Neil's Morning Update - 12/28/21

 Neil's Morning Update - 12/28/21

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 for a sixth morning (the US was closed for one of them) with Asian shares closing higher and European shares and US futures in the green as we enter the second day of the "Santa Rally" period.  This comes despite global Covid cases hitting a record high.  Likely because deaths remain around the lowest of the year.  Hopefully that will continue.  In the US the SPX, NDX, and RUT futures are up around 0.24, 0.43, and 0.15% respectively.  Commodities are generally green, the dollar is flat, bonds are around flat levels as well.

Here's the SPX futures this morning around 8.30 ET.  Hitting new all time highs.  Daily technicals continue to improve.

 In U.S. corporate news (Argus):

Tesla (TSLA 1113.60, +19.66): +1.8% on no news but continuing momentum after rising 21.6% over the past four sessions. Zoom Video (ZM 186.20, -1.24): -0.7% amid an acquisition of "certain assets" from Liminal to enhance the company's events offerings. Terms were not disclosed. Luminar Technologies (LAZR 17.93, +0.14): +0.8% after being named a top pick for 2022 at Northland Capital. 

And more on the JPM bullish call.  BBG.

“Conditions for a large selloff are not in place right now given already low investor positioning, record buybacks, limited systematic amplifiers, and positive January seasonals,” the strategists led by Dubravko Lakos-Bujas wrote in a note to clients. “Investor positioning is too bearish -- the market has taken the hawkish central bank and bearish omicron narratives too far.” 

While the S&P 500 climbed toward yet another record on Monday, the rally has recently been driven by a narrow group of mega-cap companies, which is reminiscent of the bubble in tech stocks at the turn of the century. With the economic rebound following the pandemic-induced slump now past its peak, some fund managers have warned that the next stage in the cycle is a correction, as central banks and governments wind down stimulus measures to tame surging inflation.

For JPMorgan strategists, however, the “extreme stock dispersion and record concentration within equities” is an indicator of an abundance of caution, rather than a looming selloff. Investors have been treating mega caps as safe-havens, or “pseudo-bonds,” the strategists wrote.

If anything, the drawdown in smaller companies offers investors attractive entry points for “reopening stocks”, such as travel and hospitality, as well as energy and e-commerce, as inflation normalizes and concerns over the Fed’s hawkishness abate, the strategists said.  

The bullish outlook echoes the one of Goldman Sachs Group Inc. strategists, who also said earlier this month that the narrowing rally doesn’t point to an imminent major drawdown.

“Rising concentration is not a reliable indicator for market peaks,” JPMorgan strategists said. “The largest S&P 500 companies currently have proven track record of delivering organic growth, higher pricing power, and superior capital return.”

Asia

Major equity indices in the Asia-Pacific region ended Tuesday on a higher note while markets in Australia and New Zealand remained closed but will reopen tomorrow. Japan's Nikkei: +1.4% Hong Kong's Hang Seng: +0.2% China's Shanghai Composite: +0.4% India's Sensex: +0.8% South Korea's Kospi: +0.7% Australia's ASX All Ordinaries: CLOSED.

In news, Japan's Finance Minister Suzuki said that there are no current plans for an extra budget in 2022. Electricity and gas prices in South Korea will increase next year with electricity price hikes planed for May, July, and October. Evergrande pledged to accelerate deliveries of completed properties. The developer is facing another bond payment deadline today.

And China boosted its injection of short-term cash into the banking system to the highest in two months, as demand for liquidity climbed before year-end pushing government bonds up.  BBG.

The People’s Bank of China added 200 billion yuan ($31 billion) of cash into the financial system through seven-day reverse repurchase agreements, more than offsetting the 10 billion yuan coming due. The yield on 10-year government bonds fell to 2.795%, the lowest level since June 2020. 

The PBOC’s operation came after an indicator for short-term borrowing costs soared the most in a year on Monday, a sign of liquidity shortages in the interbank market. The supply of cash tends to tighten toward the end of the year, as banks hoard cash to prepare for regulatory checks. 

