Volatility In The Grain Market May Continue | Global Demand For Containers Will Fall This Year
Saxo Bank 03.11.2022 10:45
Summary: Traders were given a case of whiplash yesterday over the FOMC meeting after the new monetary policy statement confirmed the impression that the Fed will soon downshift the size of rate hikes after another 75 basis points hike at this meeting. But then a very hawkish press conference from Fed Chair Powell took Fed terminal rate expectations next year to new highs for the cycle, pummeling risk sentiment and lighting a fire under the greenback. The next key focus will be tomorrow’s US October jobs report.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
Powell delivered a jolt to equities communicating on the FOMC press conference that the terminal rate could be higher than what the market expects and that rates will stay higher for longer. S&P 500 futures could out many support levels on the downside in the last night session and are continuing lower this morning trading around the 3,765 level with the 3,700 level being the next level to watch on the downside. Powell’s remarks confirm our view that inflation and interest rates will remain higher for longer and that equities will be under pressure in the medium term, being negatively impacted by higher interest rates and more margin compression.
Euro STOXX 50 (EU50.I)
STOXX 50 futures are naturally responding to Powell’s statements yesterday trading lower this morning around the 3,575 level with the 100-day moving average around the 3,528 level being the gravitational point on the downside to watch.
FX: USD bull market is back in business after hawkish Fed Chair Powell presser
The dollar was first weak yesterday on the new monetary policy statement before the hawkish Powell presser lit a fire under the greenback as he made it clear that the ceiling could be raised next year for the “ultimate level” of Fed funds rate, de-emphasizing the size of rates from here after several 75-basis point moves. The US dollar ripped back to the strong side, generating compelling reversal patterns for USD bulls almost across the board, with the important 0.9876-0.9850 area falling in EURUSD, GBPUSD slipping below the bottom of the 1.1400-1.1500 zone, AUDUSD crushed back below 0.6400, USDJPY support at 145.00 surviving yesterday with the pair lifting back well north of 147.00, etc. Of course, the USD will be sensitive to incoming data, but yesterday established a clear line in the sand that USD bulls will now use for longs, eyeing the cycle highs for the greenback against most other G10 currencies.
Gold trades lower following a volatile session where Fed Chair Powell managed to wrongfoot most markets. Following the expected 75 bp rate hike the written statement raised the prospect of the FOMC pausing to assess the “cumulative tightening” impact before saying at the press conference “We still have some ways to go. And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected”. Most markets, including gold, responded by turning sharply lower with the yellow metal slumping 2% from the high. These comments send a signal that we have not yet reached peak hawkishness and with that the risk of a prolonged period of dollar and yield strength slowing gold’s recovery. It’s the incoming data that everyone will have to watch, starting with US payrolls this Friday.
Crude oil (CLZ2 & LCOF3)
Crude oil traded lower after the FOMC meeting raised expectations for a higher peak in US rates and together with continued uncertainty over China demand they helped offset support from a tightening fuel market. Earlier in the day the market jumped after the EIA reported US gasoline supplies had fallen to a 2014 low while distillate supplies on the East Coast had reached a near record seasonal low. China’s zero-Covid tolerance remains the overall strategy according to the government, thereby removing some earlier optimism about a change. However, OPEC+ cuts from this month and upcoming EU sanctions is likely to keep the market rangebound with resistance in Brent at $97.25.
US treasuries (TLT, IEF)
The hawkish Powell press conference yesterday (more below) took Fed rate expectations to new highs for the cycle and the 2-year rate is pushing on cycle highs near 4.62%, while the 10-year merely rebounded above 4.00% as the yield curve is close to its most inverted for the cycle at below –50 bps for the 2-10 spread. Incoming US data will be the focus next for the longer end of the yield curve and whether 10-year yields can threaten the cycle highs well north of 4.25%.
What is going on?
FOMC one-two as dovish interpretation of new policy statement reversed by hawkish Powell presser
The initial read of the FOMC statement was dovish, as the new statement inserted the phrase: “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” This read a bit dovish as the market assumed that this means the anticipated downshift in Fed rate hikes is coming and US yields dropped, risk up, USD down, etc. In the press conference, however, Fed Chair Powell was far more hawkish, saying there is a “ways to go”, and spelling out that the incoming data means that the “ultimate level” that the Fed funds reaches is likely to move to higher levels than was though at the September meeting. This had Fed expectations for the spring of next year edging back toward the cycle highs of 5.00% and then closing the day a full 10 basis points higher near 5.10%. While Powell did say it may be possible that the Fed steps down to smaller hikes as soon as the December meeting, the FOMC felt that the speed of hikes Is becoming “less important” (leaving market to infer that the Fed just keeps hiking at more meetings if incoming data supports doing so. As well, we must remember that the Fed has cranked up the pace of quantitative tightening in the background, which provides its own tightening pressure on markets and arguably equates with several hundred basis points of rate tightening over the course of a year.
