Market Quick Take - November 30, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the Moderna CEO comment (see further down for more details) has set in motion risk-off again with the playbook technology vs physical companies. This is getting expressed via Nasdaq 100 futures down only 0.5% and S&P 500 futures down 1% reflecting the market updating its probability for lockdowns or restrictions adding friction to companies operating in the physical world. S&P 500 futures are trading around the 4,610 level in early European trading with Friday’s low being the key support level to watch today.

Stoxx 50 (EU50.I) - European equities have a value and physical world tilt compared to US equities and especially Nasdaq 100 which is seen in early price action with Stoxx 50 futures down 1.6% trading around the 4,038 level. This is below Friday’s close and just above the 200-day moving average at 4,024 which is naturally the big level to watch together with 4,000 which happens to be around the major support area from early October.

USDJPY and JPY crosses – Yesterday saw a steep back-up in the price action, as USDJPY rallied all the way to just shy of the 114.00 area before melting back lower to the lows of this local sell-off, with the 112.73 pivot low the last range support ahead of the 111.50-00 area that has more structural, trend-supporting implications. The JPY is feeding off weak risk sentiment and US treasury yields collapsing and as speculative market positioning caught the wrong way around as the omicron news hit (USDJPY was trading above 115.00 and near cycle highs as late as Thursday evening). Other JPY crosses are at technically interesting crossroads, like EURJPY, which hasn’t been able to decide if it is going to break the key 128.00 area after a false break yesterday.

EURUSD and EUR crosses – the strength in the euro is an echo of the strength in the JPY as the EUR has managed to rise against even the safe haven US dollar since the omicron variant news broke, even if it is largely weaker versus the JPY and CHF. The collapse in Fed rate expectations and yields all along the US yield curve are making the euro’s extremely low rates look “less bad”. Other crosses, like EURGBP and EURAUD, show that the euro will likely show relative stability if this storm of volatility persists. EURUSD has room to move up toward the 1.1384 (38.2% of last sell-off wave) or possibly even 1.1506 (61.8% retracement) without reversing the downtrend.

Crude oil (OILUKJAN22 & OILUSJAN21) turned sharply lower in early European trading as the mood across markets soured on renewed concerns about the omicron virus strain. This after Moderna’s head told the Financial Times that existing vaccines will be less effective at tackling omicron and it may take months before variant-specific jabs are available at scale. The news come days before the OPEC+ group of producers meet to discuss production levels for January. Brent crude oil already heading for its biggest monthly loss since March 2020 trades below its 200-day moving average for the first time in a year, a sign that more weakness may lie ahead, thereby raising the prospect for OPEC+ deciding to pause or perhaps even make a temporary production cut.

Gold (XAUUSD) received a muted bid overnight in response to the omicron virus comments from the head of Moderna (see oil section above). In addition, comments from Fed chair Powell helped reduced 2022 rate expectations from three to two after he said the omicron virus posed risks to both sides of the central bank’s mandate for stable prices and maximum employment. Despite this development together with softer Treasury yields and a weaker dollar, gold continues to struggle attracting a safe-haven bid. Speculators have been whipsawed by the price action in recent weeks and are in no mood to reenter in size at current levels. Silver (XAGUSD) looks even worse having dropped to a six-week low on weakness spilling over from industrial metals.

US Treasuries (IEF, TLT). The yield curve steepened slightly, unwinding Friday’s bond rally in the long part of the yield curve. Two-year yields remain at the same level as last week’s close as the market expects the Fed to delay interest rate hikes amid the spreading of omicron. Yet, the central bank finds itself in a difficult position as a new Covid wave threatens jobs and price pressures. Therefore, we don’t expect the Federal Reserve to turn particularly dovish and to proceed with tapering. We’ll learn more about what the Fed thinks today as Powell testifies in front of the Senate, talking specifically about the CARES act. Friday’s nonfarm payrolls are crucial, as a strong job report will open the way for a faster pace of tapering during the next FOMC meeting.

US junk bonds (HYG, JNK). According to Bloomberg Barclays indexes, junk bonds’ OAS widened by 30bps to 330bps amid Friday’s selloff reflecting the lack of liquidity in markets. Despite negative real rates continuing to support corporate bond valuations, it’s safe to expect junk bond spreads to widen throughout the end of the year amid poor liquidity. If the volatility in rates remains sustained, the widening of spreads could accelerate, posing a threat also for stocks.

German Bunds (IS0L) and Italian BTPS (BTP10). Today’s focus will be on the Eurozone CPI flash numbers and news concerning Covid lockdowns and restrictions. Friday’s flight to safety provoked yields to drop across the euro area, including among sovereigns with a high beta such as Italy. The reason behind it is that German Bunds are tightly correlated to US Treasuries and that the market was anticipating more accommodative monetary policies from the ECB, which have been benefitting mostly the periphery. Investors should remain cautious. Indeed, inflation remains a big focus and could drive the ECB towards less accommodative policies. Overall, government bond yields in the euro area are compressed by covid distortions but remain sensitive to inflation and the German election. Therefore, it is safe to assume they will resume their rise as soon as concerns around a new wave of covid ease.

