Markets

US Treasuries followed last week’s recipe. Testing the recent low (area; depending on the maturity), but eventually rebounding higher. This time without strong trigger though like Thursday’s Powell speech or Friday’s retail sales. The move seemed more erratic in nature. Timing didn’t fit with the release of second-tier, but consensus-beating US figures. NY Fed services business activity rose from -2.2 to -0.5 in November, with details showing strength in business activity and employment.

Both in the current and 6-month forward looking subindex. The NAHB housing index recorded a third consecutive increases to a 7-month high, from 43 to 46. The 6-monht sales outlook reached the highest level since April 2022 on hope on looser regulation and more construction during president Trump’s second tenure. Yesterday’s price action strengthens our short term consolidation call as dust settles over the US presidential elections, in absence of important eco data and with the Fed not in a hurry. Intraday changes on the US yield curve ranged between -0.7 bps and -3.3 bps with the belly of the curve outperforming the wings. German Bunds underperformed US Treasuries (GE 2y: +5.4 bps) in what could be the start of an opposite (to US Treasuries) consolidation phase. EUR/USD profited from relative yield dynamics with the pair being squeezed from 1.0531 to 1.0598.

Dovish Greek ECB member Stournaras labelled a December 25 bps rate cut a done deal and added that it’s an optimal reduction. That way, he dented more aggressive market bets calling on a 50 bps move (25% probability). This week’s eco data have the potential to completely close the door obviously depending on their outcome. The ECB built her recent reaction function on what her president Lagarde calls “the three criteria”: the inflation outlook, the dynamics of underlying inflation and the strength of monetary transmission.

Tomorrow, we receive important info on the second pillar via Q3 negotiated wage data. Annualized wage growth remained between 4.3% and 4.7% from Q1 2023 to Q1 2024. Last quarter’s decline to 3.5% was welcomed by the ECB in its inflation fight, but remains way above the central bank’s 2% inflation target. ECB Lagarde indicated that forward-looking wage trackers point to a an easing of pay growth in 2025 which she hopes to see reflected in tomorrow’s numbers. On Friday, EMU November PMI’s are expected to paint a similar, dire, picture as in October (50 for composite). Recall though that there was a serious discrepancy between weak Q3 soft data and hard data (+0.4 Q/Q EMU GDP growth).

News & Views

ECB chair Lagarde in yesterday’s “The economic and human challenges of a transforming era” speech again called for a(n effective) single market for both goods and capital in order to reverse progressively slowing productivity. “By acting as a union to raise our productivity growth, and by pooling our resources in areas where we have a tight convergence of priorities – like defense and the green transition – we can both deliver the outcomes we want and be efficient in our management of public spending.” Lagarde stressed the need for such changes given the two megatrends that are challenging the bloc’s economic model. The first is a new geopolitical landscape. An increasingly inward-looking global environment is a hazard to the open European economy.

The second is Europe falling behind in emerging technologies, specializing mostly in technology developed the last century. Lagarde said the innovation and financing ecosystems are not suited to develop new advanced technologies, noting that about a third of EU savings sit in cash and bank deposits compared to around one-tenth in the US. She floated an amount of up to €8tn that could be redirected into long-term investments if EU households were given better opportunities to invest their savings. The still-existing trade barriers within the EU’s single market for goods and capital are estimated to represent a shortfall of around 10% of the EU’s economic potential.

San Francisco Fed economists in research published yesterday said that the US labor market is still adding to inflationary pressures, be it less than in 2022 and 2023. “Declines in excess demand pushed inflation down almost three-quarters of a percentage point over the past two years. However, elevated demand continued to contribute 0.3 to 0.4 percentage point to inflation as of September 2024.” The findings offer some counterweight to Fed chair Powell’s observation back in the summer, when he said that the job market is no longer a source of significant inflationary pressures.

Source: ACTIONFOREX

In focus today

Today, in euro area we receive final October HICP inflation data. This will show drivers of inflation and allow us to calculate the “LIMI” indicator of domestic inflation, which has received great attention from the ECB lately.

