Market Quick Take - November 5, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - it looks more and more like a meltdown move in equities with Nasdaq 100 up 14% in little more than a month. Given the ongoing adjustments in interest rates and the potential for a strong jobs report in the US today, we believe investors should realize some of their recent gains in equities as the market could easily selloff and go back to test the levels around the high from late August and early September.

EURUSD – the EURUSD supermajor looked heavy near the bottom of the range and 2021 low (near 1.1525) yesterday, but eased back a bit higher ahead of today’s important US jobs report, which is the next best chance to test whether US payrolls and earnings data can move the needle on Fed expectations. It’s remarkable that the US dollar has managed to stay strong on the other side of a dovish Fed meeting, although 2-year EU-US yield spreads trading at cycle lows despite Fed expectations backing off over the last week support the stronger US dollar.

GBPUSD and EURGBP – sterling plunged yesterday in the wake of a surprisingly dovish Bank of England meeting yesterday (more details below) that resulted in a far more shallow trajectory of rate tightening after the bank neglected to hike rates yesterday. GBPUSD sold off steeply through the pivotal 1.3600 area and even through the huge 1.3500 area, though the nominal range lows after a spike sell-off in late September are close to 1.3400. If the US dollar continues to firm here, the action could drift lower toward 1.3000 eventually, though now the market will be very sensitive to coming UK employment data releases after the Bank’s guidance yesterday. EURGBP faces an importan resistance soon ahead of 0.8600, as the 200-day moving average comes in at 0.8586, while the povit high from late September was 0.8658.

Crude oil ended a roller-coaster day firmly in the red yesterday after OPEC+, as expected, decided to extend the current 400,000 barrels per day production increase into December. The weakness partly triggered by speculation a very unhappy US administration may release strategic reserves to help arrest rising gasoline prices, currently at their highest seasonal level in eight years, and nearly 30% above the five-year average. The market is also once again forced to focus on covid-related demand disruptions, especially in China, the world's biggest importer. Overall, however, the market remains under-supplied and this should prevent a major correction at this stage with the next area of support below $80 in Brent being a band between $77.75 and $78.25

Gold (XAUUSD) is once challenging $1800 after the market concluded the FOMC had delivered a dovish taper, and after the Bank of England surprisingly refrained from becoming the first major central bank to lift rates. US ten-year real yields dropping back below –1% helped off-set the stronger dollar and low stock market volatility. The latter being one of the reasons why ETF holdings has dropped to an 18-month low with real money investors shunning gold given the lack of need to diversify portfolios. Focus now turns to the U.S. jobs report (see below) in order to gauge the strength of the labor market, which could shift views on monetary policy once more.

US treasuries (TLT, IEF, SHY). The US yield curve steepened slightly after a rally provoked by the dovish surprise of the Bank of England. Fed hike expectations eased slightly, yet two full hikes remain priced by the end of next year. Today's non-farm payrolls are in focus. During the latest FOMC meeting, Powell re-established the link between jobs and interest rate hikes. A strong job report, especially high average hourly earnings, might lead the yield curve to bear flatten again. As the unemployment rate falls to 2019 levels in the next few months, we expect interest rate hikes to continue to advance. Thus, upward pressure will continue to be applied on the front part of the yield curve while long-term yields will also resume rising, but at a slower pace.

UK Gilts (IGLT). The BOE surprised markets by leaving the benchmark interest rate unchanged despite the UK breakeven rate is the highest since 1997. The Gilt yield curve bull steepened with 2-year yields dropping as much as 21bps, the same as march 2020 during the Covid-19 pandemic. The market will need to reconsider interest rate hikes expectations in the UK, as they were far ahead than those of the Federal Reserve. Today BOE’s Ramsden and Tenreyro’s speech as in focus. Further dovish sentiment could imply more yield curve steepening.

What is going on?

Bank of England surprises with no hike - as a majority were looking for a 15-basis point hike at yesterday’s meeting. As well, Governor Bailey said it was not the Bank’s job to guide the market “day by day and week by week” on interest rate hikes, and the general tone of caution on how the jobs market would behave in the wake of the recent end to the furlough scheme from the pandemic era .This badly surprised a market that had priced in a steep trajectory of policy hikes over the coming year, particularly after often urgent, if also confusing, rhetoric from Governor Bailey himself. Expectations for the policy rate by the end of next year dropped more than a full 25 basis points.

