Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Equity markets managed to piece together a positive session yesterday despite the huge rally in crude oil after OPEC’s production cut at the weekend. A weak ISM Manufacturing survey failed to spoil the party and may have actually given equities an assist as treasury yields dropped sharply yesterday, with much of the fall coming after the survey release. More influential data later this week includes the ISM Services survey tomorrow and the March jobs report on Friday.
Saxo’s quarterly outlook is out, and it looks at global fragmentation and how it will impact a variety of asset classes, geographical regions and macroeconomic topics in Q2 and beyond. Discover how it challenges the outlook for equities, creates discrepancies between forex pairs, shapes intriguing investment opportunities in different Asian regions, and how commodities and interest rates may affect and be affected by the Fragmentation Game. Get our in-house analysts' views on the investment landscape in a tough macroeconomic world and plan your investment strategy for Q2 2023 and beyond
S&P 500 futures continued to sprint higher yesterday driven by global energy companies rallying as much as 4.8% as OPEC delivered its surprise production cut forecast pushing oil prices higher. The index futures are trading around the 4,150 level this morning with significant resistance levels sitting above at the 4,175 level, so the question is whether US equities will soon lose momentum. As we highlighted in previous updates, the breadth of the market has been quite narrow with mega caps doing the major heavy lifting of indices. This is probably as good as it gets for now in equities as equity valuations are getting stretched as more and more signs are showing that the real estate sector is slowing down dramatically which will impact credit transmission in the economy.
While the mainland’s CSI 300 was nearly flat to the previous close, Hong Kong’s Hang Seng Index dropped by around 1%, driven by weaknesses in the internet and EV space. Hang Seng TECH Index tumbled 2.4%. Nio (09866:xhkg), XPeng (09868:xhkg), and Li Auto (02015:xhkg) plummeted 5% to 9% as the three EV makers disappointed investors with Q1 sales at the low end of guidance. China internet stocks were also among the laggards, with Alibaba (09988:xhkg), Meituan (03690:xhkg), and Bilibili (09626:xhkg) filling 5% to 6%. Semiconductor stocks continued to outperform as investors expected domestic chipmakers to gain market shares from foreign suppliers in China. SMIC (00981:xhkg) surged nearly 6% and rose for the 4th day in a row.
As noted below, the RBA held rates unchanged as expected, though AUD had surged ahead of the meeting after hot housing data, so the decision was taken as slightly dovish. Still, with a weak US dollar, AUDUSD has managed to stick above its 200-day moving average this morning. Elsewhere, the USD steadily weakened yesterday after a gap higher opening on the risk-off triggered by the OPEC production cut announced at the weekend. A weak ISM Manufacturing survey (more below) also pushed the greenback lower. The yen is also weak, somewhat oddly so, given lower bond yields, but the currency is finding its sea legs as a new Japanese financial year began yesterday and with new BoJ leadership incoming next week. As well, high crude oil prices will weigh on Japan’s current account.
Crude oil trades higher but the energy that was injected into the market following OPEC’s surprise production cut has faded with the market in process of settling back into the month-long range that prevailed before the mid-March slump. The market seems to have concluded that the decision was made to ensure stability and to pre-empt a potential slowdown in global demand growth, the bulk of which is expected during the second half. However, with US production growth slowing, OPEC+ increasingly looks like the central bank of oil that can control and set the direction for the groups most prized asset. For now, the established +3-dollar price gaps to $79.95 in Brent and $75.72 in WTI may act as a magnet until its closed, potentially preventing moves to $90 and $85 respectively.
Gold managed to bounce back on Monday after initially trading down to $1950 as higher oil prices raised concerns about inflation and the Fed’s ability to cut interest rates by the amount currently priced in. This before gold traders concluded that OPEC ‘s objective was to pre-empt an economic slowdown, not to seek much higher prices. Later in the day a weaker than expected US ISM print (see below) supported a move to $1990, as yields and the dollar dropped, before once again being met by sellers ahead of key resistance in the $2000 area. Several layers of support have now been established between $1950 and $1933, the 38.2% retracement of the recent runup to $2010.
