investment metals led by gold, while a recent WASDE report provided fresh support and demand for corn and soybeans. Selling was primarily concentrated in natural gas on mild weather, platinum, coffee and cotton. More in our weekly update which will be published later.
The Financial Times reports that the two countries will announce preparations for a common currency that other South American countries may eventually join to boost trade and reduce the use of the US dollar in the region. The currency may be called “sur”, which means south in Spanish.
Orpea used to be one of French investors’ favorite stocks. But it was before that the retirement homegroup, which operates nearly 1,200 homes worldwide, was accused of systematic mistreatment and patient abuse in early 2022. Last week, the group failed to reach an agreement with investors and creditors to renegotiate its huge load of debt (around €9.5bn). Immediately after the announcement, the share dropped more than 7 % on Euronext – which is not that much. Negotiations continue however with the Caisse des Dépôts – a French public sector financial institution which is often described as the « investment arm » of the French state. The Caisse des Dépôts proposes restructuring Orpea’s debt for 700 million euros and taking over control of the company. But this offer is seen as too low by the current management.
The activist investor has bought a considerable stake in the enterprise software company which recently laid off 10% of its global workforce. Elliott is pushing for strategic changes and board seats. Salesforce trades below its pre-pandemic share price.
The 4,000 area in the S&P 500 Index seemed to get a stern rejection last week, possibly on some of the weak US data last week, including a very disappointing retail sales report for December. But Friday’s strong rebound suggests that the market direction is still an open question. As well, US treasury yields reversed sharply on Friday after dipping to a new cycle low, a possible sign that the bid for bonds is drying up. This week’s hefty batch of earnings reports from the US may see a clearer technical picture for the equity market by Friday, while there is little macro data besides the Friday PCE inflation report out of the US, with a heavier calendar in the US next week.
The Q4 earnings season accelerates this week with key earnings from Microsoft, ASML, Tesla, Visa, and Chevron. The aggregate earnings surprise for the S&P 500 companies that have reported earnings is currently 4.1% and the market has generally responded positively to the Q4 earnings reported so far with Netflix’s 8.5% jump on its strong outlook for its advertising business being the clearest evidence. Baker Hughes reports earnings today before the market opens with analysts expecting revenue growth to accelerate to 11% y/y and a significant jump in operating income.
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