In Sweden, the day begins with a speech from Riksbank’s Anna Breman at 8.15 CET, focusing on “Current monetary policy and the economic situation”. This follows several notable events since the 6 November decision, such as US election, higher-than-expected inflation for October, and significantly higher electricity prices, presenting various discussion points. At 10.00 CET, the Swedish National Financial Management Authority will present new forecasts on the economy and public finances.

Today, we also have a few ECB speeches as well as some BoE speeches including BoE Governor Baily.

Economic and market news

What happened yesterday

In the euro area, ECBs Lagarde highlighted the critical need for Europe to reverse declining growth to sustain its welfare provisions, increase defence spending and address climate change. Lagarde emphasized the necessity for bold economic policies to generate the required wealth for these purposes. She also focused on the urgency of adapting to a changing geopolitical landscape and regaining competitiveness and innovation. Lagarde also pointed out Europe’s vulnerability to trade wars due to its heavy reliance on trade, which makes up more than half of its economic output.

Equities: Global equities were higher yesterday, with European markets lagging behind the rest. We observed some elements of the Trump trade, though not nearly to the extent we witnessed in the immediate aftermath of the elections. Health care continued to underperform, while the materials sector experienced a slight recovery after several challenging weeks for the China-linked sector.

The VIX was marginally lower and appears to have stabilised around the 15 level, aligning with expectations given the current macroeconomic backdrop.

In the US yesterday, Dow -0.1%, S&P 500 +0.4%, Nasdaq +0.6%, and Russell 2000 +0.1%.

Asian markets were broadly higher, while South Korea underperformed for the second consecutive day. US and European futures are higher this morning.

FI: The EUR swap curve saw some bearish flattening through the Monday session, which was characterized by being very limited on market moving news. The 2Y tenor was up some 5bp throughout the session, while the 10Y point rose 3bp. The Bund ASW-spread at -2.5bp was roughly unchanged, similar to peripheral and EUR credit spreads.

FX: USD sold off against all currencies but the JPY to start the week. Commodity currencies, NOK, AUD and CAD gained the most on Monday. EUR/USD rose towards 1.06, EUR/SEK traded around 11.60 and EUR/NOK around 11.70.

The S&P500 rebounded 0.39%, while Nasdaq added 0.71%, supported by a more than 5.5% jump in Tesla shares on rumours that Trump administration wants to make a federal framework for fully self-driving vehicles one of the Department of Transport’s priorities. And remember, Elon Musk’s robotaxis is one of the company’s priorities for the future development and had helped – earlier this year – revive appetite for Tesla despite the slowing sales of EV sales. So yes, the news couldn’t come at a better time for Tesla.

News were not as good on the Nvidia front though, as Nvidia’s Blackwell chips – you know the next generation chips that see an insane demand according to the CEO Jensen Huang – reportedly overheat, requiring redesign and delay for deliveries. Of course, you can argue that this type of adjustments are standard for such large-scale tech releases, and they should not have a material impact in the long run, but the delay in the short run mean that the big customers like Meta, Google and Microsoft won’t have their chips on time, the latter will extend the payoff period on their investments at a time investors can’t wait to see these investments bear fruit. Nvidia retreated 1.30% yesterday, as the news that the company is now working with Google to design its next generation quantum computing devices helped countering the negative vibes of the overheating Blackwell chips.

The Blackwell news triggered a 3% rally in AMD that also sells high capacity chips for AI applications. ‘The MI325X is expected to begin production by late 2024, while the MI350 series aims for up to 35 times better inference performance compared to its predecessors and is set to launch in 2025’​, according to ChatGPT. Any misstep from Nvidia could help AMD gain market share. For now, investors are focused on the next earnings report from Nvidia that will land on Wednesday, after the closing bell, and will hopefully put a number on how insane the demand for these Blackwell chips, whether they are overheating or not.

Beyond tech, the Dow Jones index was not cheery, yesterday, the index closed the session slightly lower, while small caps were slightly up on lower yields, but the direction of the yields are not encouraging the small cap investors given that these companies have smaller margin to deal with higher borrowing costs. As such, the buyers are seen more crowded in big caps, and even the most bearish of the bears on the Wall Street are busy lifting up their PT for the S&P500. The 6500 is increasingly pronounced for the S&P500, while gold is also among the top picks at Goldman Sachs, apparently, which sees the precious metal top the $3000 per ounce next year. In the short-run, the retreat in the US yields helped throw a floor under the gold’s retreat. We see a beautiful support forming near the minor 23.6% Fibonacci retracement and the 100-DMA – that’s around $2550 level.

