What Omicron? Macro Charts You Must Know

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Originally posted on thepensivenugget.com

Markets aren’t so afraid of Omicron after all, with most of them recovering their initial new-variant losses. Fed hawkishness has driven up yields, although macro concerns still linger as the USD remains broadly firm and the US yield curve is still in its down (flattening) trend.

If you would prefer to read this article in a slideshow format, you can do so here.

In a nutshell:

  • Macro markets are painting a disjointed picture at the moment — neither one of strong global growth nor one of systemic weakness
  • The USD has lost some of its gains, but remains broadly stronger
    - Points to tightening Dollar liquidity across the globe, and is often an indicator of deteriorating global financial and economic conditions — watch CNY closely
  • Interest rates have surged higher over the first week of 2022
    - The US yield curve has steepened in response, although still in a flattening trend
    - Oddly, US breakevens have not moved higher with rates, instead moving in the opposite direction
    - European yield curves also steepened as rates on the continent mirrored the surge in the US
  • Commodities are back to trading according to idiosyncratic factors after the initial Omicron shock
    - Oil has rallied sharply and is back around $80 a barrel
    - Base metal prices aren’t reflecting growing demand. Copper remains in its wide range and Iron Ore is still in its down trend, although Aluminium is rallying strongly again
    - Gold still isn’t doing much, especially considering how inflation is running at elevated levels all around the world

The USD remains firm… EUR

  • EUR has been trading in a tight range between 1.1270–1.1370 for the past month or so, and remains in its down trend. Support lies in the 1.117 region

The USD remains firm… although GBP is trying to break out

  • GBP has rallied sharply vs the USD, from Dec lows of 1.317 to resistance at the upper bound of its down channel, ~1.356

The USD remains firm… AUD

  • AUD rallied vs the USD over Dec 2021, but has since begun to turn lower again. The commodity currency remains in a well established down trend, which isn’t bullish for commodities or global growth

The USD remains firm… CAD

  • The USD also remained firm vs CAD, even as WTI rallied back to $80. Support lies at 1.262, and the currency pair remains in a broad up trend, like the AUD, not bullish for global growth

But the CNY continues to buck global USD strength

  • CNY continues to trade firm vs the USD in the 6.34–6.38 region. The steadfastness of this pair makes it a good indicator of a global Dollar liquidity crisis, should CNY start to weaken appreciably (especially with the Evergrande contagion going on)

US long yields surge higher… US 10y

  • US 10y yields are back trading in the 1.7% region after surging higher over the week, with major resistance at 1.78%, Mar 2021’s high, as markets react to the Fed’s hawkishness

US long yields surge higher… US 30y

  • US 30y yields have surged out of their down channel, and are looking to test major overhead resistance at 2.17%

And the US yield curve steepened a little…

  • The US yield curve has steepened in response to the surge higher in yields and is almost back at 90 bps, although the trend remains downward (more flattening)

But US breakevens aren’t as optimistic…

  • Breakevens however, have not rallied along with yields or the yield curve, and point toward falling inflation expectations

European 10y yields are also surging higher…

  • European long yields have surged higher as well, and are back to their 2021 highs after falling sharply in Nov and Dec

Dragging their yield curves steeper

  • European yield curves steepened sharply in response; with France and Germany back to their pre-Omicron levels, although Italy’s curve is still flatter

Base metals aren’t reflecting growing demand… Copper

  • Copper prices continue to trade in a range between $4.05 — $4.5, and have largely traded sideways since June 2021

Base metals aren’t reflecting growing demand … Iron Ore

  • Iron ore remains in a down trend and ~40% off its May 2021 highs; although the base metal has rallied a fair bit off its Nov lows

Except for Aluminium, which is rallying again

  • Aluminium prices have put in a bottom at $2577, and have started the new year by surging higher again

Oil has rallied strongly since December…

  • Oil is back around the $80 a barrel mark after falling to the low $60s last Dec, with a test of the triple top ~$84 looking likely in the near future

While Gold is still largely trading sideways

  • Gold continues to bounce around between $1780 — $1830 even as inflation all over the world remains elevated. Support lies at $1760 and $1684 if gold fails to sustain a move back to $1880 — $1900