Summary: After a nervous close to trading last week, sentiment has picked up to start the new week as French President Macron may succeed in brokering a summit between US President Biden and Russian President Putin, possibly helping to keep the prospects of hot military conflict off the radar for now. The latest noise from the Fed suggests that odds for a 50 basis point hike at the March meeting are fading.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – following a Friday close around the lows from January US equity futures are gaining this morning on news that Biden and Putin have agreed in principle to a summit to discuss Ukraine. Nasdaq 100 futures are trading around the 14,130 level with the 14,000 being a psychologically important level but otherwise the 13,830 level is the key downside level to watch should risk-off continue. While equity futures are bouncing on a potential Biden-Putin summit, the oil market is not sending the same positive signal suggesting the commodity market is not as rosy about the geopolitical outlook. US cash equity markets are closed today due to US holiday.
Hong Kong Stocks & China A Shares. Both Hong Kong and China A share markets were down modestly. Lenovo (00992.HK) and Nongfu Spring (09633) were added to Hang Seng Index (HSI), bringing its number of constituents from 64 to 66. SenseTime (00020.HK), LiAuto (02015.HK) and XPeng (09868.HK) were added to the Hang Seng China Enterprises Index (HSCEI). Last week, Chinese regulators moved to encourage delivery platforms to help catering merchants out with lower fees and warning about speculative bubbles in metaverse concepts. These moves continued to resonate and pressure e-commerce and Internet stocks. On the data front, the decline in home prices in the 70 largest Chinese cities moderated in January 2022. Selling prices of both new and existing apartments in first-tier cities rose slightly from a month ago but those in lower-tier cities declined.
USDJPY – while the JPY is actually broadly weak in early trading this week on the boost to risk sentiment, the US dollar is weaker and the USDJPY pair is trading below the pivotal 115.00 area at times this morning, possibly opening up for testing the larger support level down in the 113.50 area. A coincident indicator to keep an eye on is the longer end of the US yield curve if the cycle highs in yields come back into view, as this tends to weigh on the JPY.
AUDUSD – the technical situation for this USD pair is compelling to watch here, as the boost to risk sentiment keeps the focus on the pivotal zone to the upside between about 0.7250 and 0.7315. If sentiment and the global commodity focus (as well as hopes for more Chinese stimulus) can overcome the geopolitical distractions in Eastern Europe, the pair may could rally through this zone and suggest a structural turn back to the upside. A failure to do so keeps the huge 0.7000 level in play. Also worth noting, Australia has now opened its borders fully for the first time in two years.
Bitcoin and Ethereum – cryptocurrencies traded weaker still at the weekend, with bitcoin nearly touching 38k and Ethereum briefly trading below 2,600 before recovering on the general boost in risk sentiment elsewhere, i.e., showing a strong correlation with other measures of risk appetite, a concern in portfolio diversification terms.
Crude oil (OILUSMAR22 & OILUKAPR22) the news of a possible Biden-Putin summit only capped prices slightly after their strong comeback Friday after testing the 90.00 level. The supply situation is the most urgency focus for whether a run to the psychologically important $100/barrel is in the works.
Gold (XAUUSD) posted an impressive week last week, challenging above the 1,900 level at times before correcting slightly this morning on the prospects for a possible Biden-Putin summit (more below). The next layer of resistance is possibly the last major one ahead of the 2,075 top from 2020, as the 1923 area is the 61.8% retracement of the large sell-off wave from that top to the 2021 lows. The key test for bulls will be whether any further cooling of geopolitical concerns reverses the latest rally, followed by the March 16 FOMC meeting and where the market feels the central banks are relative to inflationary concerns.
US Treasuries (IEF, TLT). Uncertainty in the bond market is extremely elevated. As tensions in Ukraine escalate, yields continue to fall, and the market pares back on interest rate hikes. While at the beginning of last week a 50bps interest rate hike was priced for March, by Friday odds fell to 25bps. This week’s focus is on the PCE Index, a favorite inflation indicator for the Federal Reserve, and Fed’s speakers. We believe the Central Bank finds itself in a difficult position in which it’s extremely easy to spur either an inflation or taper tantrum.
