Summary: Equities closed last week on a strong note, but are stumbling out of the gates a bit to start this week as energy prices are pressing to new highs for the cycle yet again, and as US yields are likewise rising back toward cycle highs after the choppy back and forth last week. Earnings season moves into full swing this week with high profile names like Tesla, Netflix and Intel reporting.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities closed on a high not last week, but are slightly back on the defensive to start this week after a somewhat rocky Asian session and as energy prices and, perhaps more importantly, US yields are pressing back toward the cycle highs that looked like they were rejected last week. The tech- and momentum heavy Nasdaq 100 Index will find stronger headwinds if US yields continue to new cycle highs. Technically pivotal downside areas here include the 15,000 level in the Nasdaq 100 that was key on the way up, with the 21-day moving average currently near 14,920. For the S&P 500, the key zone is 4,420-4,400 with the 21-day SMA a bit lower near 4,375.
AUDUSD and USDCAD – we saw big runs higher in the commodity currencies versus the US dollar and especially the Japanese yen last week, with the focus firmly back on rising commodities prices and the Fed seen as behind the curve relative to the smaller DM central banks in moving to hike rates. But US yields are back on the rise as well, and if this spooks risk sentiment, the combination could yet see support for the greenback. In any case, the two currency pairs have reached notable areas of interest, with USDCAD closing last week exactly at the 61.8% Fibonacci retracement of the rally off the summer lows at 1.2367 (resistance into 1.2500) and AUDUSD having traded well into the pivotal 0.7400-0.7500 area that defines whether the pair will remain in a bear trend.
USDJPY and JPY crosses – USDJPY has reached a major line in the sand, the 114.50 area that defined the top side of the range for much of 2017 and 2018. The most compelling coincident indicator for the yen is the long end of the US yield curve, where yields have risen back toward cycle highs overnight, at least for 10-year and shorter yields. Could USDJPY spill over higher still or is the JPY downside overdone after a wild extension last week in JPY crosses, particularly those involving commodity currencies?
Gold faceplants again after red-herring rally last week, as the precious metal disappointed the bulls after teasing toward the 1,800 level and the 200-day moving average just below that level, only to sell off steeply and back into the range on Friday, most likely on strong risk sentiment and the sharp back-up in US yields. That 1,800 level remains the upside key, while 1,750 is the local range low.
Oil prices are reaching new highs for the cycle, adding sharply to a rather strong advance last week, as the WTI benchmark trades at its highest level for the cycle and Brent likewise edges toward the highest level since 2014 – the brief spike to 86.74 in October of 2018.
US Treasuries (IEF, TLT). Interesting to note that US yields are bouncing back at the short end of the US yield curve and out to 10-years, while 30-year yield remain subdued. The 5-year yield closed last week at a new high for the cycle near 1.12% and rose above 1.15% overnight, while the 10-year yield is higher but just short of the cycle highs near 1.63% of last week. US yields will quickly seize the markets’ attention if we see sharp new rises toward 1.7% in the US 10-year, the approximate high for the cycle back in March. The US macro calendar this week is without heavy-hitting data points, but the market deserve close watching.
What is going on?
Cryptocurrencies rise back toward the cycle highs after stumbling at the weekend as the first US ETF based on Bitcoin futures may be set to debut as early as today. Bitcoin traded as high as 62.5k overnight and is only a few percent shy of the all-time high near 64.9k posted back in April of this year. Likewise, Ethereum has bounced back from a tumble at the weekend and trades at 3,875 this morning, no far from the obvious range resistance and psychological level of 4,000.
China grew only +0.2% QoQ and +4.9% YoY – slightly below the +0.2%/+5.0% expected on capacity constraints in the economy and deceleration in the property sector. The industrial production number for September was in at only +3.1% YoY vs. +3.8% expected, while Sep. Retail Sales fared better at 0.4.4% YoY vs. +3.5% expected.
New Zealand inflation spiked in Q3 – to 2.2% QoQ and 4.9% YoY, far north of the 1.5%/4.2% expected and the 1.3%/3.3% of the previous quarter. This jolted rate expectations for the RBNZ significantly higher, raising the likelihood of a larger hike of 50 basis points at the bank’s next meeting on November 24 after it carried out its first hike of the cycle earlier this month. NZDUSD rose sharply overnight, extending its recent rally and touching its 200-day moving average before retreating.
Contrasting ECB and BOE comments at the weekend, as ECB president Christine Lagarde was out and continued with the transitory inflation narrative, although she did say that the ECB needs to pay “very close attention” to any signs of wage negotiations driving possible second-round effects. In the UK, meanwhile, Bank of England governor Andrew Bailey said that the BoE “will have to act” on inflation as he warned against the effects of higher energy costs. Still, he also stated that central banks don’t have the tools for dealing with supply chain issues and he believes that the pace of recent price rises would prove temporary.
Volkswagen unit Skoda will make 250k fewer cars than planned in 2021 due to lack of semiconductors, which is twice of the estimated shortfall from just last month, according to Automobilwoche.
What are we watching next?
Impact of rising input prices and supply chain disruptions on earnings - rising energy prices have been a key focus of late, particularly for European companies on the power and natural gas prices rises in Q3, but every company with global supply chains will be affected, and we’ll focus particular attention this week on companies with physical operations, from Procter and Gamble reporting tomorrow, to EV maker Tesla on Wednesday and Intel and Whirlpool on Thursday this week for how they are dealing with these challenges and the degree to which they pass on or absorb rising costs. A Bloomberg article today on European industrial companies suggests that the next risk is of significant demand destruction due to many large companies passing on higher prices to their customers.
Earnings Watch – the earnings season hits full stride this week, with a number of high profile and names reporting before the main haul of megacap and some tech names next week. Tomorrow’s US consumer products giant Procter & Gamble will be one to watch for guidance on developments in wages and inflation.
Today: Philips, Zions Bancorp, State Street, Steel Dynamics
Tuesday: Netflix, Johnson & Johnson, Procter & Gamble, United Airlines, Halliburton, Kansas City Southern
Wednesday: Tesla, Verizon, IBM, ASML, Lam Research, Biogen, Canadian Pacific Railway
Thursday: Barclays, AT&T, Intel, Union Pacific, Snap, Whirlpool, American Airlines, Southwest Airlines, Freeport-McMoRan, Nucor, Genuine Parts, Tractor Supply
Friday: Honeywell, American Express, Schlumberger
Economic calendar highlights for today (times GMT)
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