MKT CALL: MACRO OVERVIEW:
- US equity markets have shaken off those late-November/early-December fears that there would be a protracted slowdown in growth and corporate earnings, with the US S&P 500 hitting fresh all-time highs this week.
- Crude oil prices seem to be confirming the exuberance, having reentered the rising channel in place from the November 2020 and August 2021 lows.
- The US Dollar may simply be biding its time before the next leg higher as the futures market works through an overcrowded long position; speculators are the most net-long since October 2019.
Risk Rallies…Except for Cryptocurrency?
In this week’s edition of MKT Call: Macro (formerly The Macro Setup), we discussed how new data surrounding the COVID-19 omicron variant is soothing investors’ fears about a significant impact to both global growth and corporate earnings, allowing the ballyhooed Santa Claus rally to finally unfold.
Confirming prognostications made during the weekly recording over the past month, the increase in transmissibility of the omicron variant does indeed to have come along with a decrease in lethality. US equity markets have shaken off those late-November/early-December fears that there would be a protracted slowdown in growth and corporate earnings, with the US S&P 500 hitting fresh all-time highs this week. Crude oil prices seem to be confirming the exuberance, having reentered the rising channel in place from the November 2020 and August 2021 lows.
If the omicron variant is merely a passing concern, then it appears likely that the Federal Reserve will plow forward with its more aggressive QE taper timeline, keeping intact the potential for three 25-bps rate hikes in 2022. This may help explain the divergence between mega cap tech stocks (Apple, Microsoft, Tesla, etc.) and small cap tech stocks, insofar as fading breadth in the US Nasdaq 100 shows that fewer equities are enjoying the tailwind that is the Santa Claus rally.
With the US Treasury yield curve (2s10s) continuing to flatten, there is a sense that longer-term growth and inflation expectations are starting to come down. But this is not necessarily unexpected, as short-end rates rise thanks to Fed expectations while longer-end rates come down thanks to the removal of stimulus – wholly in line with recent history that has showed that long-end rates have actually come down when the Fed has abandoned its QE programs. The US Dollar may simply be biding its time before the next leg higher as the futures market works through an overcrowded long position; speculators are the most net-long since October 2019.
*For commentary from Dan Nathan, Guy Adami, and myself on the US Dollar (via the DXY Index), the US S&P 500, gold prices, Bitcoin, among others, please watch the video embedded at the top of this article.
CHARTS OF THE WEEK
Eurodollar Futures Contract Spread (JANUARY 2022-DECEMBER 2023) [ORANGE], US 2s5s10s Butterfly [BLUE], DXY Index [WHITE]: Daily TIMEFRAME(AUGUST 2021 to DECEMBER 2021) (Chart 1)
CRUDE OIL PRICE TECHNICAL ANALYSIS: DAILY TIMEFRAME (NOVEMBER 2020 TO DECEMBER 2021) (CHART 2)
DXY PRICE TECHNICAL ANALYSIS: DAILY TIMEFRAME (JULY 2020 TO DECMEBER 2021) (CHART 3)
--- Written by Christopher Vecchio, CFA, Senior Strategist
