Market Quick Take - October 11, 2021

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the rebound in US technology stocks was short-lived with Nasdaq 100 futures declining in Friday’s session and continuing lower today sitting around the 100-day moving average. The US 10-year yield is pushing higher and that could push Nasdaq 100 futures towards the 14,500 level again. Higher commodity prices and inflation expectations are toxic for equities and especially for growth stocks that are not profitable.

Hang Seng (HSI.I) - Chinese equities are extending their rebound with Hang Seng futures up 1.9% in today’s session despite the country’s high yield spread reached a new record signaling fragility. Hang Seng futures briefly touched the 50-day moving average around the 25,390 level which happened to be the 61.8% retracement level from the recent lows. One of Charlie Munger’s investment companies have recently more than doubled its position in Alibaba shares which has lifted sentiment among Chinese technology stocks.

EURUSD – for now, EURUSD is locked in a low volatility range after the recent break lower, as the focus has been more on selling the JPY on a rise in sovereign bond yields, with EU sovereign yields also rising, if at a somewhat slower pace. For EURUSD to show signs of life and halt the slide, we would likely need strong developments on the political front that bring forward expectations of bolder fiscal stimulus and German Bund yields rose above 0% (currently –0.15%) though at the margin it would also help if the energy price crunch in Europe were to continue to ease, as was the case late last week. 1.1500 is the next test for the pair and resistance is 1.1600-50.

USDJPY – broke to new highs for the cycle above 112.00 and even the highest level since late 2018 as US treasury yields rose despite disappointing US payrolls growth as the focus was perhaps on a faster than expected rise in hourly earnings. The move looks decisive with the follow through to start the week in Asia, and the next area of note higher is the range into 114.50 which served as  resistance multiple times in 2017 and 2018, with yields at the long end of the US yield curve an important coincident indicator.

Crude oil (OILUKDEC21 & OILUSNOV21) has started the week on a strong footing as the global power crunch continues to raise expectations for higher gas-to-oil switching demand at a time where OPEC+ maintains its modest pace of oil monthly oil production increases. Saudi Aramco estimates the gas shortage has already lifted oil demand by an additional 0.5m barrels/day. Coal futures in China surged 8% overnight after torrential rain and landslides halted some production at mines in the Shanxi province, the nation's top producing region. Monthly oil market reports on tap this week, starting with OPEC on Wednesday and followed by the IEA on Thursday. With WTI already trading at seven-year high, Brent may now target the 2018 high at $86.74.

US treasuries. Inflation numbers are on focus this week. The weak non-farm payrolls last Friday failed to stop the rise in yields as investors focused on high average hourly earnings and better than expected employment numbers. To add to bearish sentiment might be the long-term auctions planned for this week. On Tuesday, the US Treasury will sell 10-year bonds followed by a 30-year auction on Wednesday. Weak bidding metrics and MBS (Mortgage-Backed Security) holders turning to convexity hedging might force yields as high as 1.75% this week. However, if inflation disappoints, yields my fall back to 1.5%.

Gilts. Yields in the UK might resume their rise this week as BOE’s members become more vocal about interest rate hikes. Michael Saunders, on Saturday, said that households should get ready for “significantly earlier” interest rate hikes. If 10-year yields break above 1.20%, they will enter in a consolidation area between 1.20% and 1.32%. This Wednesday’s industrial and manufacturing production numbers and GDP figures are in focus.

What is going on?

Weak US Nonfarm Payrolls Change in September. The U.S. economy created 194,000 new jobs in September versus 500,000 expected. Three factors explain the weakness in job creation :

1)      Hiring in leisure and hospitality slowed down noticeably. Employers added less than 100,000 jobs per month in August and in September versus more than 300,000 before the pandemic. The sector is still down 1.6 million jobs compared with the level before the outbreak.

2)      Local government jobs plunged, especially for teachers (minus 144,200). This might be partially explained by the surge in Covid and vaccine mandates keeping some workers from employment.

3)      Due to bad weather in September, 404,000 workers who usually work full-time could only work part-time.

In addition, the participation rate is a bit down, at 61.6% (-0.1 point). The unemployment rate dropped to 4.8% (-0.4 point). Wages increased 0.6% MoM.

Before the release, several FOMC members, including Chair Jerome Powell and Fed governor Lael Brainard, warned that the September job report might be weak. But they consider it does not reflect the underlying strength of the U.S. economy. Therefore, it is unlikely the job report will have much impact on the timing of the tapering. The economist consensus still expects a tapering announcement in November, with effective start in December.

Strong US Average Hourly Earnings growth in September – The average Hourly Earnings in September rose +0.6% and did so despite a 0.2 hour increase in the average weekly hours, the sixth month in a row in which earnings have risen by 0.4% or more and suggesting a possible wage-price spiral dynamic in inflation if it continues.

BoE sounding hawkish after noted hawk on the MPC Michael Saunders told the Telegraph that policy tightening may come “significantly earlier” than had been expected and Governor Bailey said that action is needed if the UK is to avoid a possibly “very damaging” episode of inflation. Sterling trades higher from Friday’s close versus both the US dollar and the euro and the UK 2-year yield tacked on 14 basis points already last week ahead of these new statements. The next BoE meeting is on

The global gas market remains very volatile given the prospect of very tight supplies in both Europe and Asia this winter. The price of Dutch TTF gas has stabilized after almost halving from the panic peak seen last week. Russia’s offer to help stabilize the market has so far done the job, but with the heating season in Europe and Asia about to start, the market will need actual supplies, not just words. Friday’s closing price in TTF was still more than five times above the long-term average and still above a level that will support gas-to-oil switching. Focus today on coal which surged in China overnight due to weather related supply disruptions. 

Commitments of Traders on FX covering the week to October 5: The dollar long against ten IMM currency futures and the Dollar Index jumped 43% or $7.7 billion to $25.6 billion and is now the largest since June 2019. The greenback was bought against all currency futures except JPY, and speculators now hold net short positions in all major pairs except NZD. Selling was concentrated in EUR where speculators flipped their position to a net short for the first time since last spring

What are we watching next?

Next US macro data and FOMC minutes this week – after the market realized that the September jobs (and especially earnings) report wasn’t necessarily as negative as the initial headlines suggested, we have more interesting macro data from the US this week, including the latest JOLTS job openings survey that has lately shown a record number of job openings, September CPI and the FOMC minutes on Wednesday and September Retail Sales on Friday.

Earnings Watch – The Q3 earnings season starts this week with US financials taking the lead. We wrote a preview of this week’s earnings releases on Friday with a focus on Delta Air Lines, JPMorgan Chase, Bank of America, and Citigroup which are the most important earnings to move the market.

Tuesday: Fastenal

Wednesday: Delta Air Lines, JPMorgan Chase, BlackRock, First Republic Bank

Thursday: Fast Retailing, Bank of America, Wells Fargo, Walgreens Boots Alliance, Morgan Stanley, Citigroup, UnitedHealth, US Bancorp, Progressive, Domino’s Pizza

Friday: Zijin Mining, BOC Hong Kong, PNC Financial Services, Goldman Sachs, Charles Schwab, Truist Financial

Economic calendar highlights for today (times GMT)

0700 – ECB's Villeroy to speak
0800 – ECB's Centeno, Elderson to speak
1200 – ECB's Lane to speak
1400 – ECB's Holzman to speak
1530 –ECB's De Cos to speak
2145 – New Zealand Sep. Card Spending
0030 – Australia Sep. NAB Business Confidence

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