Financial Markets Today: Quick Take – January 2, 2022 Financial Markets Today: Quick Take – January 2, 2022 Financial Markets Today: Quick Take – January 2, 2022

Financial Markets Today: Quick Take – January 2, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Equity markets churned back and forth in the last week of 2022 and we start 2023 off with a holiday for UK and US markets today as traders get their bearings in the New Year. The US dollar is trading on its back foot despite a solid back up in US treasury yields in the final weeks of 2022 and ahead of the first important macro data this Friday in the form of the December US jobs report.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

It is a US holiday today so US equity markets will be closed. US equities fell the most in 2022 since 2008, ending a year that saw inflation and interest rates coming back to haunt excessive equity valuations. The first two weeks of the year are going to be very exciting to see whether last year’s momentum in commodities and defence stocks continues or new trends in our theme baskets will start to emerge.

Stoxx 50 (EU50.I)

First day of trading under way in Europe with STOXX 50 futures up 0.7% despite several recent remarks from ECB members that policy rates must remain high or go even higher to curb inflation. STOXX 50 futures remain in a tight trading range established since mid-December with the 3,782 level being the key level to watch on the downside and the 3,875 level on the upside.

FX: USD trades near multi-month lows as 2023 gets under way

Interesting to see the USD weakness despite a solid surge in US treasury yields, especially at the long end of the yield curve, as 2022 drew to a close. The first week or two of this year will be needed to see if some portion of the USD’s weakening was down to end-of-year effects. USDJPY trades not far above the important 130.00 level as investors anticipate that the new Bank of Japan leadership change in April will finally bring some tightening, while the market still predicts that the Fed will quickly reach its “terminal” high in the policy rate and eventually ease policy before the year is over. But will the first data points of the year, starting with this Friday’s December US jobs data, support this view?

Crude oil (CLG3 & LCOH3)

Crude oil futures ended a volatile 2022 close to unchanged after having traded within the widest range since 2008. Another volatile year undoubtedly lies ahead with multiple uncertainties still impacting supply and demand. The two biggest that potentially will weigh against each other in the short term remain the prospect for a recovery in Chinese demand being offset by worries about a global economic slowdown. Covid fears, inflation fighting central banks, lack of investments into the discovery of future supply, labour shortages and sanctions against Russia will also play its part in the coming months. Ahead of yearend, hedge funds raised bullish Brent crude oil bets by the most in 17 months. At 144k contracts, however, it remains around half the five-year average.

Gold (XAUUSD) and silver (XAGUSD) ended 2022 on a high note

Having closed 2022 near unchanged despite massive headwinds from a stronger dollar and surging treasury yields, the outlook for 2023 looks more price friendly with recession and stock market valuation risks, an eventual peak in central bank rates combined with the prospect of inflation not returning to the expected sub-3% level by yearend all adding support. In addition, the de-dollarization seen by several central banks last year, when a record amount of gold was bought look set to continue, thereby providing a soft floor under the market. As always, the dollar and yield movements will be a key focus while in the short term the market will look ahead to Wednesday’s FOMC minutes and Friday’s US job report.

Yields on US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) start the year near multi-week highs

US Treasury yields backed up higher as 2022 drew to a close, particularly at the longer end of the yield curve, helping to steepen the yield curve from its most inverted levels in some four decades earlier in December, but still starting the year with an inversion for the 2-10 yields of around –50 basis points as market participants figure that a recession is on the way this year that will see the Fed chopping rates by year end. The 10-year yield level to watch to the upside is perhaps the 4.00% area ahead of the 4.34% high from October, which is a 15-year high.

What is going on?

2022 was the worst year for combined stock and bond portfolios in modern memory

The year of 2022 was so unusual as bonds failed to provide any diversification in what investors have traditionally seen as “balanced” portfolios of, for example, 60 percent stocks and 40 percent bonds. An FT article calculated that 2022 was the worst year, in nominal terms, for combined equity and stock portfolios, since 1871.

China official December Non-manufacturing PMI plunges to 41.6

... as December was the month (December 7 seen as the major turning point) that China finally backed away from its zero Covid policy, ironically meaning that in the short term, activity levels have plunged as the virus spreads rapidly throughout the country rather than due to official restrictions on activity. In a New Year’s address, President Xi Jinping discussed the “new phase of Covid response”.

Hedge funds increased commodities exposure ahead of year-end

Speculators went on a buying spree ahead of yearend with broad demand lifting the combined net long across 24 major commodity futures contracts by 16% to a six-month high of 1.4 million lots. Except for natural gas all other contracts saw net buying led by Brent crude which saw the net long jump by the most in 17 months. The other main contributors were gas oil, gold, grains led by corn, as well as sugar and cocoa. Combined with the prospect of a recovery in demand from China, continued dollar weakness ahead of yearend may have played a role supporting demand. Speculators exited 2022 with the biggest dollar short since July 2021, but it is worth noting the bulk being against the euro where the €18.5 billion long is the biggest in 23 months.

What are we watching next?

US Data this week relative to market expectations for Fed policy

The market continues to express the view that inflationary pressures will decelerate and that the labour market will loosen up sufficiently for the Fed to begin chopping rates before year-end. Last week’s US Consumer Confidence survey for December showed a strong surge in confidence, a development that is at odds with past patterns for the survey if the country is tilting into a recession. Further strong US data for December and the next month or two would be an interesting challenge of the market expectations. This week sees the release of the December ISM manufacturing survey on Thursday and the December jobs report on Friday.

Earnings to watch

The earnings calendar is light in the first week of the new year, but in a couple of weeks the first Q4 earnings releases will begin to be released. The Q4 earnings season will continue its focus on margin pressures related to input costs on employees and raw materials including energy.

  • Thursday: Walgreens Boots Alliance, Conagra Brands, Lamb Weston, Constellation Brands, RPM International
  • Friday: Naturgy Energy

Economic calendar highlights for today (times GMT)

  • 0815-0900 – Eurozone Final Manufacturing PMI
  • UK Markets Closed
  • US Markets Closed
  • 0145 – China Dec. Caixin Manufacturing PMI

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992