Neil's Morning Update - 12/8/21

Neil's Morning Update - 12/8/21

Please excuse typos. Mornings are tilted more international, evenings more U.S. Continuing to try to make this more digestible for those who are not as familiar with the markets, lingo, etc. Feel free to leave your thoughts in the comments section, they are appreciated. Also, I don't discuss crypto extensively as I don't consider myself knowledgeable enough to talk intelligently on the subject (and there are plenty of other sources for that). As are reminder, this is a free blog I put out to try to help people get information, so no editors, etc.

A small glossary.

SPX = S&P 500

Naz = Nasdaq Composite

NDX = Nasdaq 100 (100 largest stocks in the Naz)

RUT = Russell 2000 (smaller stocks)

DMA = Daily Moving Average (the moving average over the given time period (20, 50, 100, 200 days normally)).

MACD = Moving Average Convergence Divergence (basically a trend indicator)

RSI = 14-day Relative Strength Index (basically what it sounds like)

BBG = Bloomberg

WSJ = Wall Street Journal

Also, on my charts, the lines are 20-DMA (green), 21-DEMA (red), 50-DMA (purple), 100-DMA (BLUE), 200-DMA (brown)

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Global stocks and US futures have traded with a positive bias in the overnight session, although US futures are well off their best levels. Those best levels occurred during a brief spike following news that while there was deterioration in the neutralization of the Omicron virus from two Pfizer shots, that was restored with a booster shot. As it's sort of a glass half full/empty thing, not surprised to see us back where we started. Asian shares led the overnight session. In the US, RUT is leading indicated up around quarter of a percent, SPX and NDX up less than a tenth.

Here's the SPX futures this morning. Personally I'm very unsure which direction we go today. Technicals continue to improve.

In U.S. corporate news (Argus):

Pfizer (PFE 52.04, +0.32): +0.6% after saying that preliminary data for its COVID-19 vaccine showed that a third dose could still offer a sufficient level of protection against the Omicron variant and two doses may still induce protection against severe disease. Casey's General (CASY 194.10, -7.12): -3.5% after missing EPS estimates on below-consensus revenue. Toll Brothers (TOL 72.55, +1.31): +1.8% after beating top and bottom-line estimates and guiding FY22 revenue above consensus. EPAM Systems (EPAM 651.02, +59.02): +9.9% on news that it will join the S&P 500 prior to the open on Dec. 14, replacing Kansas City Southern (KSU). Southwest Air (LUV 45.45, +0.24): +0.5% after raising Q4 revenue guidance. The company observed strong leisure travel demand over Thanksgiving and said leisure bookings continue to be above expectations. Stitch Fix (SFIX 19.05, -5.92): -23.7% after guiding fiscal Q2 revenue below consensus, overshadowing its better-than-expected results for fiscal Q1.

Asia

Major equity indices in the Asia-Pacific region ended the midweek session on a higher note. Japan's Nikkei: +1.4% Hong Kong's Hang Seng: +0.1% China's Shanghai Composite: +1.2% India's Sensex: +1.8% South Korea's Kospi: +0.3% Australia's ASX All Ordinaries: +1.3%.

Gains in China were despite Creditors of Kaisa Group Holdings Ltd. saying they "have yet to receive payment on a $400 million dollar bond that was due to mature Tuesday, as the company’s shares were halted pending an announcement from the builder. The lack of payment puts Kaisa on the brink of becoming the second major Chinese developer to renege on debt obligations this week, as China Evergrande Group looks poised to begin a process of overhauling its balance sheet without a government bailout. S&P Global Ratings said Tuesday that an Evergrande default 'looks inevitable.'" BBG.

In news, the Japanese government is reportedly considering tax incentives for employers who raise wages. A Bank of Japan policymaker said that the BoJ has no need to reduce its massive stimulus program. Chinese press reported that Chinese IPOs in the U.S. will slow in the short term due to SEC rules. Fitch expects China's GDP growth to slow to 4.8% in 2022. Nikkei reported that Apple (AAPL) told suppliers that iPhone production will be about 7.0% lower than originally planned due to supply chain issue s. The Reserve Bank of India made no changes to its policy stance.

In economic data, Japan economic surveys for November/December improved somewhat.

