Neil's Morning Update - 12/23/21

 Neil's Morning Update - 12/23/21

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)

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

Source abbreviations: BBG = Bloomberg; WSJ = Wall Street Journal; RTRS = Reuters; SA = Seeking Alpha; HR = Heisenberg Report 

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Global stocks continued to be in the holiday spirit this morning with most major global indices in the green ahead of the Christmas holiday break which starts tomorrow for much of the world.  In the US the SPX, NDX, and RUT futures were up around 0.23, 0.15, and 0.48% respectively.  Commodities are mixed, the dollar is down, bonds are around flat levels.

As a reminder markets will be closed on Friday because Christmas falls on a Saturday (and the bond market closes early today (believe 2pm ET)).

Here's the SPX futures this morning. Just under that 4700 level.  Daily technicals continue to tilt negative but continue to improve.

 In U.S. corporate news (Argus):

Novavax (NVAX 187.50, +4.20): +2.3% after data showed its COVID-19 vaccine produced cross-reactive immune responses against the Omicron variant.  Ortho Clinical Diagnostics (OCDX 22.50, +2.71): +13.7% after agreeing to be acquired by Quidel Corporation (QDEL 154.33, -11.91, -7.2%) for $24.68/share, or approximately $6 billion in cash and stock. Scientific Games (SGMS 67.10, +4.92): +7.9% after withdrawing its all-stock offer to acquire the remaining 19% equity interest in SciPlay (SCPL 12.65, -2.82, -18.2%) that it doesn't currently own. Apple (AAPL 176.12, +0.52): +0.3% as investors continue to buy the dip in the market. On a related note, the company temporarily closed eight stores due to the spread of the coronavirus. 

Asia

Major equity indices in the Asia-Pacific region ended Thursday on a higher note. Japan's Nikkei: +0.8% Hong Kong's Hang Seng: +0.4% China's Shanghai Composite: +0.6% India's Sensex: +0.7% South Korea's Kospi: +0.5% Australia's ASX All Ordinaries: +0.3%.

In news, the Japanese government plans FY22/23 debt issuance of JPY36.90 trln, nearly JPY7 trln down from the original estimate. FY22 GDP is expected to reach 3.2%, up from the previous forecast for 2.2% growth. Q1 crude steel production is expected to be down 1.4% qtr/qtr. China's Industry Minister said that the country's industrial economy will face downward pressure in Q1.The Chinese city of Xi’an on Wednesday ordered its 13 million residents to stay at home and avoid unnecessary outings in one of the biggest lockdowns related to the pandemic in the country this year. Since Dec. 9, the city in the northwest of China has confirmed more than 140 Covid-19 cases, city officials said at a briefing.

In economic data, Japanese leading indicators improved back into positive territory.

Japan's October Leading Index 1.3% m/m (last -0.4%) and Coincident Indicator 1.1% m/m (last -2.6%)

Singapore's November CPI 3.8% yr/yr (expected 3.4%; last 3.2%)

Australia's November Private Sector Credit 0.9% m/m (last 0.5%) and November Housing Credit 0.7% m/m (last 0.6%)

Europe

As of 8 am Eastern, Major European indices trade in the green. Travel and leisure shares led gains in European amid thin trading ahead of Christmas. STOXX Europe 600: +0.6% Germany's DAX: +0.6% U.K.'s FTSE 100: +0.2% France's CAC 40: +0.4% Italy's FTSE MIB: +0.3% Spain's IBEX 35: +1.1%.

In news, Germany's health minister said that new lockdown measures are not currently needed, but he did not rule out a future lockdown. British Prime Minister Johnson is not expected to announce new post-Christmas restrictions at this time, but new restrictions were imposed in several UK areas (Scotland, etc.). EU officials will meet in January to determine a resolution to the fishing dispute between France and the U.K. (more below). Wholesale natural gas prices in Europe dipped from a record high (more below)

In economic data, import prices in Germany grew at their fastest yr/yr pace since 1974 in the November reading. Spanish 3QGDP was revised materially higher and Italian confidence figures came in a little better than expected overall.

Germany's November Import Price Index 3.0% m/m (expected 1.1%; last 3.8%); 24.7% yr/yr (expected 22.3%; last 21.7%)

Spain's Q3 GDP 2.6% qtr/qtr (expected 2.0%; last 1.2%); 3.4% yr/yr (expected 2.7%; last 17.7%)

Italy's December Consumer Confidence 117.7 (expected 116.2; last 117.5) and Business Confidence 115.2 (expected 115.3; last 115.9)

From ING - "Manufacturing resilience and construction sector optimism were confirmed, as was a softening in the services sector. Consumers surprised on the upside, but the picture might change due to rising contagion numbers. Growth in 4Q21 is likely to be stronger than in 1Q22"

As traders are increasing bets on BoE rate hikes in 2022.  This has the pound strengthening. BBG.

Traders are betting the Bank of England will look through risks from the omicron strain to hike its key interest rate above 1% next year for the first time since 2009. 

Money markets are now pricing 100 basis points of policy tightening from the U.K. central bank in Dec. 2022, according to sterling overnight index swaps. That would push the BOE rate up to 1.25% from 0.25% currently, leaving behind the record-low levels of the pandemic era.

“Concerns over the inflationary environment in 2022 and the level of persistence in the price pressures are warranted,” said Simon Harvey, senior market analyst at Monex Europe. “We’ve seen central banks start to acknowledge this over the past month, but 1.25% from the Bank of England looks a bit stretched in our view given current conditions.”

... the pricing is all the more notable given rate hikes would come on top of the BOE’s plans to remove stimulus through the bond market. Once its rate reaches 0.5%, the central bank has said it would stop reinvesting the proceeds of its maturing bonds. After the rate reaches 1%, there could be an active sale of gilts.

“Market participants’ reluctance to price in rates rising much beyond 1.00% could continue to reflect the BOE’s plans to begin quantitative tightening next year,” said Lee Hardman, a currency analyst at MUFG. “We continue to believe that the U.K. rate market appears well priced at the current juncture for up to four BOE hikes next year.”

 As the surging energy prices have heavy users starting to scale back use and are threatening the food supply chain.  BBG.

The relentless surge in European energy prices is exposing the region’s biggest gas and power consumers to heavy losses, forcing industrial giants to cut production and threatening the economic recovery.

With energy costs spiking to fresh records day after day, financial strain is mounting for industries including metals and fertilizers. Aluminium Dunkerque Industries France, Europe’s top smelter of the metal, curbed output in the past two weeks. Trafigura’s Nyrstar will pause zinc production in France in early January and Romanian fertilizer maker Azomures temporarily halted activity.

“Higher gas prices, both for households and for businesses, are going to be headwinds to activity,” Sarah Hewin, head of Europe and Americas research at Standard Chartered, said in an interview on Bloomberg TV. “This latest surge in gas prices is clearly a negative development for the outlook for all European economies and including the U.K. as well.” 

“We’re seeing an existential crisis of the European aluminum industry and other metals-smelting industries that are power intensive,” said Mark Hansen, chief executive officer at metals trader Concord Resources Ltd. “It’s not always so easy to get these businesses back in operation. These are not just on-off switches.” 

 There’s also a threat to the food-supply chain. Romania’s top fertilizer producer Azomures, a unit of Swiss grain trader Ameropa AG, said on Friday that facilities had started to be shut down and that farmers would not be able to afford such high prices. Norway’s Yara International, which curbed output earlier this year, said it would continue to monitor the situation closely and curtail production where necessary.

“This is going to bite us eventually in terms of the cost of food and this isn’t going to have an impact on Europe, this is going to have an impact in a lot of countries,” said Anne-Sophie Corbeau, a research scholar at the Center on Global Energy Policy at Columbia University.

“If there are further supply disruptions or extreme cold weather in the first quarter, we are basically down to shutting down factories,” Corbeau said. “That’s the only we thing we can do, because governments cannot have people freezing in the dark”.  

 But some relief is on the way as the US sends a "flotilla" of LNG tankers to the EU.  Gas prices in Europe are down 20% today on this report and milder weather forecasts (as well as some profit taking after a parabolic move).  BBG.