“The big amount of injection will help to alleviate liquidity pressure,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group Ltd. “It is necessary to help the financial institutions to move cross the year-end smoothly.”

The seven-day repo rate fell 13 basis points to 2.29% as of 5:07 p.m. local time, after soaring 52 basis points on Monday.  “The net injection will likely continue in the rest of this week,” said Peiqian Liu, China economist at Natwest Markets. With PBOC’s rhetoric in December leaning toward the dovish side, signaling Beijing’s concerns over the near-term outlook on growth, China should be willing to use broad-based easing tools to aid the economy, she added.

In economic data, the Japanese government raised its assessment of industrial production after the November industrial production report beat estimates.  November construction orders improved also, and core CPI came in above expectations.

Japan's November Industrial Production 7.2% m/m (expected 4.8%; last 1.8%). November jobs/applications ratio 1.15 (expected 1.16; last 1.15) and November Unemployment Rate 2.8% (expected 2.7%; last 2.7%). November Construction Orders 11.7% yr/yr (last 2.1%) and November BoJ Core CPI 0.8% yr/yr (expected 0.5%; last 0.6%)

South Korea's December Consumer Confidence 103.9 (last 107.6)

Hong Kong's November trade deficit HKD11.60 bln (last deficit of HKD30.50 bln). November Imports 20.0% m/m (last 17.7%) and Exports 25.0% m/m (last 21.4%)

Europe

As of 8 am Eastern, major European indices trade on a higher note while the U.K.'s FTSE is closed for Boxing Day. The STOXX 600 trades right around record high levels.  STOXX Europe 600: +1.1% Germany's DAX: +0.8% U.K.'s FTSE 100: CLOSED France's CAC 40: +0.5% Italy's FTSE MIB: +0.8% Spain's IBEX 35: +0.6%.

In news, French Prime Minister Castex announced plans for tighter coronavirus restrictions in the middle of January, including vaccine passports and mandatory work from home. Russia's Gazprom did not book export capacity to Europe for the eighth day in a row. Officials from Russia and the U.S. will meet to discuss the situation in Ukraine during the second week of January. 

In economic data, Spain's November Retail Sales 4.9% yr/yr (last -0.7%)

As nat gas prices continue to fall in Europe despite the continued lack of flows from Gazprom.  Prices are down around -40% from the highs.  BBG.

European natural gas extended its declining streak to the longest in more than a year as shipments from the U.S. look set to ease the region’s energy crunch.  European natural gas extended its declining streak to the longest in more than a year as shipments from the U.S. look set to ease the region’s energy crunch.

Benchmark Dutch front-month gas fell for a fifth day, dropping as much as 9.2% in Amsterdam. More vessels carrying liquefied natural gas are heading to Europe, raising expectations the new supplies will help to re-balance the tight market. 

While milder weather in much of mainland Europe over the coming week will curb energy demand, the region’s storage sites are still about 23% below the five-year average for this time of the year, [and] the market remains on edge as forecasts show temperatures will drop to way below normal in the second week of January.

Russia’s Gazprom PJSC decided against booking any capacity offered by Ukraine for next month at a so-called interruptible capacity auction on Tuesday. Russian flows via Mallnow to Germany remained halted, according to early morning data from operator Gascade. 

As one commentator notes it was the decline in exports to South America (which is now in the middle of summer) that helped free up LNG to go to Europe (or which was drawn away due to better pricing).

Commodities/Currencies/Bonds

Bonds - Bonds are right around flat levels this morning with 2-year bond yields down one basis point at 0.75%, while the 10-year is flat at 1.47%.  

Dollar (DXY) - Trading around flat levels remaining under the 20-DMA again this morning.  Currently at $96.02.  Remains in intermediate-term uptrend.  Daily technicals negative.  Technicals would indicate further softening from here.

VIX - Trading around flat levels as well at 17.75.  

