Neil's Morning Update - 12/9/21

Neil's Morning Update - 12/9/21

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 trade mixed this morning with gains across most of Asia, but mild losses in Europe and in US futures. Most commodities are trading weaker with the dollar up a bit. Bond yields trade around flat levels. In the US, RUT is leading to the downside, indicated down around seven tenths of a percent, NDX down four tenths and SPX down a little less than that.

Here's the SPX futures this morning. MACD ever so close to crossing over to a cover shorts positioning.

In U.S. corporate news (Argus):

Amazon.com (AMZN 3507.00, -16.16): -0.5% after Italy fined the company EUR1.128 billion for alleged abuse of its dominant position. Amazon plans to appeal the fine, according to CNBC.CVS Health (CVS 95.14, +2.04): +2.2% after raising its FY21 EPS/revenue guidance, announcing a 10% increase to its yearly dividend, and authorizing a $10 billion share repurchase program. GameStop (GME 165. 50, -8.15): -4.7% after missing EPS estimates on above-consensus revenue. Hormel Foods (HRL 43.00, +0.21): +0.5% after beating top and bottom-line estimates. RH (RH 635.00, +58.04): +10.1% after beating top and bottom-line estimates.

Asia

Major equity indices in the Asia-Pacific region ended Thursday on a mostly higher note. Japan's Nikkei: -0.5% Hong Kong's Hang Seng: +1.1% China's Shanghai Composite: +1.0% India's Sensex: +0.3% South Korea's Kospi: +0.9% Australia's ASX All Ordinaries: -0.2%.

In news, China Securities Journal speculated that China's CPI may accelerate in 2022 while producer price growth could slow due to a higher base. Bank of Korea Governor Lee will hold a briefing on inflation next week. A Reserve Bank of Australia policymaker said that labor participation is holding back wage growth. The Japanese government is expected to present its tax plan tomorrow.

In economic data, China's CPI increased at its fastest pace since mid-2020 in the November reading, new lending came in under estimates, and auto sales weakened.

China's November CPI 0.4% m/m (expected 0.3%; last 0.7%); 2.3% yr/yr (expected 2.5%; last 1.5%). November PPI 12.9% yr/yr (expected 12.4%; last 13.5%). November new loans CNY1.27 trln (expected CNY1.555 trln; last CNY826.20 bln) and November total social financing CNY2.61 trln (expected CNY2.70 trln; last CNY1.59 trln). November M2 Money Stock 8.5% yr/yr (expected 8.7%; last 8.7%). China's November passenger vehicle sales at 1.816 million units, drop 12.7% y/y, down 11.6% versus 2019, CPCA says the sales data is weak in general. NEV sales at 0.378 mln units, up 122.3% y/y, up 19.8% m/m. Tesla China exports 21,127 vehicles in Nov.

Japan's Q4 BSI Large Manufacturing Conditions 7.9 (expected 5.3; last 7.0). November M2 Money Stock 4.0% yr/yr (expected 4.1%; last 4.2%) and November Machine Tool Orders 64.0% yr/yr (last 81.5%)

New Zealand's Q3 Manufacturing Sales Volume -6.4% qtr/qtr (expected 4.2%; last -0.1%)

As Evergrande is officially declared in default by Fitch. BBG.

China Evergrande Group has officially been labeled a defaulter for the first time, the latest milestone in months-long financial drama that’s likely to culminate in a massive restructuring of the world’s most indebted developer.

Fitch Ratings cut Evergrande to “restricted default” over its failure to make two coupon payments by the end of a grace period on Monday, a move that may trigger cross defaults on the developer’s $19.2 billion of dollar debt.

The downgrade came just minutes after Fitch applied the same default label to Kaisa Group Holdings Ltd., which failed to repay a $400 million dollar bond that matured Tuesday. Together, the two companies account for about 15% of outstanding dollar bonds sold by Chinese developers.

Long considered by many investors as too big to fail, Evergrande has now become the largest casualty of Chinese President Xi Jinping’s campaign to tame the country’s overindebted conglomerates and overheated property market. Before this week, Chinese borrowers had defaulted on $10.2 billion of offshore bonds in 2021, with real estate firms making up 36% of the total, according to data compiled by Bloomberg.

And the House passes a Xinjiang-focused bill that is sure to raise China's hackles. WSJ.

The U.S. House passed legislation designed to punish China for its treatment of Uyghur Muslims in the country’s Xinjiang province, a move that is sure to anger Beijing and add to rising tension between the world’s two largest economies. The 428-1 vote on the Uyghur Forced Labor Prevention Act demonstrated the broad, bipartisan sentiment in Congress for the U.S. taking a harder line against China. A similar measure has already passed in the Senate.

The bill would require the U.S Department of Homeland Security to create a list of entities that collaborate with the Chinese government in the repression of the Uyghurs, a predominately Muslim ethnic minority, in Xinjiang, as well as other groups, and ban those goods from entering the U.S. The bill contains a “rebuttable presumption” clause that assumes all goods coming from Xinjiang are made with forced labor -- and thus banned -- unless the commissioner of U.S. Customs and Border Protection gives an exception.

The Senate would either have to take up the House bill or work out a compromise between the two measures before the bill could be sent to President Joe Biden for a signature. With the end of the year rapidly approaching and a host of other measures competing for Congress’s attention, including addressing the debt ceiling and passing Biden’s signature Build Back Better legislation, the chances of getting something done before the end of the year are rapidly diminishing.

As the yuan has quietly strengthened despite all the drama.

Which has China looking to curb those gains. BBG.

China forced banks to hold more foreign currencies in reserve for the second time this year, its most substantial move yet to rein in the surging yuan which this week strengthened to the highest in three years.

Financial institutions will need to hold 9% of their foreign exchange in reserve from Dec. 15, the central bank said in a statement Thursday evening Beijing time, a 2 percentage point increase. Earlier in the day, the People’s Bank of China had signaled a limit to its tolerance for the recent advances by setting its reference rate at a weaker-than-expected level.

The gap between Thursday daily fixing set by the PBOC and the forecast in a Bloomberg survey of analysts and traders was the largest since mid-October. That was when yuan gains accelerated on strong trade data and hopes of easing tensions between China and the U.S.

The move, which the PBOC said will help liquidity management, effectively reduces the supply of dollars and other currencies onshore -- putting pressure on the yuan to weaken. The increase is the second rise this year, after the central bank hiked the ratio by 2 percentage points in June, the first increase since 2007.

Europe

As of 8 am Eastern, major European indices trade on a mostly lower note while Italy's MIB (+0.5%) outperforms. STOXX Europe 600: -0.1% Germany's DAX: -0.1% U.K.'s FTSE 100: -0.2% France's CAC 40: -0.1% Italy's FTSE MIB: +0.5% Spain's IBEX 35: -0.6%.

In news, U.K. Prime Minister Boris Johnson tightened pandemic rules to curb the spread of the omicron variant, advising people to work from home and mandating the use of so-called vaccine passports in large venues. New work-from-home guidance in the U.K. could cost the country’s economy £2 billion ($2.6 billion) a month, according to Bloomberg Economics. European Central Bank policymaker Schnabel said that benefits of the bond buying program have been fading. The ECB is reportedly planning a temporary increase in its quantitative easing program once pandemic purchases end. Germany's deputy finance minister said that strict budget rules will be adhered to after the pandemic.

In economic data, German trade numbers solidly beat expectations.

Germany's October trade surplus EUR12.50 bln (expected E UR13.40 bln; last EUR12.90 bln). October Imports 5.0% m/m (expected 0.4%; last 0.4%) and Exports 4.1% m/m (expected 0.9%; last -0.7%). October Current Account surplus EUR15.40 bln (last EUR19.60 bln)

BofA Survey: UK Consumer Inflation Expectations For 5 Years Ahead Fall To Lowest Since May – RTRS

And British appear to not be letting Covid issues dent their spending (although we'll see if the most recent restrictions are different).

As European currency volatility nears the highs of the year as traders brace for the ECB and BoE meetings next week. BBG.

Currency traders are taking no chances when it comes to next week’s policy decisions by the world’s major central banks.

One-week volatility for euro and sterling has risen to multi-month highs, with meetings by the Federal Reserve, the European Central Bank and the Bank of England in focus. Currency hedging costs were already elevated as investors assess the risks from the omicron variant and whether existing vaccines prevent infections.

The following charts show that it’s monetary policy dynamics that will be the main driver of currency moves into the Christmas holidays.

Norway’s central bank also meets next week and hedging costs remain near cycle highs. Yet as policy makers’ plan to raise interest rates next week has been thrown into doubt by the emergence of the omicron variant, another run higher for krone volatility may be in the cards.

As Boris Johnson struggles with fallout over a Christmas party from last year. BBG.

Boris Johnson is again on the back foot over Covid-19, forced by omicron to impose tougher restrictions while he struggles to contain the fallout over allegations his staff broke lockdown rules with a Christmas party.

Even after a turbulent few weeks for his government, events Wednesday were dramatic enough to deepen tensions with members of his ruling Conservatives. First came a humiliating appearance in the House of Commons, where the prime minister apologized after a video emerged showing key aides joking about Downing Street festivities in apparent breach of Covid rules last year

Hours later, Johnson effectively conceded that his pandemic plan to rely on vaccine boosters rather than social restrictions had run out of road against the omicron strain. With the number of confirmed cases doubling every two to three days, his government opted for its so-called Plan B.

And energy prices continue to push higher.

Commodities/Currencies/Bonds

Bonds - Bond yields are close to flat levels with the the 2-year yield at 0.68%, just under post-pandemic highs, while the 10-year is down two basis points to 1.48%.

As MS brings forward first rate hike expectations by six months.

And high-yield bond defaults look to set a record low this year.

Dollar (DXY) - After falling yesterday to the 20-DMA, bouncing modestly this morning. Currently at $96.08. Remains in intermediate-term uptrend. Daily technicals remain negative.

VIX - After falling under, back above 20 at 20.57.

Crude (/CL) - After testing the $74 level earlier which we said would be resistance, has fallen back, down -1%. Currently at $71.66 WTI. Daily technicals remain mixed but very close to turning positive.

As Citi lowers 2022 crude forecast.

And as some of the bounce in crude this week looks to be the work of retail traders, who haven't previously been big participants in the market. BBG.

Investors in oil ETFs have been piling into the asset class -- just as money managers flee the futures market.

Thirteen long-only oil funds posted inflows of just over $500 million last week, the biggest such addition since May 2020. By far the biggest beneficiary was the $2.5 billion U.S. Oil Fund, the market’s largest exchange traded product, which gained about $236 million.

The flows ran contrary to speculators investing in oil, who continued to cut exposure last week, pulling the biggest position out of Brent and West Texas Intermediate since July. Prices last week plunged to a three-month low on concerns around the impact of Omicron variant of Covid-19 on global growth, having already lost $10 in a single day on Nov. 26.

Non-reportable long positions in WTI -- those that don’t fit the main reporting categories of swap dealer, producer, consumer or speculator -- jumped by the most since 2017. CME’s micro WTI contract -- a retail focused product -- posted average daily volumes of 129,000 contracts last week, the highest weekly average since it began trading earlier this year.

Nat Gas (/NG) - After stabilizing on Monday, continues to trade just under the 200-DMA for a fourth day. Currently at $3.81. Daily technicals remain negative.

Gold (/GC) - Continues to remain in the range of the last couple of weeks below resistance. Currently at $1777. Daily technicals tilted negative.

Copper (/HG) - After making progress with the overhead resistance has fallen back to the lows of the week. Daily technicals are neutral. In longer term uptrend.

US Data

Only major data point today is jobless claims which came in at a new post-1969 low. I'll have a quick report out later.

US Initial Jobless Claims Dec-4: 184K (exp 220K; R prev 227K)

- Continuing Claims Nov-27: 1992K (exp 1910K; R prev 1954K)

Misc.

Random stuff:

Japanese study (not peer-reviewed) finds Omicron to be four times more transmissible than Delta (but does not look at severity). BBG.

The omicron variant of Covid-19 is 4.2 times more transmissible in its early stage than delta, according to a study by a Japanese scientist who advises the country’s health ministry, a finding likely to confirm fears about the new strain’s contagiousness.

Hiroshi Nishiura, a professor of health and environmental sciences at Kyoto University who specializes in mathematical modeling of infectious diseases, analyzed genome data available through November 26 in South Africans in Gauteng province.

“The omicron variant transmits more, and escapes immunity built naturally and through vaccines more,” Nishiura said in his findings, which were presented at a meeting of the health ministry’s advisory panel on Wednesday.

But on that severity more good news from the EU just now.

As Bank of Canada held off from raising rates yesterday, but ING says it won't be for long, and they see four hikes next year.

The Bank of Canada left monetary policy unchanged today, but the accompanying statement confirmed expectations that 2022 will see the central bank raise interest rates in response to strong growth, record employment and elevated inflation. The forward guidance remains that the timing of the first hike will come “in the middle quarters of 2022”, but we see the possibility of a first move in March with three further moves in each of the subsequent quarters.

The central bank is forecasting GDP growth of 4% in 2022 and 3.75% in 2023 on the back of strong consumer demand, business investment and a recovery in exports to the US. High prices are also going to be supportive for activity in the natural resource sector of the economy, which accounts for 10% of economic activity.

With the BoC having pointed to the prospect of earlier rate hikes and abruptly ending QE at the October policy meeting we changed our own forecast to four 25bp rate hikes in 2022 – one in each quarter. The emergence of the Omicron variant is a cause for concern, but the tone of the BoC statement suggests that even if it does lead to some consumer caution the case for policy tightening remains strong. As such, we see no reason to change our four-hike view for 2022.

As Brazil hikes by 150bp.

As the rise in home prices as lifted cash out refi amounts.

And the rise in equity prices means the "cash on the sidelines" can't buy what it used to.

And, well, it sort of speaks for itself.

As US looks to tighten enforcement of existing sanctions. WSJ.

The Biden administration is moving to tighten enforcement of sanctions against Iran, according to senior U.S. officials, the first sign of Washington increasing economic pressure on Tehran as diplomatic efforts to restore the 2015 nuclear deal falter.

According to senior State and Treasury Department officials, the U.S. will send a top-level delegation, including the head of Treasury’s Office of Foreign Assets Control, Andrea Gacki, next week to the United Arab Emirates. The U.A.E. is a top U.S. ally but also Iran’s second-largest trade partner and a conduit for Iran’s trade and financial transactions with other countries.

The U.S. officials will meet with petrochemicals companies and other private firms and banks in the U.A.E. doing billions of dollars of trade with Iran. They will warn that the U.S. has “visibility on transactions that are not compliant with sanctions,“ one of the senior officials said. ”Those banks and firms face extreme risk if this continues.”

The visit could be followed by sanctions against Emirati and other firms, the officials said.

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.