Cold-stricken Europe is drawing a flotilla of U.S. liquefied natural gas cargoes amid an energy crisis that has sent gas prices to record levels.

Out of 76 U.S. LNG cargoes in transit, 10 tankers carrying a combined 1.6 million cubic meters of the heating and power plant fuel have declared destinations in Europe, shipping data compiled by Bloomberg shows. Another 20 tankers carrying an estimated 3.3 million cubic meters appear to be crossing the Atlantic Ocean and are on a path to the continent. Nearly one-third of the cargoes come from Cheniere Energy Inc.’s Sabine Pass LNG export terminal in Louisiana, the shipping data shows. 

U.S. LNG export terminals are operating at or above capacity after reaching record flows on Sunday. Asia is typically the top destination for U.S. LNG cargoes, but that has changed this winter with the significant premium for gas in Europe. 

 

 And new UK Brexit negotiator Liz Truss seems to be drawing a harder line than her predecessor, David Frost, who resigned in protest after not seeing eye-to-eye with the Johnson government on Covid restrictions.  Article 16 refers to a termination of the deal.

The U.K.’s new minister in charge of post-Brexit negotiations reiterated a threat to unilaterally suspend parts of the deal, keeping up the tension between Britain and the European Union over Northern Ireland. 

“The U.K. position has not changed,” Foreign Secretary Liz Truss said Tuesday after her first call with European Commission Vice-President Maros Sefcovic. “We remain prepared to trigger Article 16 safeguards to deal with the very real problems faced in Northern Ireland.” 

Truss has taken charge of negotiations over the future of Northern Ireland following the resignation of Brexit Minister David Frost, who quit in protest over coronavirus restrictions. 

Her initial comments dash any hopes for a quick fix to the issue. Talks made slow progress under Frost -- who had called for a root-and-branch overhaul of the post-Brexit settlement for Northern Ireland -- with the EU unwilling to discuss wholesale changes.

Britain’s primary complaint is that the protocol, which places an effective customs border down the Irish Sea to ensure no hard border on the the island of Ireland, disrupts trade between Northern Ireland and the rest of the U.K. The protocol was signed and agreed by the British government in 2019. 

Last week, with Frost still in the post, the U.K. signaled a softening of its position, saying it would be happy to conclude an interim deal in the spring that dealt with the most pressing issues, dropping its demand for a comprehensive fix on all its complaints. 

Commodities/Currencies/Bonds

Bonds - Some mild curve flattening this morning with 2-year bond yields up one basis point at 0.68%, while the 10-year is flat at 1.47%.  

As a March hike is slowly becoming consensus.

Dollar (DXY) - After falling below, testing the underside of the 20-DMA which has now rolled over and is pointing down.  Currently at $96.17.  Remains in intermediate-term uptrend.  Daily technicals negative.  Technicals would indicate further softening from here.

VIX - After making back under the 20 as I thought was likely is stabilizing around the lows of the past couple of weeks at 18.75.  Think it probably moves lower but less sure now.  

Crude (/CL) - Up a little this morning after breaking through significant resistance yesterday.  Now has the 100-DMA to deal with.  Currently at $72.94 WTI. Daily technicals are positive.

As gas prices are getting a lift due to a fire at a large refinery - BBG - "Exxon Mobil Corp. reported a fire at its Baytown oil-processing facility in Texas. The plant is the fourth-largest refinery in the U.S. and has a capacity of about 561,000 barrels a day."

As S Korea will be the third country (after China and the US) to actually release (as opposed to say they will release) stockpiles with 3.17mb release starting next month, although 2mb of it is a loan which will have to be returned with interest (date unspecified).  As a reminder not many countries have taken up the US on their loan release.  Argus.

South Korea will release 3.17mn bl of oil from its reserves starting next month, as part of a global effort by oil-consuming countries to lower fuel prices.

South Korea will sequentially release the oil from January-March next year according to the production plans of each refinery, the ministry of trade, industry and energy (Motie) said today. The release will take the form of a loan and a sale, with 2.08mn bl of crude to be loaned to domestic refineries and 1.09mn bl of oil products to be released to the highest bidder.

