Summary: Another jumpy day for equity markets yesterday, which failed to sustain solid intraday gains and actually posted their worst daily close for the cycle in the US before rising after hours on strong results from Apple, which managed to skirt the worst of the semiconductor shortage crisis. Fed rate expectations remain pinned near the cycle highs, supporting the surge in the US dollar, although long US treasury yields reversed most of their FOMC meeting-inspired gains.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities had another volatile session yesterday with a wide trading range, but technically Nasdaq 100 managed to avoid a new low which short-term is encouraging. On balance the mix of earnings yesterday was very good with especially Appl earnings showing a lot of strength lifting sentiment. The key risk factor for US equities is still the US 10-year yield which has stopped extending higher for now settling around the 1.82% level which arguably gives a pause in the equity selloff. The natural retracement level to watch on a rebound in Nasdaq 100 future is the 14,428 level.
Hang Seng (HK50.I) traded lower overnight, after large declines in Tesla, Intel, AMD and Teradyne spread to EV makers and semiconductor companies listed in Hong Kong. DYD (1211.HK) and Xpeng (9868.HK) fell more than 8%. Hua Hong Semiconductor (1347.HK) fell as much as 13% after announcing revenues up 89% and profit up 93% respectively in 4Q. In mainland China, markets traded lower with Chinese real estate company Hopson Development falling hard on fresh concerns about the ailing property sector. PWC, Hopson’s auditors, resigned as they did not have access to information to complete the Company’s 2021 audits. The State Council released a White Paper laying out China’s aerospace development blueprint for the next five years.
EURUSD - the USD firmed across the board yesterday as Fed rate hike expectations remain pinned near the high of the cycle and in the wake of strong US GDP data (although the one-off contribution of a huge inventory build that represented the bulk of the strong print will not repeat). EURUSD yesterday plunged to new lows below the prior pivot low of 1.1186 from last November and could be on the path to 1.1000 or lower as long as Fed expectations continue to rise while the ECB remains stuck in the mud with its negative policy rate and fails to indicate any urgency to hike rates. It is notable that long US treasury yields erased most of the rise that materialized in the wake of the FOMC meeting perhaps tempering the USD’s upside potential.
USDJPY – USDJPY trades back above 115.00 on the stronger US dollar in the wake of the FOMC meeting, but the key coincident indicator that often supports USDJPY rallies, long US treasuries, is not providing support after long US treasury yields yesterday erased most of their FOMC meeting-inspired rise. Watching the 116.35 high that was posted in the first week of 2022 for further developments, while a failure back below 114.75-50 would suggest a bearish reversal.
A troubled week for industrial and precious metals with yields and the dollar rising after the Federal Reserve signaled a tighter-than-expected monetary policy stance. With five rate hikes now priced in for 2022 the market will question whether the impact can drive further profit taking and downside price momentum. Industrial metals traded lower for the first time since early December led by nickel (-7%) and copper (-2%) while silver (-6.4%) led the weakness in precious metals ahead of gold (-1.9%). Platinum (-1%) received support from palladium which surged 10% on supply disruption concerns from Russia, the top producer. Biggest short-term challenge could come from a slowdown in Chinese demand during their New Year holiday which starts on Tuesday.
Iron ore futures (SCOH2) up 6% reached a September high overnight in Singapore after the world’s 4th biggest iron ore producer, Fortescue Metals (FMG) reported quarterly results and flagged concerns of labour shortages in Western Australia, that could further hamper shipments. It buoyed shares in iron ore heavyweights Champion Iron (CIA), Rio Tinto (RIO) and BHP (BHP) with iron ore being supported by lack of supply and spurred by China cutting interest rates three times and announcing or starting 3 trillion yuan in infrastructure projects.
What is going on?
Russian foreign ministry spokesman says war with Ukraine “unthinkable” - inspiring a significant recovery in the Russian ruble, which by this morning had gained more than 3% from its lows versus the US dollar posted earlier this week. Tensions remain high as the US and its allies have rejected Russian demands related to Ukraine and the posting of NATO troops in countries along its border, while Russia is said to be considering US offers for further talks, while other talks are to be held between Russia and France, Germany and Ukraine in two weeks, for which the Russian Foreign Ministry spokesman Zaitsev expressed hopes for progress. The Biden administration yesterday repeated a warning that Russia may invade Ukraine in February.
