Summary: Markets are off to a sluggish start this week after a choppy session on Friday, with China reporting its first official Covid deaths in months, one in Beijing, and driving new headwinds for reopening hopes. The Hang Seng Index was down over 5% at one point overnight. The week ahead is a short one in the US, with markets closed there on Thursday for the Thanksgiving holiday. Wednesday sees the release of many preliminary manufacturing and services PMI.
S&P 500 futures are trading slightly lower in early European trading hours driven by lower sentiment as China’s zero Covid policy is already under pressure with rising case numbers and the central bank, PBoC, urging stabilisation of financing to the real estate sector indicating how fragile this part of the economy is. The key level on the downside to watch in the S&P 500 futures is the 3,955 level and after that the 100-day moving average at around the 3,919 level.
Euro STOXX 50 (EU50.I)
European stocks are still up more than 20% from the lows in early October following better than expected macro news and mild weather on the continent. But it seems the good fortune might change now with the weather turning much colder in Northern Europe and if China is not opening up as fast and wide as expected that is a negative for European companies as China is the largest trading partner to Europe. STOXX 50 futures are trading around the 3,910 level with the 3,892 level being the first support level to watch on the downside and then the 3,873 level.
The US dollar traded firmer in the Asian session overnight after choppy action late last week as there has been no major follow up move in US yields after the huge reaction to the October CPI data release the week before. Risk sentiment seems to be the local driver here and major reversal levels for USD pairs are still quite distant, meaning the USD can continue to consolidate without major technical implications just yet. Examples of levels are the 1.0100 area in EURUSD, the 1.1600-50 area in GBPUSD and 0.6500-25 in AUDUSD. Little in the way of US macro data this week, although on Wednesday we do get the FOMC minutes, together with a dump of data points including Oct. Durable Goods Orders, weekly jobless claims, preliminary Nov. Manufacturing and Services PMI, and Oct. New Home Sales ahead of the Thanksgiving holiday, with markets close in the US on Thursday and only partially open on Friday.
Crude oil dropped further to fresh multi-week lows in early Monday trading with January Brent touching 86.40 and December WTI below 80. The short-term outlook has been hurt by renewed dollar strength, the most inverted US yield curve in four decades signaling high risk of an economic recession, and not least China’s continued struggle with Covid (see below). Ahead of EU sanctions on Russian oil, which will reduce supply from early next year, the seasonal softness in demand has been exaggerated by the above-mentioned developments. Crude oil trades within a wide range, and it will take a break below the September low at $83.65 in Brent and $76.25 in WTI for that to change.
Gold (XAUUSD) Gold trades lower for a fourth day with the market potentially targeting $1735 support. While a stronger dollar driven by FOMC hawks (see below) is weighing on prices, gold’s biggest short-term threat remains long liquidation from funds who in the runup to last week’s failed attempt to break resistance around $1800 had bought gold futures at the fastest pace since June 2019. During a two-week period to November 15 money managers bought 80k lots thereby flipping a short position to a 49k lots net long. During the same period holdings in bullion-backed ETFs continued to drop, signaling no appetite from longer-term focused investors to get involved. An extension of the recent rally likely requires further declines in yields and the US dollar driving fresh demand for ETFs or some other catalyst that sees a run to safety.
US treasury yields rose slightly on Friday, but have fallen back to start the weak amidst soft risk sentiment in Asia. Friday saw the yield curve inversion reaching a new extreme for the cycle at –72 bps for the 2-10 slope. For the 10-year yield, the cycle low is 3.67%, with considerable focus on the 3.50% level (the major high from June just after the FOMC meeting), while an upside reversal would require a jump well through 4.00%.
China reported its first official Covid-related death in nearly 6 months in Beijing as the outbreak continues to get worse and cast doubts on a Xi pivot. The capital added 516 cases on Sunday and called the situation "grim." There are some retail and school closures, and the request to stay home was made over the weekend and has been extended. Meanwhile, a district in Guangzhou has imposed a 5-day lockdown to conduct mass coronavirus testing in some areas. China focused commodities have taken a haircut on the recent deterioration on concerns tighter restrictions could be enforced, while China implements its new 20-point tweaking covid restriction plan, aimed at minimising disruptions to people’s daily lives and the economy. The iron ore (SCOc1) price fell almost 4% on Monday in Asia while copper has lost 8% during the last week. Hopes regarding China’s property sector remain after the nation introduced a property rescue package last week.
Referencing the US’ ban against exports of key advanced semiconductor production technology, the Netherland’s trade minister said Friday. This was among signs that Europe is seeking a “middle path” on its policy toward China after US President Biden’s administration asked key allies to comply with its ban as well. French President Macron Friday also pushed back against the idea of dividing the world into rival blocs, while German Chancellor Scholz visited China two weeks ago looking for economic reconciliation between the two countries.
This takes the decline in house prices down 14% from the peak sounding off the alarms at the Riksbank and commercial banks as the house price declines will drive impairments on loans related to the sector. This could in turn lead to lower credit extension from banks into the private sector and thus slow down the economy further.
In a speech on Friday, ECB president Christine Lagarde confirmed once again that the central bank will mostly focus on fighting inflation in the short- and medium-term. According to her, the risk of a recession in the eurozone has significantly increased but even if this happens, it is unlikely to quell inflation significantly. This means that hiking interest rates is still on the cards. She also advises the eurozone government to embrace targeted and temporary fiscal stimulus. Too much fiscal stimulus is likely to stimulate demand, thus increasing inflationary pressures. Based on the detailed eurozone HIPC report for October which was released a few days ago, there is so far no sign whatsoever of a peak in underlying inflation pressure. In our view, we should not take for granted that the ECB will slow the pace of hikes to 50 basis points in December.
The weekly Commitment of Traders report covering the week to November 15 saw speculators make some major position adjustments as the dollar and yields dropped, a further inversion of the US yield curve raising the risk of an incoming recession as well as temporary hopes China would ease its Covid restrictions. Developments that saw funds reduce exposure in energy and grains while adding length to metals and softs. The biggest changes being a sharp reduction in speculative bets in crude oil, soybeans, corn and cattle while buying was concentrated in gold, copper, sugar and cocoa.
The Reserve Bank of New Zeeland is likely to deliver its sixth consecutive 50bps rate hike this week, or more with consensus tilting towards a larger 75bps move. The calls for a hike come amid hot inflation at 7.2% YoY in Q3 – well above the RBNZ’s 1-3% target – which comes in conjunction with a tight labour market. Most members of the RBNZ shadow board also supported a 75bps rate hike. NZDUSD started the week on a stronger footing, after having touched 0.62 on Friday. AUDNZD remains in a downtrend with China’s Covid outbreak as well as a relatively dovish RBA limiting the prospects for AUD.
Fed’s Boston Governor Collins appeared on a CNBC interview on Friday and said she hasn’t decided on the magnitude of next month’s interest rate hike, but that a 75bps rate hike remains on the table. She also emphasised that there is no clear and significant evidence that the overall inflation is coming down at this point, and there is also no clear consistent evidence of softening in labor markets. In fact, her comments raised terminal rate expectations as she said that data since September have kind of increased the top of where the Fed may need to go with interest rates. On the economy, she is concerned there could be a self-fulfilling dynamic that could make a more severe downturn more likely. However, Collins is reasonably optimistic a recession can be avoided. On the other hand, we also heard from Atlanta Fed Governor Raphael Bostic who said he favours slowing down the pace of rate hikes and hinted that terminal rates will be about 1% pt higher from here. Worth noting however that Collins is only a voter this year (and not in 2023) while Bostic is not a voter this year or next.
Today’s US earnings focus is Zoom Video and Dell Technologies. After being a darling through the pandemic Zoom Video has experienced revenue growth coming down to 4.4% y/y expected in the FY23 Q3 (ending 31 October) release down from 35% y/y a year ago. The company is well run but is facing intense competition in the video conferencing business. Dell Technologies will likely highlight the trends we already know of slowing PC sales and lower spending on enterprise technology driven by a slowing economy and falling share price in the technology sector.
Economic calendar highlights for today (times GMT)
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