In Europe, the Stoxx 600 index was flat, the Chinese stocks are lower as the Chinese authorities gather in Hong Kong to discuss the latest developments in China’s financial sector, while the Japanese Nikkei is under the pressure of a rebound in the Japanese yen against the US dollar, on the back of a broadly softer US dollar – a move that I believe is just a correction of the past few week’s rally on political developments and the hawkish shift in Federal Reserve (Fed) expectations.

The EURUSD tested the 1.06 psychological resistance yesterday, supported by the weak dollar and also the news that Greece will repay 5 billion euros of long-term debt before time. But outlook for the EURUSD remains negative on divergence between the European Central Bank (ECB) and the Fed, Hence, price rallies in the EURUSD will soon create interesting opportunities for the euro bears to come back in and give an other try to breaking the 1.05 offers’ back.

In energy, US crude posted a 3% rally yesterday, but the bulls could find the $70pb offers hard to clear, as the amply global supply / weak global demand outlook remains supportive of the bears. The short-end of the market shifted into contango, another signal that investors price in an oversupplied oil market, which could cap the upside potential of short-term price rallies. Solid resistance is seen between $70/72pb range. The key resistance to the actual negative trend – that has been building since summer – stands at the $72.85pb level – which is the major 38.2% Fibonacci retracement on summer decline.

Source: AP

(Nov 19): Japan’s ruling party named Daishiro Yamagiwa as the new chairman of its group that promotes semiconductors, as it sets up a new mechanism to boost funding for the key industry.

Yamagiwa, who formerly served as economic revitalisation minister, replaces Akira Amari, a Liberal Democratic Party heavyweight who championed Tokyo’s renewed push for chips until he lost his seat in parliament in last month’s national election.

The appointment comes after Prime Minister Shigeru Ishiba pledged more than ¥10 trillion (RM289.17 billion) of fresh public support for Japan’s semiconductor and artificial intelligence sectors. Those outlays are in addition to the roughly ¥4 trillion Japan has secured for the industries in the last three extra budgets, including ¥920 billion for Rapidus Corp in Hokkaido, according to the industry ministry. Rapidus aims to mass produce advanced logic chips by 2027.

“Semiconductors can be a choke point for future industries and we shouldn’t be wondering whether Rapidus will be able to win or not,” Yoshihiro Seki, secretary general of the LDP group, said to reporters on Tuesday. “We have to make it succeed and win no matter what.”

The LDP group is likely to press ahead with legislation needed to enable the new funding mechanism in a regular parliamentary session next year. The LDP and its coalition partner Komeito lost their majority in last month’s election and they now need support from opposition parties to implement their policy measures.

Yamagiwa resigned from his ministerial post in 2022 due to alleged ties to the Unification Church, a group whose influence in Japan came under fire following the assassination of former Prime Minister Shinzo Abe. Yamagiwa’s website says he has severed those ties.

In addition to the legislative hurdle, Ishiba’s chips pledge is set to rely on a complex mix of funding measures, according to the draft of an economic stimulus package seen by Bloomberg. The government is expected to announce the package later this week. 

A breakdown of the funding methods in the draft:

¥2.2 trillion through transfers from the fiscal investment and loan special account to the energy special account; will also issue special bonds linked to the energy account as needed

¥1.6 trillion by utilising money returned to the national treasury, using leftovers in existing funds for chip support, and selling government-owned shares in Shoko Chukin Bank

¥2.2 trillion by using green transformation bonds and tapping money returned to the national treasury through reviewing existing industry ministry funds

At least ¥4 trillion worth of financial support through investment and guaranteeing private sector loans

As for how the funds will be allocated, about ¥6 trillion will be used for next generation chip development and mass production of power chips, and at least ¥4 trillion will be used to offer financial support via investment or debt guarantees, according to the draft. It also says the government aims to submit new legislation necessary to enable the new framework in a regular parliamentary session next year.

Source: Theedgemarkets

Reviewing the seasonal performance of US equity in December