A historic squeeze in US natural gas - The expiring and thinly traded February contract abruptly surged by 72% yesterday as remaining shorts had to scramble to find offers in order to avoid delivery. The contract expired up 46% at $6.265 with the jump being the biggest since the contract was launched in 1990. A shift towards colder weather has given gas a boost this week but with inventories only trailing the long-term average by around 1% there is plenty of gas to go around. The new front month contract of March ended up 6.1% at $4.2830.
Apple earnings were strong despite headwinds from supply chain. The CEO Tim Cook said on the earnings call that the global supply chain worsened in Q4 compared to previous quarters, but despite these challenges the company delivered revenue of $124bn vs est. $119bn and EPS of $2.10 vs est. $1.90. The company said that growth will decelerate in the current quarter, but said that it is also seeing improvements in its global supply chain.
Commodities outperforming all other asset classes this month. The Bloomberg Commodity (BCOM) Spot Index which tracks the front month performance of 24 major futures hit a record high this week with continued strong gains in energy helped lift the index for a fourth straight week. The energy heavy S&P GSCI is up 10% this month while the more broadly exposed BCOM has risen by 7%. A performance that has seen the commodity sector move well clear of other asset classes with protection against turmoil in stocks and bonds being driven by tight supply as rising demand is being met by inelastic supply.
Positive U.S. data. U.S. Q4 GDP was out above consensus at 6.9 %. Personal consumption was up 3.3 %. This is better than expected and a strong finish to the year. Inventory made a very strong and positive contribution to the economic activity too. Initial jobless claims were down to 260k versus 265k estimated and 290k in prior week. This seems to indicate that the Omicron impact is now fading. The biggest decreases were in Pennsylvania (-8k), New York (-6k) and New Jersey (-5k). On the downside, U.S. durable goods orders fell by 0.9 % month-over-month in December versus a drop expected of 0.5 %.
China will jail forty-seven steel company officials for faking air pollution data, in a sign that Beijing’s crackdown on firms that are flouting environmental rules is intensifying. The officials who worked at four mills in Tangshan city near Beijing, China’s top steelmaking hub, were give prison sentences from six to eighteen months, and the sentences underscore Beijing’s push to clean up a major source of air pollution. Authorities have ramped up environmental controls on the steel industry over the past decade in a bid to reduce bouts of dirty air (Bloomberg)
What are we watching next?
U.S. December core PCE is out today. This is the Fed’s preferred inflation gauge. The economist consensus expects monthly core CPE inflation to just round up to 0.5 %. The year-over-year reading is expected at 4.8%, the highest level for the cycle and since 1983. The December FOMC economic forecasts predict that this core PCE indicator will drop to 2.6% by the end of this year, a rather bold forecast
U.S. Q4 Employment Cost Index (ECI) is out today. We know from J. Powell’s December FOMC press conference that the strong increase in the ECI was a major factor behind the Fed’s hawkish pivot. The release of the Q4 print will provide the Fed with an indication of wage inflation persistence into 2022. This is a major indicator today.
Australia’s central bank, the RBA holds its interest rate meeting Tuesday February 1st, with traders expecting the RBA to hint of rate hikes for 2022. Market expectations are for the RBA to rise official interest rates four times this year, with the first hike expected in May. It follows Australia recording its hottest inflation in 14 years, with CPI rising 3.5% year on year in the December quarter. That’s far above the RBA target of 2-3% inflation year on year. The biggest contributor to rising prices are fuel prices, which surged 32% YOY to a record high CPI fuel price reading.
On Monday Jan 31, markets are closed in China, Hong Kong, South Korea, Taiwan and Vietnam for Chinese Luna New Year Holiday. China’s market closed remains next week.
Earnings Watch. Today the key earnings focus is on Chevron and Caterpillar which will give good insights into the global energy and construction sectors.
Economic calendar highlights for today (times GMT)
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Commodity Strategy
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Chief Investment Strategist
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Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy