- Major U.S. stock indexes green; Nasdaq up most
- All 11 S&P sectors higher, tech leads
- STOXX close up 0.7%
- Dollar, crude, bitcoin gain; gold slips
- U.S. 10-year Treasury yield ~1.53%
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OIL CAPACITY SHOCKS COULD MEAN $150 A BARREL BY 2023 – JPMORGAN
Oil producers are likely to have capacity shocks in the coming two years that could see oil prices jump to $125 a barrel in 2022 and $150 a barrel in 2023, according to analysts at JPMorgan.
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Brent crude prices have eased since hitting a three-year high of $86.70 a barrel on Oct. 25 though prices remain relatively elevated at $76.14 a barrel. JPMorgan sees the problem getting worse due to underinvestment in the sector over the past 18 months.
The bank expects that OPEC+’s spare capacity will be around 2 million barrels a day in 2022, which is 43% below consensus estimates of 4.8 million barrels a day, and sees the group’s total capacity shortfall extending to 3 million barrels a day by the first half of 2024, compared to OPEC+’s target of 49.1 million barrels a day in that time frame.
OPEC+ “has returned to a (position) of positive leverage, which it will defend by keeping inventories low, the market in balance and taking action to support optimal reservoir management through paced volume growth,” the analysts said.
Longer-term oil prices of $80 a barrel is likely needed to spur the investment needed to increase capacity as demand grows, and oil is likely to trade around this price from 2024, JPMorgan said.
In the interim, however, prices are expected to rise to $90 a barrel in 2022 and $104 a barrel in 2023, with overshoots to $125 a barrel in 2022 and $150 a barrel in 2023 likely, the bank said.
EUROPEAN STOCKS: NIBBLING ON THE DIP (1155 ETD/1655 GMT)
Glass half full: investors bought the dip!
Glass half empty: investors didn’t buy much of it!
European stocks ended the day up 0.7% which isn’t much of a rebound considering the 3.7% hit the pan-European STOXX 600 suffered on Friday.
“Dip buyers are emerging across a host of sectors, and as ever it will take a while for the market to claw back all the losses suffered last week”, wrote Chris Beauchamp, Chief Market Analyst at IG.
As some analysts cautioned today, there are so many unanswered questions about the omicron variant that a ‘wait and see’ strategy is probably proving a popular option among investors.
Anyhow, much of the credit for the limited bounce back is due to oil prices which have lifted energy stocks, the clear winners of the session with a 2% jump.
Travel and Leisure shares also made a comeback with a 1.8% rise but again, that’s small change in comparison with the 8.8% drop on Friday.
As a sign of the lack of conviction for the sector, hotel operator Accor and BA owner IAG lost 0.8 and 0.3% respectively.
Some of today’s tech frenzy on Wall Street has washed on European shores but without much enthusiasm: the sector’s index rose 1.6% while the S&P technology jumped 2.2%.
Car makers were the worst performers with the sector losing 0.3%, dragged down by France’s Faurecia, down 7.9%, which cut its guidance for the second time this year.
HOMES FOR THE HOLIDAYS: PENDING HOME SALES JUMP TO 10-MONTH HIGH (1105 ET/1605 GMT)
Housing market data released on Monday supported the notion that the sector, despite slowing down under the weight of its own success, still has some gas in the tank.
Pending sales of pre-owned U.S. homes (USNCH=ECI) surged by 7.5% last month, blasting past consensus and posting a decisive rebound from September’s 2.4% decline, according to the National Association of Realtors (NAR). read more
The increase sent the index to its highest print in ten months, where it hovers well above pre-COVID levels.
“This solid buying is a testament to demand still being relatively high, as it is occurring during a time when inventory is still markedly low,” writes Lawrence Yun, NAR’s chief economist.
Indeed, while the initial threats – and resulting lockdowns – surrounding the pandemic have waned, its effects don’t appear to be going away any time soon, as evidenced the new Omicron variant. read more
As a result, demand for elbow room and home office space remains robust, with many potential buyers finding additional impetus in the form of rising rents and interest rates.
“Motivated by fast-rising rents and the anticipated increase in mortgage rates, consumers that are on strong financial footing are signing contracts to purchase a home sooner rather than later,” Yun added.
The initial suburban flight drove inventories to record lows, even as homebuilders struggled replenish those inventories as they wrestled with land scarcity and a hobbled supply chain.
These factors launched home prices into the stratosphere, and beyond the grasp of many potential buyers, particularly and the lower end of the market.
But as Rubeela Farooqi, chief U.S. economist at High Frequency Economics points out, inventories and home prices have both shown recent signs of easing.
“Inventories, while they have declined over the last three months, have moved up from lows earlier this year,” Farooqi says. “Gradually easing supply constraints should be a positive for existing home sales over time.”
As a potential home sale is counted as ‘pending’ once the contract is signed, the data acts as a fairly accurate predictor of actual home sales a month or two down the line.
So, much like the Commerce Department’s building permits report, which also showed a nice rebound in October, pending home sales is among the sector’s most forward-looking indicators.
But the stock market is the most forward-looking indicator of them all, reflecting where investors believe the housing sector will be six months to a year down the road.
But as shown in the graphic below, index performance rebased to a year ago shows that relationship has since converged, although the SPCOMHOME has gained an edge of late, nicely echoing the recent uptick in the NAHB’s Homebuilder Sentiment index.
Wall Street was heading sharply higher before the data hit, rebounding from Friday’s steep sell-off due to renewed pandemic fears in the form of our newest addition to the common vocabulary ‘Omicron.’
But the perennial stay-at-home plays, namely market leading tech megacaps, have since taken a decisive lead, pushing the Nasdaq to the head of the pack.
RECOVERING FROM OMICRON? GIVE MARKETS 10 DAYS! (0959 ET/1559 GMT)
Even though markets have quickly switched from panic selling to dip-buying, main equity benchmarks remain well below the levels they were at before Omicron jitters wiped $2 trillion off stock markets worldwide.
At this point one may wonder how long could it possibly take for a complete recovery?
To answer that, Mediobanca looked at market behaviour in October last year when the Delta variant was first spotted.
Back then, it took 10 days to rebound and reach new highs, it says, which suggests that this time around the recovery process should be faster, given that the number of vaccinated is much higher and the time to market of new shots is shorter.
“We might be back to highs quite soon,” the Italian investment bank wrote in an email to clients.
U.S. FUTURES BOUNCING AFTER OMICRON SELL-OFF (0815 ET/1315 GMT)
U.S. equity index futures were pointing towards a higher open on Monday, after Friday’s sharp sell-off in a shortened post-Thanksgiving holiday session fueled by the finding of a new coronavirus mutation in South Africa.
A top South African infectious disease expert said on Monday that existing COVID-19 vaccines should be highly effective at preventing severe disease and hospitalization from the new variant, named Omicron, and U.S. President Joe Biden was due to update the public on the new variant and the U.S. response later in the day. read more
The Dow Industrials (.DJI) suffered its biggest one-day percentage decline since October 2020 and the S&P 500 (.SPX) saw its biggest daily percentage drop since February 25 on Friday, as concerns about the new variant rattled markets, although many analysts said the selling was likely exacerbated by the light volume trading session.
After slumping about $10 a barrel on Friday, oil prices were rebounding by about 5% while travel-related stocks such as American Airlines (AAL.O) and Norwegian Cruise Line (NCLH.N) also gained ground after tumbling on Friday.
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