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Investor Resolve To Be Tested

STOCK INDEX FUTURES

Global equity markets overnight were lower with the exception the Australian market. With another leg of the quadruple witching expiration completed on the opening this morning and the trade shifting into the March contract, the bulge in trading volume should be past. In a negative big picture development, China is apparently planning to ban domestic online brokerages from offshore trading, as that could rob the world markets of a significant investment block. The most recent US daily infection count was 143,760 keeping the omicron issue alive and creating uncertainty in the marketplace. Earnings announcements will include Darden Restaurants before the Wall Street opening.

S&P 500: According to press reports out of London, stocks there declined because of surging omicron cases, but we also think the hawkish news flow from the US Federal Reserve, Bank of Japan and Bank of England provides the bear camp with ongoing confidence. In fact, seeing press reports express concern about central banks in London trading this morning at the same time infections are surging there should create fears of premature tightening. As indicated already, expiration/contract rollover will be largely completed with the opening of the NYSE this morning and that could reduce volatility. On the other hand, we would not rule out a spike down retest of the 4600 level in the March S&P early on. As indicated already, the NASDAQ was the weakest component of the markets yesterday with tech sector issues getting hammered and several funds seemingly rotating to other sectors.

CURRENCY FUTURES

DOLLAR: Two weeks ago, the trade was not expecting the Bank of England and the Bank of Japan to be perceived as more “hawkish” than the US Federal Reserve. In fact, seeing the Bank of England move to tighten caught many off guard and that could push expanded volatility into today’s action. However, the dollar appears to have found some value around the 96.00 level and the trade is beginning to reevaluate its interpretation of the Fed after analysts pointed out the Fed’s desire to make gradual major policy changes in a measured fashion. If the omicron situation were not severe and if growth in other non-US countries were more impressive, we would expect the dollar to continue back toward the December lows. Instead, we see the 96.00 level holding and the dollar staging a bounce later today.

EURO: With infection counts remaining troublesome in the euro zone some fears of premature hawkishness at the ECB and definitively weak German economic data recently, the bear camp in the euro has fundamental ammunition. Even the technical condition favors the bear camp with yesterday’s spike high testing and failing at the last 35 day’s consolidation highs and with the euro this morning sitting 150 points above the middle of the current consolidation range.

YEN: The Yen is likely to carve a narrow path today despite the surprisingly hawkish dialogue from the Bank of Japan as the trade is suspicious of the Bank of Japan’s capacity to remove stimulus and certainly its capacity to raise rates given its anemic economy.

SWISS: With the Swiss this morning adding to very substantial strength yesterday and following the significant reversal on Wednesday, a continuation on the upside to resistance of 1.0931 is possible. However, the US economic report slate is empty today and weakness in equities could make it difficult for the bull camp to extend their control.

POUND: In retrospect, the Pound probably overreacted to the Bank of England surprise, but the currency could be underpinned this morning because of November UK retail sales gaining 1.4% over October. In other words, UK retail sales definitively outperformed US retail sales and the market appears to be discounting part of the worsening omicron situation in the UK. On the other hand, the British pound was significantly oversold into this week’s low, and the trade clearly avoided pressing the currency below the 1.320 level.

CANADIAN DOLLAR: Apparently the trade buys into the idea that the Bank of Canada will be moving to tighten policy quicker than has been expected over the prior 5 months. On the other hand, traders should not forget the stellar Canadian jobs report for the month of November! Obviously, the market has an affinity for the 78.00 level as it has respected that level as support on many occasions since February.

INTEREST RATES

While one cycle of central bank meetings is not enough to draw a conclusive opinion, seeing the Bank of England and the Bank of Japan perceived as more hawkish than the US Federal Reserve is certainly a potential major market event. In defense of the US Federal Reserve Chairman, he did indicate the Fed is better off making slow major transitions and the market should not discount the Fed’s ultimate inflation fighting commitment. However, US treasury bonds were none the worse for wear following historically hot CPI and PPI readings over the last couple weeks and they have not seen significant damage from the Bank of England being the first central bank to hike rates. In retrospect, yesterday’s headline initial claims reading justified buying interest in Bonds and Notes which in turn has helped March bonds generally hold above the critical pivot point of 162-00. However, foreign interest in U.S. asset-backed securities resulted in overall net foreign sales of long-term securities of $22.2 billion in October and that combined with hot inflation readings, a developing central bank tightening bias apparently in motion is the type of fundamental evidence to produce a very major long-term top. On the other hand, until the Fed feels the need to openly battle inflation, many traders will choose not to fight the US Federal Reserve with US Treasury sales. While we do not expect a major impact from equity markets today that could be the main force driving treasury prices. In fact, there are no major US or Canadian economic numbers scheduled for today, while Fed Governor Waller and San Francisco Fed President Daly will speak during afternoon US trading hours. Earnings announcements will include Darden Restaurants before the Wall Street opening.

Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.

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Futures and options trading involve significant risk of loss and may not be suitable for everyone.  Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM.  The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.

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