Japan's Q3 GDP -0.9% qtr/qtr (expected -0.8%; last 0.5%); -3.6% yr/yr (expected -3.1%; last 1.9%). Q3 GDP Capital Expenditure -2.3% qtr/qtr (expected -3.9%; last -3.8%) and Q3 GDP External Demand 0.0% qtr/qtr (expected 0.1%; last -0.3%). Q3 GDP Private Consumption -1.3% qtr/qtr (expected -1.1%; last 0.9%). November Economy Watchers Current Index 56.3 (last 55.5). December Reuters Tankan Index 22 (last 13). October Current Account surplus JPY1.18 trln (expected JPY1.309 trln; last JPY1.034 trln)

As a Chinese port closes due to a 2-week lockdown.

As China's correlation with the rest of EM has fallen dramatically.

And a slew of analysts were out yesterday noting the RRR cut, and the added cut in the relending rate for small and rural businesses by 25 basis points, signals a change in Chinese policy to support of the economy. Heisenberg Report.

“The Politburo meeting and a trio of easing initiatives confirm countercyclical easing is underway,” Morgan Stanley said Monday, after the RRR cut but prior to the relending news. In addition to the RRR move, “housing financing conditions have improved gradually amid policy support and local media reported that real estate loans have increased in November,” the bank’s Robin Xing and Jenny Zheng went on to say, adding that together, “these factors suggest the credit impulse has already bottomed and could start to rebound from November.”

[T]he emphasis is shifting from the regulatory crackdown to supporting growth, Macquarie wrote, citing Politburo messaging and the RRR cut. The bank sees monetary and fiscal policies pivoting looser over the next several months, although they were careful to note that any easing is likely to be piecemeal and measured. It’s probably too early for the relaxation of curbs on housing and local government debt.

“The Politburo policy-tone adjustment signaled clearly that the senior leadership has recognized downward pressures on the economy,” UBS said, in their assessment. Despite emphasis on “prudence,” the RRR cut “in fact sends a clear signal of monetary policy easing,” the bank went on to write.

SocGen’s Wei Yao and Michelle Lam expect more easing. “The signaling and implementation of [the] RRR cut was a surprise to the markets, but not to us,” they wrote, on the way to reiterating that on their view, “eased supply constraints are no offset to decelerating demand caused by housing, and marginal tweaking (including relaxations to property funding) is not enough to cushion the slowdown in the broader economy.” Although a single RRR cut “is far from enough to resolve any of the downward pressure on China’s economy, we believe it could open the door to other, more impactful easing measures,” the bank suggested.

Europe

As of 8 am Eastern, major European indices trade near their flat lines amid reduced participation due to the Feast of Immaculate Conception. STOXX Europe 600: UNCH Germany's DAX: -0.4% U.K.'s FTSE 100: +0.1% France's CAC 40: -0.1% Italy's FTSE MIB: -0.6% Spain's IBEX 35: -0.4%.

In news, Germany's new Chancellor Scholz took office today (more below). Bank of France expects that domestic growth in Q4 will be under 0.75% due to staffing and supply chain shortages. Germany sold 10-yr bunds to good demand. UK interest rate futures have pared rate hike expectations for December to 45% from 57% earlier in the day (down from nearly 100% a couple of weeks ago).

In economic data, France's Q3 nonfarm payrolls 0.4% qtr/qtr (expected 0.5%; last 1.2%)

As Angela Merkel's 16-year run as Germany's PM comes to an end with Olaf Scholz and his diverse coalition coming into power. WSJ.

Germany’s parliament elected Olaf Scholz, 63, chancellor on Wednesday, ending Angela Merkel’s 16-year rule. The country’s new center-left leader inherits longstanding challenges from his predecessor and faces a cluster of short-term crises that could complicate his plans to modernize the German state and its economy.

Mr. Scholz and his Green and free-market coalition partners have agreed on a four-year program to overhaul Germany’s economy, fight climate change, digitize public services and reverse its demographic decline.

For now, however, they will have to manage the country’s worst Covid-19 wave to date, rising inflation, rocketing energy prices, falling consumer confidence, and a manufacturing sector that faces a toxic combination of supply bottlenecks, falling orders and skilled labor shortages.