Czech central bank hikes by 125 basis points, far more than expected. The market was looking for a smaller, if still large 75-basis point hike to the policy rate in Czechia yesterday, but the bank delivered more, taking the policy rate to 2.75%, the highest since 2008 as the bank attempts to get ahead of inflation risks after the Czech CPI reached 4.9% in September. Governor Rusnok said that inflation could reach as high as 7% this winter and promised more rate hikes to come. The next CPI release is next week. EURCZK trade d sharply lower yesterday in a further retreat from October highs above 25.75 and is now close to the range lows this year of 25.25, with CZK longs now earning over 300 basis points of carry versus the negative yielding Euro.

Tesla hikes prices on Model 3 and Y. Rising input costs across aluminum, steel, copper, and more importantly lithium (which is up 225% year-to-date) are threatening Tesla’s profit margins and as a result the world’s leading EV maker is hiking prices on its two most popular models (3 and Y). The biggest issue for EV makers is not demand but the availability of supply on key input materials such as lithium.

US earnings recap. Moderna shares declined 18% yesterday on cut to FY revenue guidance with the vaccine maker now expecting revenue of $15-18bn vs est. $19.9bn. The company has been hit by production challenges and reiterated on the conference call that its flu vaccine data should be out soon. Airbnb shares were up in primary and extended session yesterday reporting stronger than expected Q3 revenue and EBITDA, but the Q4 revenue growth momentum is fading something against expectations as the travel booking platform is conservative on guidance given the current Covid-19 wave in cases. Square saw its shares lower yesterday as investors were surprised about the miss in Bitcoin revenue suggesting a slowdown in cryptocurrency trading outside the traditional channels and may suggesting that retail is losing a bit of appetite whereas institutional investors are still increasing their activity in cryptocurrencies.

What are we watching next?

US Oct. Nonfarm Payrolls Change and Average Hourly Earnings data today. The market has taken treasury yields lower all along the curve in the wake of the quite dovish FOMC meeting this week, apparently not fearing that economic data will see the Fed second guessing its guidance from the meeting. Chair Powell made it clear in the FOMC press conference that the Fed is willing to tolerate hot inflation levels well into 2022 before second-guessing its stance that this inflationary cycle is temporary, so it will take some very hot numbers for both payrolls growth and perhaps just as importantly, average hourly earnings, to change the narrative and see the market pricing the Fed to accelerate the timeline toward its first rate hike. Earnings could seize increasing attention in particular as huge payrolls growth numbers are unlikely to be sustained in a US labor market that is supply constrained by millions of early retirements during the pandemic, ongoing virus concerns keeping some parents in part-time roles, and vaccine mandates. Today’s October Average Hourly Earnings rise is expected at +0.4% MoM and +4.9% YoY. The October nonfarm payrolls change is expected at +450k after the low +194k print for September.

Earnings Watch – another week is coming to an end in the earnings season with S&P 500 and Nasdaq 100 once again leading the global surge in earnings with Nasdaq 100 seeing 4.8% q/q growth in EPS in Q3. Today, the key focus is on Alibaba and EOG Resources. Alibaba is still down 50% from its peak as investors are still confused over the longer-term impact from Chinese regulation of the technology sector. EOG Resources is a US shale oil and gas producer and is thus important to watch in terms of gauging whether more US crude could come to the market in 2022.

Friday: Enbridge, TC Energy, Honda Motor, Amadeus IT Group, Siemens Gamesa, DBS Group, Alibaba, EOG Resources, DraftKings

Saturday: Berkshire Hathaway

Economic calendar highlights for today (times GMT)

0700 – Germany Sep. Industrial Production
0745 – France Sep. Industrial Production
0830 – ECB's Holzmann/Guindos to speak
0900 – Norway Norges Bank’s Governor Olsen to speak in Bergen
1215 – UK Bank of England Chief Economist Pill, Deputy Governor Ramsden to speak
1230 – Canada Oct. Net Change in Employment/Unemployment Rate
1230 – US Oct. Average Hourly Earnings
1230 – US Oct. Nonfarm Payrolls Change
1230 – US Oct. Unemployment Rate
1300 – Bank of England’s Tenreyro to speak
1400 – Canada Oct. Ivey PMI

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