This is equivalent to 3.3pc of the government's total 97mn bl of oil stockpiles and the remaining amount can last for 103 days, which is expected to be sufficient to respond to any sudden oil supply or demand crisis in the future, Motie said.

As Iran looks to untraditional ways to get payment for oil exports.

Nat Gas (/NG) - After getting over over the 200-DMA for the second time in the last two weeks, it again has not held again falling back down over -4%.  Now the 20-DMA (green line) is coming in as additional resistance. Currently at $3.80.  Daily technicals positive.  

Gold (/GC) - Up half percent this morning getting back over that cluster of resistance.  Currently at $1810.  Daily technicals positive.  

Copper (/HG) - Down a little as it struggles with the 50-DMA.  Daily technicals positive. 

US Data

Big day for data today.  So far this morning we've gotten November Personal Income and Spending and PCE Prices, weekly unemployment claims, and November Durable Orders.  Headlines below.  Later this morning we'll get November New Home Sales (Briefing.com consensus 770,000; prior 745,000) and the final December University of Michigan Consumer Sentiment survey (Briefing.com consensus 70.4; prior 70.4).   

Jobless claims and personal income and spending came in right around expectations.  PCE prices were a tenth higher than expected m/m while durable goods orders came in above expectations. 

US Initial Jobless Claims Dec-18: 205K (exp 205K; R prev 205K) 

− Continuing Claims Dec-11: 1859K (exp 1835K; R prev 1867K)

US Personal Income Nov: 0.4% (exp 0.4%; prev 0.5%) 

− Personal Spending Nov: 0.6% (exp 0.6%; R prev 1.4%)

US PCE Core Deflator (M/M) Nov: 0.5% (exp 0.4%; R prev 0.5%) 

− PCE Core Deflator (Y/Y) Nov: 4.7% (exp 4.5%; R prev 4.2%)

US Durables Goods Orders Nov P: 2.5% (exp 1.8%; prev -0.4%) 

− Durables Ex-Transportations Nov P: 0.8% (exp 0.6%; R prev 0.3%)

As Gallup consumer confidence data looks a lot like UofM's (in contrast to Conference Board's which hit highest since July for December).

Misc.

Random stuff:

As wastewater data suggests there's a lot more Omicron circulating than is being reported via testing (similar to the first wave when we didn't have testing set up).

And Sinovac doesn't work well against preventing infection from Omicron even with a booster (although there's no data yet on severe disease or death which I think will be much better) while Astra vaccine does.

And interesting study from the Cleveland Fed showing "Other reasons" to be the most cited reason for nonemployment.  As there is no reason given, they try to figure it out, noting it could be related to a "benefits cliff" effect that I hadn't really considered previously..

The largest category of reasons is “other reasons,” but lower-income and less-educated individuals are substantially overrepresented in this category. These individuals have long had lower workforce participation rates, and research on the benefits cliffs has revealed many situations in which increasing work can lower family incomes because of discrete cutoffs for other benefits.

As Jurrien Timmer constructs a very nice chart on real yields during expansions noting that the most durable had low but positive (so getting back to that level might not be terrible).

As it's official that there won't be a Libyan election on Friday.  BBG.

Libya’s election body said a presidential vote scheduled for Friday can’t go ahead and proposed holding it a month later, calling on parliament to resolve obstacles to the landmark ballot in the OPEC nation.

The High National Election Commission said the inadequacy of electoral legislation was a main obstruction to the vote taking place as scheduled. Its proposal to instead hold the first round of presidential elections on Jan. 24 will need parliamentary approval.

The election is a key step following long-running United Nations-brokered talks aimed at ending a decade of conflict that ravaged the North African country and battered its economy. 

Among those who registered to run for president are a son of Libya’s former autocratic leader Moammar Al Qaddafi, eastern military commander Khalifa Haftar and Abdul Hamid Dbeibah, the prime minister of the unity government.

The commission’s proposal came after the parliamentary body tasked with overseeing the vote said a Friday ballot would be impossible.

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