And he will have to do all this while keeping together an unprecedented coalition between his Social Democrats, the environmentalist Greens and the center-right Free Democrats, three parties that often have opposing policies on issues ranging from taxation to immigration.

Analysts said Mr. Scholz will have to avoid the fate of past left-right coalitions, which have often spent more time and political capital trying to keep themselves from falling apart than pursuing their policy agendas.

Pandemic management will likely consume most of the government’s energy in coming months. To curb rising deaths and hospitalizations, Mr. Scholz supports a general vaccine mandate, a controversial policy that has triggered protests in Germany and will face multiple challenges in the courts when it comes into force, likely early next year.

Mr. Scholz, historically a proponent of the trans-Atlantic alliance, is expected to adopt his predecessor’s stance toward the U.S., aligning Germany diplomatically with Washington on most big foreign policy issues while maintaining some areas of disagreement dictated by Germany’s trade interests, including the country’s close economic ties to China and, to a lesser extent, Russia.

While navigating the short-term crises, Mr. Scholz will start implementing his government’s program of structural overhauls, Prof. Fuest said, including upgrading the country’s patchy digital infrastructure and modernizing public administration, cutting CO2 emissions without harming growth or triggering social upheaval, and managing a demographic decline that economists say will trigger an acute labor shortage within two years.

And I noted on Monday in the evening summary that the March/April 2022 spread for US natural gas had cratered on warmer forecasts and high production. It's the opposite in Europe. John Kemp.

Lower than normal temperatures across much of Northwest Europe so far this autumn and winter have intensified gas consumption and the pressure on storage. Average daily temperatures in Frankfurt, Germany, have been below the long-term seasonal average for 11 of the past 14 days.

Frankfurt temperatures have averaged 0.4°C below the long-term seasonal norm over the 62 days since the start of October, boosting heating demand. At the same time, wind speeds have been slower than average over the past two months, which has depressed electricity generation from wind farms. The result has been increased direct consumption for residential and commercial heating as well as increased indirect consumption for power generation.

Futures prices for gas delivered in January 2022 on the Dutch Title Transfer Facility virtual trading hub have rebounded to 95 euros per megawatt hour (MWh), up from 65 euros at the end of October. And the calendar spread between March and April 2022, related to storage levels at the end of winter, has surged into backwardation of almost 30 euros/MWh, up from 13 euros at the end of October.

With the heating season less than a quarter done, traders are anticipating increased probability that inventories will fall to critically low levels if the winter remains colder than normal for an extended period. Given the pressure on stocks, Europe’s gas market is still only one supply disruption or extreme cold weather event away from another price spike.

And uncertainty about US/Russia relations isn't helping. BBG.

European natural gas futures jumped as traders weighed the risk of fresh international sanctions against top supplier Russia and its new pipeline project if it invades Ukraine.

The U.S. will push Germany to agree to stop the contested Nord Stream 2 gas link if Russia invades its neighbor, according to documents seen by Bloomberg and people familiar with the plans.

Dutch front-month gas, the European benchmark, surged as much as 7.9% earlier Tuesday as heightened tensions added to existing concerns over Russian supplies, which have already been curtailed in recent months while the continent’s stockpiles remain unusually low.

Commodities/Currencies/Bonds

Bonds - Bond yields continue to creep higher. The 2-year yield is up two basis points to 0.71%, a post-pandemic high, while the 10-year is up two to 1.50%.

Dollar (DXY) - After trending higher for five days, falling today, testing the 20-DMA. Currently at $96.11. Remains in intermediate-term uptrend. Daily technicals remain negative.

VIX - Trades around flat levels at 21.80.

Crude (/CL) - Trades around flat levels as it continues to have trouble with the mild resistance of its old uptrend line. Above that next resistance around $74. Currently at $71.95 WTI. Daily technicals now mixed with an RSI positive divergence. MACD turning also.

As the WTI curve (yellow line) has gotten back about 2/3 of its backwardation from 11/23 (the top purple line). @BrynneKKelly

Nat Gas (/NG) - After stabilizing yesterday, pushing higher this morning up 5% to the 200-DMA. We'll see if it can push through. Currently at $3.89. Daily technicals remain negative but positive RSI divergence.

Gold (/GC) - Continues to remain in the range of the last few days below resistance. Currently at $1783. Daily technicals tilted negative.