European earnings this morning
Orsted is raising its full-year guidance on EBITDA excluding new partnerships to DKK 21-23bn and Q3 revenue was DKK 36.5bn vs est. DKK 26.7bn highlighting the increased profitability in power generation using renewable energy. BNP Paribas beats on both revenue and net income driven by strong results in its fixed-income, commodities, and currencies trading. BMW is also beating on both Q3 revenue and EBIT and maintaining its EBIT margin fo 7-9%.
US earnings recap
Fortinet, the industry leader in cyber security, delivered Q3 revenue of $1.15bn vs est. $1.12bn and adj. EPS $0.33 vs est. $0.27 and Q4 outlook on revenue of $1.28-1.32bn vs est. $1.27bn and Q4 EPS outlook of $0.38-0.40 vs est. $0.35, but despite strong figures shares were lower in extended trading. Albemarle delivered high growth in Q3 on revenue and earnings, but lowered its fiscal year revenue and EPS a bit against their previous guidance.
Wheat (ZWZ2) prices slump as Russia to resume grain deal participation
Amid mounting pressure on Russia to avoid a galloping food crisis, Russia finally agreed to resume its participation in the Ukraine grain deal, allowing safe passage of Ukraine’s crop exports. Wheat prices dropped over 6% on the news and corn was lower as well, with vessels likely to resume normal operations today. Russia however threatens to pull out of the agreement at any time, which suggests volatilities can continue till the war goes on.
Better-than-expected US ADP turns attention on NFP
US ADP national employment reported a 239k increase in October, above the expected 193k and the prior, revised lower, 192k, ahead of the key NFP on Friday. While there is little confidence in this data set as the methodology has been recently revised and there is limited backward data, a tight labor market is still the clear read. Focus now turns to NFP due on Friday, with unemployment rate and wage growth remaining as the key metrics to track. Bloomberg consensus expectations are still set for a headline gain of 200k for October, with unemployment rate inching a notch higher to 3.6% from 3.5% previously and wage growth slightly weaker at 4.7% YoY from 5.0% YoY previously.
Maersk warns about rapid economic deterioration
Maersk, the world’s largest owner of container ships, said it expects global container demand to decline by up to 4% this year, as against its previous estimate of +/- 1%. It also warned that next year could be worse, signalling further downturn in global trade may be on the cards. Still, Q3 earnings before interest and tax rose to $9.48bn vs. $8.63bn expected.
What are we watching next?
Next US data points and impact on US yields
Fed Chair Powell made it clear yesterday that he didn’t feel the size of Fed rate hikes are very important after yesterday’s 75 basis point move, but that the Fed could continue to tighten beyond what the Fed itself was forecasting less than two months ago, suggesting a higher peak rate. Currently, peak Fed rates for next year are projected at 5.10% by next spring, a new cycle high and well above the prior highs just above 5.0% after Powell made a hawkish impression at yesterday’s press conference. That leaves the market still very sensitive to incoming data for gauging how high the Fed might take rates next year, with the next data points of note the October US ISM Services survey up today and the October jobs data up tomorrow.
Earnings to watch
Today’s US earnings focus is ConocoPhillips, PayPal, Starbucks, MercadoLibre, and Cloudflare. Based on previous results in the energy sector we expect ConocoPhillips to deliver good results. PayPal has had headwinds for some time and could disappoint. One of our worst performing theme baskets has been e-commerce which has been hit by difficulties in advertising targeting due to Apple’s data privacy decision, supply chain bottlenecks, and explosive prices on logistics. MercadoLibre is the South American version of Amazon and analysts expect revenue growth of 45% y/y and EPS growth of 24% y/y. Cloudflare will be in focus and given the negative sentiment over Fortinet’s earnings release last night expectations might be too high for any cyber security company to deliver on.
Today: Verbund, Barrick Gold, Orsted, Novozymes, BNP Paribas, BMW, Enel, ING Groep, DBS Group, ConocoPhillips, Amgen, PayPal, Starbucks, Regeneron Pharmaceuticals, EOG Resources, Moderna, MercadoLibre, Block, Cloudflare, Coinbase
Friday: Enbridge, Societe Generale, Intesa Sanpaolo, SoftBank, Amadeus IT Group, Duke Energy,
Economic calendar highlights for today (times GMT)
0730 – Switzerland Oct. CPI
0805 – ECB President Lagarde to speak
0900 – Norway Norges Bank Deposit Rate announcement
1130 – US Oct. Challenger Job Cuts
1200 – UK Bank of England Rate Announcement
1230 – UK Bank of England Governor Bailey press conference
1230 – US Sep. Trade Balance
1230 – Canada Sep. Building Permits
1230 – Canada Sep. International Merchandise Trade
1230 – US Q3 Nonfarm Productivity/Unit Labor Coasts
1230 – US Weekly Initial Jobless Claims
1330 – Czech Central Bank Rate Announcement
1400 – US Sep. Factory Orders
1400 – US Oct. ISM Services
1430 – EIA's Weekly Natural Gas Strorage Change
0030 – Australia RBA Monetary Policy Statement
0030 – Australia Q3 Retail Sales
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: