Market Quick Take - February 7, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Equity markets churned back and forth and closed mixed last week after the official US jobs report showed far more payroll gains than expected and US yields surged higher in anticipation of more rapid Fed policy tightening. This week, markets in China are back online after a long holiday, earnings season rumbles on and traders will have to mull the implications of the latest spike in oil prices.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Friday’s session ended much better than feared in early hours of trading as Nasdaq 100 futures were pushing below the Thursday’s lows, but a late session rally pushed the Nasdaq 100 to a relatively strong close. This morning, Nasdaq 100 futures are trading around the 14,725 level which is above the 38.2% retracement level from last week’s highs. If US technology stocks push higher today the 50% and 61.8% retracement levels at 14,811 and 14,917 respectively are the key levels to watch. The VIX sits just above 23 indicating above average expected volatility with the forward curve sloping slightly upwards. While the earnings season is still ongoing, we do not expect a big impact any longer from earnings.

Hang Seng (HK50.I) traded lower in Asia led by internet, software, and catering stocks while oil and gas, coal mining, industrial mental mining, and infrastructure stocks were up. Alibaba (9988.HK) fell 3.7%; Meituan (3690.HK) was down 2.7%. In A-share markets, CSI 300 was up 1.6% in the morning session. Caixin Service PMI fell to 51.4 in January (down from 53.1) to its lowest level in five months. Passenger trips during the pre-holiday travel rush and during the holiday were still 64.6% and 68.8% respectively below the same period in pre-pandemic 2019. Tourism revenues were 3.9% and 43.7% below 2021 and pre-pandemic 2019 respectively. New home sales (by floor space) in 30 major cities were down 30.2% in January yoy. The top-100 developers’ sales (by value) were down 41% in January yoy.

EURUSD – the exchange rate surged higher last week as Thursday’s ECB meeting was seen as the “capitulation” meeting in which the central bank admitted that it would review its inflation policy in coming meetings and the market took this as nearly certain to mean a quick end to balance sheet expansion and. Most of the upside was due to the strong euro, not a weak US dollar and the rally held well Friday despite a very strong US Jan. employment report (more below). Still, it may be difficult for the pair to post further short term gains after the magnitude and speed of the rally off the cycle lows below 1.1150. Resistance is the major pivot high from late last year just ahead of 1.1500 and likely that big, round number itself, and first support is perhaps 1.1400, although the 38.2% retracement of the rally is all the way down at 1.1345. 

USDCNH – the USDCNH exchange rate stayed relatively quiet last week during China’s long holiday week, but the PBOC surprised the market today by fixing the onshore CNY at 6.3580 to the US dollar, the weakest level relative to expectations in years. The week before last the bank seemed to send a signal by weakening CNY sharply just after it has posted new multi-year lows and this sends a further signal that the bank is not interested in allowing CNY and CNH to slip further against the US dollar.

Crude oil (OILUSMAR22 & OILUKAPR22) trades mixed following a week that saw prices hit the highest levels since 2014. US natural gas (NATGASUSMAR22) and WTI, however, trades softer, with a drop in the March-April WTI prompt spread to $1.6 from $2.2 on Friday signaling reduced supply risks as output returned after a winter storm swept across the South. Saudi Arabia raised its selling price to all corners of world for March, a signal they expect strong demand for its crude, not least considering the rising gap between OPEC+ quotas and what is and can be being produced. Focus on geopolitical developments as well as monthly oil market reports, starting with the EIA tomorrow, as the market seeks guidance on the supply and demand situation.

Gold (XAUUSD) once again managed to find a bid below $1800 on Friday after a stronger-than-expected US job report sent US 10-year yields higher while increasing the number of expected US rate hikes in 2022 to more than 5. Total holdings in bullion-backed ETFs dropped for a second day on Friday while hedge funds in response to the hawkish January FOMC meeting cut their net long in COMEX futures by 47% to a four-month low (COT update covering week to February 1). Silver (XAGUSD) has bounced after once again finding support at $22 and following a 58% reduction in the net futures long, a break above the 21-day moving average may trigger some fresh momentum buying. Gold resistance at $1817, the 21-day moving average and 50% retracement of the Jan 25-28 FOMC related slump.

US Treasury (IEF, TLT). Markets long await Thursday’s CPI numbers. However, tomorrow’s trade balance will also be crucial for bond investors. A larger trade deficit requires more foreign investors to buy US assets while more buyers are needed to fund the US budget deficit while the Federal Reserve ends its QT. That could drain demand from upcoming US Treasuries auctions. The US Treasury is selling 3-year notes tomorrow, 10-year bonds on Wednesday, and 30-year Bonds on Wednesday. To worry investors holding risky assets should be the 10-year auction, as yields broke above 1.9% on Friday, getting close to the pivotal 2% level.

EU Sovereigns (VGEA). In Europe, the focus will be on the European Commission economic forecasts, especially for a possible revision of inflation projections for this year and 2023. The market is focused still on last week’s hawkish ECB’s meeting, however rising yields in the US could force European peers higher. The biggest focus at the moment is the German Bund, and the BTPS-Bund spread as it could trigger another EU political crisis as it widens. We believe the breaking point will arrive when the BTPS-Bund spread gets close to 200bps. Although we are far from that, things can move quickly as volatility remains sustained and rates rise globally.

What is going on?

ECB’s Klaas Knot says appropriate to hike rates this year – the Dutch central bank governor is the first member of the ECB’s Governing Council to specifically state that interest rates should be raised this year, as he also argued that QE should be wound down as quickly as possible before hiking rates in Q4.

US Jan. jobs report far stronger than expected. On Friday, the market was looking for weak jobs growth for January after the ADP Jan. private payrolls tally reported an outright drop of 300k in payrolls earlier in the week. This took expectations to below 150k for the official nonfarm payrolls, with some banks expecting a negative number. Instead, the BLS reported growth of 467k and even more impressively, the Nov. and Dec. numbers were revised over 700k higher. The Unemployment Rate ticked up to 4.0%, but that was due to the participation rate normalizing another 0.3% higher (meaning the labor force grew and more workers began looking for jobs). The Average Hourly Earnings number rose 0.7% month-on-month and 5.7% year-on-year vs. 0.5%/5.2% expected, respectively, although average weekly hours worked fell 0.2 hours, skewing the reading somewhat higher.

Strong rebound of the UK January construction PMI. It was out at 56.3 versus prior 54.3. The UK construction sector is gaining momentum as commercial activity surged to a six-month high and supply chain disruptions are easing. This helped to offset a weak start of the year for house building.

Disappointing EZ December retail sales. They declined by 3 % month-over-month versus minus 0.5 % expected. This is a big miss. It seems that rising consumer inflation is starting to take a toll on consumer spending. This is also happening in the United Kingdom, for instance. In detail, retail sales of non-food products fell by 5.2 % and internet sales by 3.9 %.

What are we watching next?

Corporate credit spreads – with central banks lurching onto a more aggressive policy tightening path, the impact on corporate credit bears watching after a long period of remarkably generous conditions for corporate borrowers. Yield spreads have widened across the board this year, if modestly, with investment grade spreads in the US at their highest since late 2020, according to one Bloomberg index, while high yield spreads have yet to widen beyond late 2021 levels. The FT reports, however, that some bond investors are scrambling to hedge corporate bond holdings with credit default swaps (CDS’s) where the activity level rose in January to the highest since March of 2020. Corporate credit spreads are an important measure of financial conditions.

February Eurozone Sentix investor confidence is out this morning. In January, the index unexpectedly improved to 14.9 from 13.5 in December. Expect it will continue to move upward. The economist consensus forecasts the headline to reach 15.2. However, the expectations index is likely to remain subdued due to the continued effects of supply bottlenecks and high inflation figures.

Russo-Ukrainian crisis update. The French president Emmanuel Macron is flying to Moscow today to meet the Russian president Vladimir Poutine today. Tomorrow, he will be in Kyiv (Ukraine). He is trying to find a path to common ground from which to move forward.

Earnings Watch. Busy earnings week ahead with earnings focus today on Amgen and Tyson Foods. The Q4 earnings season shows that profit margins are under pressure from rising input costs across wages and commodities with the pressure being the biggest in the US.

  • Monday: NTT, Daikin Industries, Amgen, Tyson Foods
  • Tuesday: Thomson Reuters, Cenovus Energy, BNP Paribas, SoftBank Group, Nissan Motor, BP, Ocado, Yara International, Pfizer, S&P Global, Fiserv, KKR & Co, Chipotle Mexican Grill
  • Wednesday: Commonwealth Bank of Australia, Manulife Financial, A.P. Moller – Maersk, DSV, Pandora, Sampo, L’Oreal, Toyota Motor, Honda Motor, GlaxoSmithKline, Adyen, Equinor, DNB Bank, Evolution, Walt Disney, CVS Health, Uber Technologies, Twilio
  • Thursday: KBC Group, Brookfield Asset Management, Constellation Software, Vestas, Neste, TotalEnergies, Pernod Ricard, Credit Agricole, Societe Generale, Siemens, Semiconductor Manufacturing International, Unilever, AstraZeneca, British American Tobacco, Arcelor Mittal, Heineken, Zurich Insurance, Credit Suisse, Coca-Cola, PepsiCo, Philip Morris, Linde, Duke Energy, Moody’s, Illumina, Datadog, Global Payments, Cloudflare, VeriSign, Twitter
  • Friday: Enbridge, Dominion Energy, Apollo Global

Economic calendar highlights for today (times GMT)

  • 0900 – Switzerland Weekly Sight Deposits
  • 0930 – Euro zone Feb. Sentix Investor Confidence
  • 1545 – ECB President Lagarde to speak
  • 2000 – US Dec. Consumer Credit
  • 2350 – Japan Dec. Current Account Balance
  • 0030 – Australia Jan. NAB Business Survey
  • 0215 – New Zealand RBNC Governor Orr to speak on future of money
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.