What is going on?

Covid maker Moderna CEO says expects “material drop” in vaccine effectiveness for omicron.  Stéphane Brancel, CEO of the covid vaccine producer Moderna, told the Financial Times in an interview that “There is no world, I think, where [the effectiveness] is the same level ... we had with Delta.” He also said that “I think it’s going to be a material drop. I just don’t know how much because we need to wait for the data. But all the scientists I’ve talked to ... are like ‘this is not going to be good’.” The tone was jarring for the market and is in rather sharp contrast to comments from Pfizer (below).

Jack Dorsey steps down as CEO of Twitter. Investors were initially cheering the stepdown sending shares up by 10% but ended lower for the session as investors are uncertain about what the management change means. But in our view the company has a large potential to improve profitability and take market share from other social media platforms if executed well.

US President Biden says no lockdowns planned, Pfizer director sounded more upbeat than Moderna. Some of the recovery yesterday in US equities was in the wake of US President saying in a speech yesterday that the new omicron variant is a cause for concern and not panic, that there would be no new call for lockdowns. A Pfizer director yesterday made comments that contrast rather sharply with those from Moderna’s CEO noted above as they claimed that the “There’s a reasonable degree of confidence in the vaccine circles that [with] at least three doses... the patient is going to have fairly good protection against this variant.”

Market volatility seeing far more significant strains in credit market than during delta outbreak. Corporate credit spreads are an important measure of financial conditions, and for those attempting to draw parallels between the current uncertainty triggered by the omicron news with the reaction to the delta variant spread back in July, it is worth noting that credit spreads have widened far more sharply and from levels that were already a bit elevated (perhaps on the fears of a more hawkish Fed before the omicron news shifted the narrative slightly). One measure of credit spreads, the Barclays US Corporate High Yield OAS, trade above 340 basis points Friday, the highest since February of this year, before easing slightly yesterday, and junk-bond ETFs like HYG and JNK spiked to their worst levels for this year Friday before a sharp recovery yesterday.

Fed Chair Powell says omicron variant a threat to both Fed mandates as the omicron variant could “pose downside risks to employment and economic activity and increased uncertainty for inflation”. This comment was from a prepared text before an appearance later today before the Senate. The market has removed a full rate hike from 2022 Fed expectations since the omicron variant news.

The delayed Commitments of Traders report covering speculative positions held in commodities on November 23 showed the impact of Powell’s renomination which helped send treasury yields and the dollar sharply higher. Long liquidation hit both energy and metals, led by crude oil, gold and platinum while the agriculture sector, more concerned with other drivers such as weather, saw across the board buying of all 13 futures contracts. The combined long held across these contracts reached a six-month high, representing a nominal value of $43.5 billion.

What are we watching next?

Headline risk painfully obvious as solid information on virus will take time. The Moderna CEO comments noted above show that market participants will need to remain careful on drawing conclusions before more is known about the transmissibility, virulence, and vaccine-evading characteristics of the new omicron strain of covid. The major vaccine makers have offered timelines of two to six weeks for assessing its vaccine evading capabilities, and in the meantime, travel shutdowns and behavior modification are a risk as we await anecdotal and statistical evidence of the spread of the virus and the its virulence.

Earnings Watch – Li Auto showed strong Q3 results yesterday with deliveries keeping pace with XPeng, another Chinese EV-maker, and good guidance on Q4. Investors sent up Li Auto shares by 7%. Today’s earnings focus is on Salesforce reporting FY22 Q3 (ending 31 Oct 2021) tonight after the market close with analysts expecting revenue growth of 26% y/y.

Tuesday: Bank of Nova Scotia, Salesforce, Zscaler, NetApp, HP Enterprise

Wednesday: Trip.com, Royal Bank of Canada, National Bank of Canada, Snowflake, Synopsys, Crowdstrike, Veeva Systems, Okta, Splunk, Elastic, Five Below

Thursday: Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, Cooper Cos, Marvell Technology, DocuSign, Ulta Beauty, Asana, Dollar General, Kroger

Friday: Bank of Montreal

Economic calendar highlights for today (times GMT)

0745 – France Nov. Flash CPI

0855 – Germany Nov. Unemployment Change/Rate

0900 – Poland Nov. CPI

0900 – ECB's Villeroy to speak

1000 – Euro Zone Nov. Flash CPI

1300 – UK Bank of England’s Mann to speak

1330 – Canada Sep. GDP

1400 – US Sep. S&P CoreLogic Home Price Index

1445 – US Nov. Chicago PMI

1500 – US Fed Chair Powell, Treasury Secretary Yellen to speak

1500 – US Consumer Confidence Survey

1800 – US Fed Vice Chair Clarida to speak on Fed independence

2130 – API Weekly Report on US Oil and Fuel Inventories

0030 – Australia Q3 GDP

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