Crude (/CL) - After a strong day yesterday, continuing the momentum this morning now testing the 50-DMA.  If it can get through this level it could make a run at the old highs.  Not yet overbought despite the gains over the last week.  Currently at $76.45 WTI. Daily technicals are positive.

As in keeping with the "low liquidity" theme in the oil markets very little change last week.  Net length did go up a little though (which can make a difference in low liquidity markets).

And Venezuela sees big bounce back in crude production in 2021 claiming to have achieved 1mbd output.

Dec 27 (Reuters) - Venezuela this year almost doubled its oil production from last year's decades-low as its state-owned company struck deals that let it pump and process more extra heavy crude into exportable grades.

The surprising reversal began as state-run Petroleos de Venezuela (PDVSA.UL), known as PDVSA, won help from small drilling firms by rolling over old debts and later obtained steady supplies of a key diluent from Iran. The two lifted output to 824,000 barrels per day (bpd) in November, well above the first three-quarters of the year and 90% more than the monthly average a year earlier.

Whether it can continue to ramp up production is unclear. Years of unpaid bills, mismanagement and, more recently, U.S. sanctions have cut its access to specialized drilling equipment and foreign investment. The sanctions have also limited its customers to firms with no track record of trading.

PDVSA's latest gains - including reaching 1 million barrels of daily output for the first time in nearly three years, which Oil Minister Tareck El Aissami described in a Christmas day message as a "great victory" - still fall short of current management's 2021 goal of producing 1.28 million bpd.

Workers in producing regions say the reopening of oilfields continues and more flow stations are expected to restart. However, oil experts said PDVSA has done all it can and further gains might be capped by a lack of additional rigs and functioning upgraders for its tar-like crude.

"Base production in 2021 was way below PDVSA's production capacity," said Francisco Monaldi, director of the Latin American Energy Program at Rice University's Baker Institute in Houston. "We are reaching that capacity now. To see an output increase during 2022, investment in new wells and upgrading infrastructure is needed," he added.

Nat Gas (/NG) - After big day yesterday, down this morning testing the top side of the 20 and 200-DMA's.  Currently at $4.01. Daily technicals positive.  

In terms of yesterday, specifically the news was "Gas demand is receiving a short-term boost from chillier-than-normal weather. Temperatures are expected to fall on the West Coast, and in the Midwest and Northeast from Jan. 2 to 6, according to forecasts from the NOAA."  BBG.

That said, we're unlikely to see the big spikes we've seen in Europe.

Gold (/GC) - Up nicely this morning as it pushes to highest levels in over a month.  Currently at $1821.  Daily technicals positive.  

Copper (/HG) - Trades around flat levels as it struggles with the level of the November highs.  Daily technicals positive.  

US Data

In the US we'll get the two big house price surveys - FHFA Housing Price Index for October and the S&P Case-Shiller Home Price Index for October - later this morning which I'll put something out on.

We'll also get some regional Fed reports (Richmond Fed manufacturing and services and Dallas Fed services).  I'll report on the results in the summary (and might update when they come out), but unfortunately the blog is taking up a bit more time that I can devote so I'm looking for places to cut, and I think some of the "second-tier" reports is one place.  Regional Fed surveys qualify.  

Did miss the Dallas Fed Mfg out y'day:

"Texas factory activity increased at an above-average pace in December... The production index, a key measure of state manufacturing conditions, held fairly steady at 26.7, a reading indicative of solid output growth."

Here was the report:

Texas factory activity increased at an above-average pace in December, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, held fairly steady at 26.7, a reading indicative of solid output growth.

Other measures of manufacturing activity also indicated continued growth. The new orders index dipped slightly from 19.6 to 18.1—still far above the series average of 6.7. The growth rate of orders index edged down but remained elevated at 13.4. The shipments index ticked down from 24.3 to 19.1, while the capacity utilization index inched up from 26.4 to 27.8.

