Daily Market Outlook, December 1, 2021

Overnight Headlines

  • Powell Places Faster Bond-Buying Taper On Fed's Christmas Table
  • Fed Vice Chair Clarida: High Inflation Seen This Year Is Not A Success
  • Top US Senate Democrat, Republican Confident On Debt-Ceiling Hike
  • Schumer Eyeing Build Back Better Vote As Soon As Week Of Dec 13
  • Incoming German PM: Action Must Be Taken If Inflation Doesn't Ease
  • UK PM Johnson Assures Another Lockdown Is 'Extremely Unlikely'
  • Caixin PMI Shows China's Manufacturing Activity Contracted In Nov
  • China Reports Highest Daily Local Covid-19 Cases In Nearly A Month
  • Japanese Factory Activity Expands At Fastest Pace In Nearly Four Years
  • Australia's Economy Contracts by Less-Than-Expected In Third Quarter
  • Yen Shines, Aussie Sags As Powell Turns Hawk Despite Uncertainty
  • Oil Rises Ahead Of Two Day OPEC Meeting Under Omicron Cloud
  • Asian Shares Bounce From Year Low But Omicron, Fed In Focus

The Day Ahead

  • Market risk tone improved overnight despite the weaker close in US equities following hawkish comments from Fed Chair Powell (see below). A softer Chinese Caixin manufacturing PMI report was shrugged off, while strong South Korean export figures indicated that trading volumes may be overcoming some of the issues surrounding supply chains. Still, markets remain volatile as investors assess the omicron variant, with very early indications that it may be highly transmissible but there is uncertainty about how lethal it is and the degree of vaccine escape.
  • As focus remains on the potential fallout from the new Covid variant, US Fed Chair Powell yesterday explained his thinking about the additional risks and uncertainties it brings to the economic outlook. He said that rising Covid cases and the emergence of the new variant “pose downside risks to employment and economic activity, and increased uncertainty for inflation”. The point about inflation is that greater supply chain disruptions could drive up costs even as demand cools. We noted as a risk yesterday and in our weekly that the Fed could still hint at a quicker tapering pace owing to inflation risks. Powell yesterday confirmed in prepared remarks to the Senate that that an earlier end to tapering was possible. He and Treasury Secretary Yellen testify in Congress again today, this time at the House.
  • Today’s economic data have likely been overtaken by the discovery of the new variant, the effects of which will show up in future releases. The US ADP employment report, a prelude to Friday’s official nonfarm payrolls release, is expected to show robust private sector jobs growth of over 500k in November. The US ISM manufacturing report, construction spending and the Fed Beige Book will also be watched, including on latest indications for inflation.
  • The main UK/European release is the final November manufacturing PMI readings. The preliminary ‘flash’ PMI showed no let-up in both input and output price pressures for both the UK and the Eurozone. The headline PMIs improved in November for the UK and the Eurozone to 58.2 and 58.6 respectively. Separately, the OECD publishes its Economic Outlook this morning, with probably a passing mention of the recently discovered omicron variant. It nevertheless highlights the ongoing risk to the global recovery from new variants and unequal vaccination rates in different countries.
  • Markets remain volatile as participants assess the economic impact of the omicron variant, which could further complicate central bank policy if it aggravates supply chain disruptions. Oil prices have continued to slide, with Brent crude dropping briefly below $70 ahead of today’s meeting of OPEC+ to decide on production levels

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.1200 (346M), 1.1320-30 (564M), 1.1400 (1.3BLN)

EUR/GBP: 0.8400 (1.9BLN)

AUD/USD: 0.7165 (781M), 0.7200 (302M), 0.7270 (375M)

AUD/NZD: 1.0450 (266M), 1.0500 (1.3BLN)

USD/JPY: 112.50 (334M), 113.00 (323M), 113.50-60 (347M), 114.00-05 (553M)

114.90-115.00 (543M). EUR/NOK: 10.15 (745M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.15 Bullish above

  • Consolidates in Asia as risk currencies gain
  • EUR/USD opened +0.38% at 1.1335 after a whippy US session
  • It completed a bullish outside day recovering from low after Powell comments
  • The range so far in Asia is 1.1316/42 and it is 1.1325/30 into the afternoon
  • Risk assets surged in Asia, as Omicron concerns moved to the background
  • EUR/USD has been benefiting from Omicron related sell-offs since Friday
  • EUR/USD technical outlook solid in short-term but fundamentals are negative...
  • Resistance @ the 21-day MA at 1.1387 with support @ the 10-day MA @ 1.1283

GBPUSD Bias: Bearish below 1.36 Bullish above.

  • GBP steady – buoyant in Asia, awaiting fresh catalysts
  • GBP steady to buoyant in Asia, awaiting fresh catalysts
  • Cable 1.3310-29, holding above 1.3288 low yesterday, 1.3278 low Friday
  • Holding for now in area of 1.3319-52 hourly Ichi cloud, 1.3322 55-HMA
  • Seen heavy above 1.3331 descending 100-HMA, recent moves above rejected
  • GBP/JPY 151.07-62, above 150.65-67 double bottom yesterday, Friday
  • Also mostly below 151.51 descending 55-HMA, 151.55 hourly Ichi cloud base
  • BoE key going forward, seen more hawkish but weak economy may weigh

USDJPY Bias: Bullish above 112.50 Bearish below

  • USD/JPY risk premiums ease, but recovery faces option resistance
  • Better risk sentiment and a firmer USD support USD/JPY in mid 113s Wed
  • USD/JPY recoveries capped 114.00 Tues-Mon. 113.50-114.00 is big option zone
  • $900-million expiries between 113.50-114.00 Wednesday
  • Thursday has $1.2-billion strikes expiring 113.60-70, $1.1-billion at 114.00
  • Another $1-billion between 113.50-114.00 Friday
  • Related option hedging flow will add congestion and hinder further recovery
  • USD/JPY option implied volatility and downside risk premiums are easing
  • Reflects better risk sentiment and lower perceived risk of USD/JPY drop

AUDUSD Bias: Bearish below 0.75 Bullish above

  • AUD/USD pops as risk revival continues into Europe open
  • AUD/USD pops to 0.7171, may shed bearish bias, cue short-covering
  • Wed close above 0.7176 marks exit from Bollinger downtrend channel
  • Risk-on in Asia after Powell comments flattened US yield curve
  • S&P futures +0.8%, oil prices +3.1% as Omicron pessimism abates
  • Asia stocks mostly up even though China Caixin missed
  • Australia's Q3 GDP not as bad as feared, -1.9% q/q