European Sovereigns and UK Gilts (VGEA, IGLT). The PMI data for Europe and the UK will be released today. Investors will be interested to know whether economic activity is rising as governments remove pandemic restrictions. If the recovery is underway, it could enable the ECB and the BOE to be more aggressive. Central bank official speeches will be in the spotlight as the bind markets seek clues regarding forward monetary policy.
What is going on?
The latest noise from the Fed: plenty of rate hikes and QT in the pipeline, but perhaps not a 50 basis point hike in March. The most influential voice heard recently was Fed Vice Chair Lael Brainard, who indicated “I do anticipate it will be appropriate at our next meeting to initiate a series of rate increases” and on quantitative tightening: “We have a recovery today that is much stronger and faster than in the last cycle. So I do believe it will be appropriate to commence that runoff in the next few meetings.” New York Fed president and FOMC voter John Williams made similar comments Friday on the outlook for Fed tightening and pushed back against the idea of a 50 basis point hike in March as “he didn’t see any compelling argument to taking a big step at the beginning.” Odds of a 50 basis point hike in March have dropped from very high to now very low over the last couple of weeks, with about 30 basis points of hiking priced for the March 16 FOMC meeting at present.
US President Biden and Russian President Putin agree “in principle” to a summit – sentiment improved to start the week as US President Biden indicated he is willing to meet with Russian President Putin on the condition that Russia doesn’t invade Ukraine in the meantime. The possible summit was brokered by French President Macron, with Russian Foreign Minister Lavrov and US Secretary of State Blinken to potentially meet this Thursday to establish the agenda.
What are we watching next?
Macro data highlights on this week’s calendar include the flash Manufacturing and Services PMI estimates from the Euro Zone, UK, US and elsewhere are up today, but the highlights of the week on the macro calendar are the US Consumer Confidence survey tomorrow and especially the February US PCE inflation data up on Friday, as this is the inflation data series most tracked by the US Fed.
Earnings Watch. The Q4 earnings season is cementing itself as the second straight quarter of profit margin pressure suggesting inflationary pressures are real headwinds now for companies. Overall, the earnings season has been good in terms of revenue growth, but the outlooks provided are generally mixed and many companies have low visibility over global supply chains. This week more Q4 earnings releases will hit the market with Thursday being the big day. Tomorrow, earnings releases from Home Depot, MercadoLibra and Palo Alto Networks are key to watch.
- Monday: Williams Cos
- Tuesday: Hang Seng Bank, HSBC, ASM International, Norsk Hydro, Home Depot, Medtronic, MercadoLibre, Palo Alto Networks, Agilent Technologies, Mosaic
- Wednesday: Rio Tinto, Danone, Munich Reinsurance, Barclays, JDE Peet’s, Iberdrola, Oversea-Chinese Banking, Lowe’s, Booking, TJX, Stellantis, eBay
- Thursday: Anheuser-Busch InBev, Royal Bank of Canada, Canadian Imperial Bank of Commerce, AXA, Safran, Saint-Gobain, Deutsche Telekom, Sun Hung Kai Properties, Hong Kong Exchanges & Clearing, Anglo American, Lloyds Banking Group, BAE Systems, Alibaba Group, Intuit, NetEase, EOG Resources, Block (formerly Square), Moderna, Newmont, Keurig, VMware, Autodesk, Dell Technologies, Monster Beverage, Coinbase, Zscaler
- Friday: BASF, Amadeus IT, Holcim, Swiss Re, Sempra Energy, Li Auto
- Saturday: Berkshire Hathaway
Economic calendar highlights for today (times GMT)
- US Markets Closed today for Presidents Day
- 0815-0900 – Euro zone Feb. Flash Manufacturing and Services PMI
- 0830 – Sweden Riksbank meeting minutes
- 0830 – ECB’s de Cos to speak
- 0930 – UK Flash Feb. Manufacturing and Services PMI
- 0100 – Australia RBA’s Kent to speak