Perceptions of broader business conditions showed some improvement in December. The general business activity index remained positive but eased nearly four points to 8.1. The company outlook index pushed up from 1.3 to 8.6, its highest reading since August. Uncertainty regarding outlooks continued to rise, though the index retreated to 19.2.

Labor market measures indicated robust employment growth and longer workweeks. The employment index inched up to 30.9, an eight-month high. Thirty-five percent of firms noted net hiring, while 4 percent noted net layoffs. The hours worked index also remained elevated and was largely steady at 19.7.

Prices and wages continued to increase strongly in December. The raw materials prices index remained highly elevated but dropped from its series high to 66.2. The finished goods prices index held steady at 42.3, far exceeding its historical average of 7.7. The wages and benefits index remained near its own series high, at 45.5.

Expectations regarding future manufacturing activity remained positive but less so in December than in November. The future production index fell to 40.6 from 51.7, and the future general business activity index dropped 15 points to 14.0. Other measures of future manufacturing activity such as capital expenditures and employment showed mixed movements but remained solidly in positive territory.

Misc.

Random stuff:

CDC cuts guidance on quarantine periods.  WSJ.

U.S. officials cut the number of days that they recommend people isolate after being infected with Covid-19 to five days from 10, reflecting recent research, new pandemic-management ideas and stress on some industries as the Omicron variant has sickened workers. The Centers for Disease Control and Prevention said Monday that people who have been infected with Covid-19 and are asymptomatic may leave isolation after five days and should wear masks around other people for five more days.

Vaccinated people exposed to someone with Covid-19 should wear a mask around others for 10 days and take a Covid-19 test five days after exposure if possible, the CDC said. The guidance opens the door for people to more quickly return to work, stores and other public spaces after contracting the coronavirus, a move public health experts say is in line with recent research about how long vaccinated individuals with Covid-19 remain contagious.

The CDC said the change was informed by science demonstrating that the majority of Covid-19 transmission occurs early in the course of illness, generally in one to two days before the onset of symptoms and two to three days after.

As flight cancellations continue to grow.  BBG.

Flight cancellations that disrupted U.S. travel over the Christmas weekend stretched into Monday, with winter storms further pressuring carriers that were already short-staffed because of spreading Covid-19 cases.

More than 1,000 U.S. flights were canceled Monday as of 1 p.m. New York time, after more than 2,800 were dropped over the weekend, according to data from FlightAware.com. One of the hardest-hit carriers was Alaska Air Group Inc., whose operations at its main base at Seattle-Tacoma International Airport were affected by snowfall and some of the region’s coldest temperatures in years.

And Omicron infection appears to give protection against Delta.

And Fundstrat says "hysteria phase" of the outbreak is over.

As Covid cases hit new daily record globally.  BBG.

Global Covid-19 cases hit a daily record on Monday, disrupting the holiday season a year after vaccines first started rolling out and two years after the emergence of the virus that many hoped would be fleeting. 

The more than 1.44 million worldwide infections smashed the prior record after factoring out a day in December 2020 when Turkey backdated a significant number of cases. A more conservative gauge -- the seven-day rolling average that smooths out one-time fluctuations and holiday reporting irregularities -- is also at an all-time high, owing to a tidal wave of omicron infections. Better pandemic tools may explain some of the rise in case counts. More infections are being found during this omicron wave thanks to improved contact tracing and testing capabilities in the worldwide fight against the pathogen.

The silver lining is that daily Covid deaths haven’t significantly increased. The seven-day rolling average of deaths has hovered at about 7,000 since mid-October after falling from a delta-driven peak, despite the emergence of omicron. 

The outlook heading into 2022 depends on whether the death toll follows cases and surges higher in the days to come, or if the omicron wave proves mild as more real-world data emerges. While deaths tend to lag infection rates by a few weeks, early indications from southern Africa and other locations where omicron has been circulating suggest some decoupling of the measures.

To see more content, including summaries of most major U.S. economic reports and my morning and nightly updates go to https://sethiassociates.blogspot.com for the full history.