Copper (/HG) - We noted last night that it made it through one layer of resistance (the 200-DMA) as it attempts to move higher. Trading around flat levels currently. Daily technicals are neutral now. In longer term uptrend.

US Data

We'll get October JOLTS survey and EIA weekly inventories later this morning. Earlier we got mortgage applications which bounced 2% week through Dec 3rd after falling -7.2% the previous week. Refi's, which had fallen sharply the previous week, bounced back up 9% on a surge in FHA refis, but purchases which have been steadily increasing fell by -5% w/w but remain robust. Y/y refi's are down -37% and purchases -8% on very difficult comps. From the report:

“Mortgage rates declined for the first time in a month, prompting a pickup in refinancing, with government refinances increasing more than 20 percent over the week. While the 30-year fixed mortgage rate and 15- year fixed mortgage rate both declined only one basis point, the FHA rate fell 7 basis points, driving the surge in government refinances. Borrowers are continuing to act on these opportunities, but if rates trend higher as MBA is forecasting, the window of opportunity to refinance will continue to get smaller,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The purchase market was slower last week, with applications falling after four consecutive increases. Activity is still close to the highest level since March 2021, which is a positive sign as the year comes to an end. Purchase activity continues to be constrained by a lack of inventory, combined with rapid rates of home-price appreciation and mortgage rates higher than in 2020.”

Misc.

Random stuff:

And more on that Pfizer news: BBG

Pfizer Inc. and BioNTech SE said initial lab studies show a third dose of their Covid-19 vaccine neutralizes the omicron variant, A booster with the current version of the vaccine raises antibodies 25-fold, providing a similar level as observed after two doses against the original virus and other variants, the companies said. So-called T-cells still provide protection against severe illness, they said.

Nonetheless, the partners said they’re confident they will have an omicron-specific version of the vaccine ready for delivery by March 2022.

Blood plasma from people immunized with two doses of the vaccine has a 25-fold reduction in neutralizing antibody levels versus omicron, when compared with the original strain of the virus, the companies said.

The data are preliminary, as the partners continue to study the new variant. It’s possible that people vaccinated with two doses will still be protected against severe forms of Covid from the omicron variant, thanks to T cells that aren’t affected by the variant’s mutations, the companies said.

And a day after reaching compromise on the debt ceiling looks like Congress has got the defense bill in line. Solid progress this week. WSJ.

WASHINGTON—The House voted Tuesday to approve a $778 billion defense-policy and budget bill that authorizes $25 billion more in defense spending than requested by President Biden and contains a provision to create a commission on the War in Afghanistan, three months after America’s longest war ended in a chaotic and bloody withdrawal.

The National Defense Authorization Act, or NDAA, passed 363 to 70 with the backing of a majority of both Democrats and Republicans. The legislation includes pay raises for troops and money for military construction, ships and aircraft, and typically passes Congress with broad bipartisan support.

This year lawmakers agreed to make major changes to the military-justice system, but scrapped plans to require women to register for the draft. The bill boosts military spending by about 5% over last year’s budget, exceeding Mr. Biden’s request of $752.9 billion for the Defense and Energy departments’ national-security programs.

Senate Majority Leader Chuck Schumer (D., N.Y.) said he expects the Senate to pass it without amendments, sending it to the president’s desk for his signature.

As retail foot traffic improves over 2019 for a second week.

And homebuilder inventories hit a new low.

And WSJ says SE Asia is more prepared for a Covid outbreak.

SINGAPORE—The Delta-driven wave of infections wreaked havoc on supply-chains when it tore across Southeast Asia this summer, disrupting production of everything from semiconductors to sneakers and raising prices for Western consumers.

But countries like Vietnam and Malaysia have learned from that experience and are better prepared for fresh waves of the virus, economists and factory operators say, as the new Omicron variant spreads globally.

Some countries in the region, including Vietnam and Thailand, have shifted away from aggressive Covid-19 containment strategies to boost their economies. That move has been aided by a rapid rise in vaccinations.

Government calculations “have changed to tolerate a much higher level of cases,” said Trinh Nguyen, a senior economist at Natixis.

To see more content, including summaries of most major U.S. economic reports and my morning and nightly updates go to Cbus Neil's Blog Posts for more recent or Sethi Associates for the full history.