Market Quick Take - December 21, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures bounced back after hitting the 100-day moving average yesterday trading around the 15,800 level this morning in early European trading hours. Liquidity is slowly coming down and we subscribe less value to the daily moves for the rest of the year. Most moves will just be noise. Despite the recent selloff S&P 500 futures are trading around 4,600 and comfortably close to the all-time high suggesting that the recent volatility is about repositioning of portfolios before they roll into the new year.

Turkish Lira (EURTRY) delivered another day for the history books on Monday. After hitting a record low at 20.75 against the euro, it surged by close to 40% to trade below 13 this Tuesday morning. The biggest rally in forty years came after President Erdogan’s government announced several measures including the introduction of a new program to protect savings from the lira’s fluctuations. The government will make up for losses incurred by holders of lira deposits should its declines against hard currencies exceed interest rates promised by banks, Erdogan said. It will take some time for the market to digest the longer-term impact of these measures, and until then the currency may continue its wild fluctuations.

Crude oil (OILUKFEB22 & OILUSFEB22) trades higher after declining almost 5% during the previous two sessions. With omicron-related demand worries the key driver of the recent weakness, some relief came after Moderna, just like other drug makers, said a third dose of its vaccine increased antibody levels against the omicron variant. For now, the relief bounce is unlikely to drive a major turnaround in sentiment with the Brent prompt spread signaling an oversupplied market. Some longer term support from a Rystad Energy report saying that global oil and gas discoveries are heading for the lowest level since 1946.

Gold (XAUUSD) trades back below its 200-day moving average after failing to gain a foothold above $1800 and after risk sentiment improved after Moderna said a third vaccine shot increased the body’s ability to fend of the omicron variant. We see limited prospects for a major move ahead of the new year with positioning, both long and short, having been trimmed after weeks of sideways trading.

Arabica Coffee (COFFEEUSMAR22) which recently hit a decade high at $2.52 tumbled to a four-week low after the USDA on Friday made a surprise upgrade to its world output estimate. However, with developments on the ground in Brazil still pointing to a challenging 2022 season, the weakness is likely driven by omicron worries driving a reduction in a speculative long, which had built strongly in recent months. Having broken below the 2014 high at $2.255, the market could make a push towards $2.20 followed by $2.12, but overall, the fundamental outlook points to renewed support but first a painful correction phase may force weak longs out of the market.  

 US Treasuries (SHY, IEF, TLT). This week it's all about personal consumption expenditures, the consumer confidence index, and the University of Michigan Survey. Although the long part of the yield curve is stuck by Covid and growth fears, the front part of the curve might resume soaring, contributing to its flattening trend. Yet, we believe that long-term yields have upward potential as the market will need to accept the Fed’s tightening agenda. Yesterday, Eurodollar futures priced in more than three rate hikes in 2023 contributing to a bear steepening of the yield curve. Today, the US Treasury is selling 20-year bonds.

European sovereigns (IS0L, BTP10). The focus will be on the E.U. consumer confidence released today and the producer price index coming out from Italy. For the month of November, Italian PPI spiked to 9.4%. A sustained number contributes to higher inflation in Italy as well as Europe. Yet, following last week’s ECB meeting, it’s likely rates will trade rangebound until the end of the year compressed by covid fears. In 2022 we see scope for steeper EUR curves as the central bank’s total net bond purchases will be less than half than this year. However, the steepening might not begin until January, as the customary large bond issuance at the beginning of the year.

What is going on?

President Biden’s ‘Build-back-better' spending plan that on Sunday was torpedoed by U.S. Senator Joe Manchin, a moderate Democrat, could still be revived after the two held talks. The Democrats are now looking to make enough changes to secure a ‘Yae’ from Manchin.

Nike reports better than expected earnings. Revenue at $11.4bn vs est. $11.3bn was impressive given the big miss on revenue in Greater China and the earnings beat was even more impressive as gross margins are improving beyond expected. Nike says revenue will grow mid-single digit in FY22 and gross margin will expand by 150 basis points with the CFO expressing confidence that production in Vietnam will normalize soon.

Micron shows computing demand is still high. The US-based memory chip maker reported better than expected results last night with EPS guidance for Q2 (ending 28 February) significantly above consensus estimate. Personal computing demand is high, but shipments will be flat due to supply constraints in other parts of the supply chain. Micron said its data center segment grew impressively 70% y/y in the quarter and the company is projecting CAPEX of $11-12bn in FY22 (ending September 2022) compared to $10bn in the previous fiscal year.

What are we watching next?

Equity weakness in December as liquidity dries up. Are we going to see a repeat of equity weakness like in 2018 where the post FOMC narrative was that of a policy mistake? This time around it does not smell of policy mistake as the Fed changed its outlook to match that of the market, but the Omicron and fiscal drag next year are both adding to growth concerns in the short-term and with liquidity drying up as trading books are closed, we could see more weakness. Omicron impact on economic activity is a key short-term risk to watch as Germany yesterday said that GDP growth could be negative in Q4 due to the rising Covid cases in Q4 that have restricted mobility.

Chinese housing crisis and monetary easing. The prime lending rate was lowered in China for the first time in 20 months and commercial banks have recently been instructed to lower loan rates to ease financial conditions. These steps coupled with recent liquidity injections are signs that China is moving in easing direction while the rest of the world is tightening. China is doing this of course to offset the weakness on demand coming from lower new home prices and Chinese real estate developers under pressure to reassure their financials. If China goes into more aggressive stimulus mode in early 2022 it could be major positive for emerging market assets as it will drive demand for commodities and could lower the value of the USD.

Earnings Watch – no earnings this week and will stay light until the Q4 earnings season starts in mid-January.

Economic calendar highlights for today (times GMT)

0030 – RBA Minutes of December Meeting

0700 – German Jan GfK Consumer Confidence

1330 – Canada Oct Retail Sales

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