What’s happening in markets?
The S&P 500 moves higher on energy stocks surging, while the Nasdaq is weighed by the oil price surging 6%
The Dow Jones Industrial Average rose 1%, while the S&P 500 moved up 0.4%, with energy stocks outperforming after the oil price surged 6% when nine OPEC+ countries announced production cuts. Meanwhile, the Nasdaq was weighed down after the oil price rose 6% spooking investors that inflation could pick up and force the Fed to remain on its hiking path. That said, a higher oil price also acted as a catalyst for profit taking, given the Nasdaq 100 has risen about 20% this year. The S&P500 Energy sub-index surged 4.9% after Marathon Oil (MRO:xnys) and ConocoPhillips (COP:xnys) gained about 10%, with energy gains offsetting weakness from tech names and the regional banking sector, which helped the S&P500 to move further above its 100 day moving average, and sit 4.8% under its 200 day moving average. Tesla (TSLA:xnas) was a laggard, losing 6.1% as investors questioned Tesla’s ability to grow its margins, after it sales rose 4% in Q4. Despite beating expectations investors are reflecting on Tesla’s ability to grow its profits after it cut the cost of its EVs, while it heavily ramps up production, and scales up two new plants.
Treasuries gain on a weak ISM manufacturing report
Treasuries spent the Asian session and the London morning hours lower and bear-flattened as short-end yields rose on inflation concerns stemming from the surprised production cut by nine OPEC+ countries. The rise in yields was completely reversed and yields finished the New York session lower across the curve after a weaker-than-expected ISM manufacturing report. Yields on the 2-year and the 10-year dropped 6bps to 3.96% and 3.41% respectively.
CSI300 advances while Hang Seng Index flat
CSI 300 gained 1% oil and gas names gained on news that nine of the OPEC+ countries cut production, and domestic chipmakers surged as foreign competitor Micron was under cybersecurity review by the Chinese authorities. Computing, AI Generative Content concept, media, brokerage, and telecommunication stocks advanced. Caixin China PMI Manufacturing came in at 50.0, below 51.5 the prior month and the 51.4 consensus estimate.
Hang Seng Index spent most of the session underwater before paring losses to finish nearly flat. driven by weaknesses in the technology space. Semiconductor names gained similar to their A-share peers on the probe on Micron products. SMIC (00981:xhkg) soared 7.5% and Hua Hong (01347:xhkg) rose 5.8%. CNOOC (00883) climbed 2.4% on higher oil prices. Nio (09866:xhkg) and XPeng (09868:xhkg) gained 1%-2% as China’s Ministry of Industry and Information Technology is considering plans to promote car sales. Macao casino operators surged over 7% following gaming revenues soaring 247% Y/Y in March in Macao.
Bilibili (09626:xhkg) dropped 4.5% on reports that content creators were complaining about declines in income on the platform.
Australia’s share market tracks sideways ahead of the RBA decision, while weighing up oil inflation risk
The energy sector is leading most of the ASX200’s sectors higher today after the oil price surged 6%, which is its best gain in a year. Meanwhile the Materials sector is lagging, after the iron ore price fell for its second session with Fortescue looking to boost output. The leader board is dominated by coal mining giants, with the Newcastle coal price moving up off its low, on hopes that demand is increasing from China. The coal price is down 57% from its high and broke above its 21 day moving average, and is 7% under its 50-day moving average, which is the next level it would need to cross to potentially suggest buying is gaining momentum. Both Whitehaven Coal and New Hope Corp are the best performing stocks today up, about 6%.
FX: AUD surges ahead of RBA decision; GBP approaching YTD highs
The USD weakened on Monday with Treasury yields sliding on dovish ISM manufacturing print. AUDUSD soared 1.5% higher, surging above the 200DMA at 0.6750 and coming in close sight of the 0.68 handle as the RBA decision is awaited today. Expectations are split for rates to be left unchanged at 3.6%, or to hike by 25bps. AUDNZD also surged to test 1.08. GBPUSD rose above 1.2420 amid the USD weakness and BOE’s Huw Pill saying that inflation is still far too high and UK banking system is well capitalized. EURUSD also making its way above 1.09, and USDJPY heading towards the 132 handle.
Crude oil production cuts, add to the supply deficit and throw short sellers under the bus
Oil prices notched their biggest gain in a year, after OPEC’s surprise decision to cut output forced market participants to refocus on the supply deficit. OPEC + will slash output by 1.16 million barrels per day from May, with the cuts running through to the end of 2023. As a result Macquarie expects a deficit of at least 750,000 b/d in the second half of 2023. And we think that shale drillers might see this an opportunity to massively boost output. But given how inelastic supply is, it’s unlikely that production expansion will be able to make up for the cutbacks. US gasoline prices are seen rebounding to $4 a gallon. We are also mindful that the supply cuts, have thrown short sellers under the bus and could be forced to cover their shorts
Gold recovers from an initial decline
Even though inflation concerns brought Gold prices lower initially to test $1950, a recovery was seen later in the session. Fresh concerns on growth also returned with the downbeat US ISM manufacturing print, taking gold to highs of $1990 again. On the upside, $2000 remains the key level to watch, while support is seen at $1944 followed by $1933, the 38.2% retracement of the recent runup to $2000. Silver was still down 0.5% as industrial metals were in decline.
What to consider?
US ISM manufacturing fell below expectations
Headline ISM Manufacturing fell short of expectations at 46.3 from 47.7 (exp. 47.5), signalling more concerns of a contraction in activity. New orders fell to 44.3 from 47 previously, while supply chains were noted to be ready for growth as respondents commenting on reduced lead times for their more important purchases. Prices Paid fell back to contractionary territory at 49.2 in March after the jump in February to 51.3. The employment component also declined, falling to 46.9 from 49.1, slipping further into contractionary territory and continuing the weak trend since September 2022.
The numbers have added a fresh recessionary fear in the markets, after a shot higher in inflationary fears coming out of the weekend when OPEC+ announced a surprise crude production cut. Focus now shifts to the services print of the ISM due tomorrow.
AUD charges 1.7% ahead of RBA decision, after the USD softens and oil surges rising inflation expectations
After the USD softened and oil price soared, rising concerns about inflation, the AUDUSD gained ground, rising to its highest level in five weeks, up 1.7% from yesterday, moving further above its 200dma at 0.6750, while getting in sight of 0.68 handle. RBA meeting today has split expectations for rates to be left unchanged at 3.6%, or to hike by 25bps. The RBA has been dovish of late and could potentially become more hawkish and backflip in light of OPEC+ production cuts, which may result in the AUD moving higher. The market has priced in rates will stay at 3.6%, as headline CPI and the Melbourne Institute’s gauge showed CPI also slowed. But some economists expect a hike. For potential considerations read our article.
Fed speakers continue the hawkish rhetoric
Fed’s most hawkish member Bullard was on Bloomberg TV yesterday, where he continued to highlight that financial stress remains under control and inflation still remains a problem. He said oil fluctuation might "make our job a little bit more difficult," but whether it has a lasting impact is "an open question", and continues to support the case for terminal rates above 5%. Another member, Cook, said disinflation is underway but still more is needed as tight labor market continues to contribute to price pressures.
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