US treasury gapped slightly higher at the open yesterday on the surge in crude prices after OPEC’s announced production cut at the weekend, but ended the day sharply lower, with much of the intraday action around the release of the weak US Mar. ISM Manufacturing survey (more below). The 2-year Treasury yield benchmark dipped just below 4.00% after trading as high as 4.13% earlier in the day and the 10-year benchmark fell a few basis points, trading 3.42% this morning.
Market expectations for an RBA pause were quite firm until data yesterday showed that house prices rose sharply in Sydney by 1.4% in March and nationwide prices showed their first advance after ten months of declines. This development perhaps unsettled expectations for an RBA pause and AUD rallied hard yesterday, only to have the decision deflate much of the rally. The new monetary policy statement retains a bias for further tightening, positioning today’s hold on further increase as something the “provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty.”
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.
Blackstone’s $70bn BREIT real estate fund saw another massive redemption requests worth $4.5bn in March but only 15% of those redemptions could be fulfilled. The fund has experienced several months of redemptions far exceeding the available outflow which is limited to 5% a quarter. Large investors are clearly worried about their real estate exposure, and this signals that more pain is to come in this sector.
The Richard Branson owned Virgin Orbit has filed for chapter 11 as the company failed to secure funding and has cut 85% of its workforce. Virgin Orbit was part of the pandemic bubble in high-flying venture capital funded start-ups with lofty ambitions and little revenue. By end of 2021, the company had a market value of $2.7bn with only $7mn in revenue.
Illumina, the biotechnology company leading the industry within sequencing and microarray solutions used for genomic analysis, has been ordered by the FTC to divest its $7bn acquisition of cancer treatment company Grail (was originally incubated in Illumina) carried out in 2021. The FTC is worried that the acquisition will reduce innovation and competition in early-stage cancer detection. Illumina plans to appeal the decision.
The Canadian mining giant has rejected an offer from Glencore despite a 20% takeover premium as the miner is prioritizing to split the business into two parts: coal and metals. After that point, the board is likely open to hearing offers from prospective buyers of its metals unit which includes a $3.4bn copper business which is the most sought-after metal in the world today.
Mines in the biggest copper-producing nation are struggling just as demand for the wiring metal is expected to accelerate in the shift away from fossil fuels. Chile, which accounts for a quarter of the world’s mined copper, posted its lowest monthly production in six years last month with state-owned giant Codelco expecting output to drop 7% in 2023 after tumbling last year as it strives to tap new areas of its aging deposits after decades of underinvestment. Mines are being hampered by water restrictions in a prolonged drought as well as a string of operational setbacks and project delays as they battle deteriorating ore quality. It’s intensifying fears of a looming shortage given copper is a key material in the energy transition, used in everything from electric vehicles to wind turbines (Source: Bloomberg)
The Fed’s most hawkish member Bullard (not an FOMC voter this year) was on Bloomberg TV yesterday, where he continued to highlight that financial stress remains under control and inflation 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%. FOMC voter Cook said that disinflation is underway but still more is needed as tight labor market continues to contribute to price pressures.
The widely covered angle on the charges against Trump are related to hush money payments paid during his 2016 presidential campaign to avoid embarrassing revelations about an extramarital affair and specifically, the tax treatment of those payments. But the more serious potential would be an arraignment sees Trump charged with other crimes related to his business practices. Trump is set to speak after the arraignment tomorrow.
Taiwan’s president Tsai Ing-wen is swinging back through the US on her return journey to Taiwan and will meet with US House Speaker Kevin McCarthy and a bipartisan group of lawmakers tomorrow despite stern warnings against doing so from China. A trip by then House Speaker Nancy Pelosi last year to Taiwan drew intense criticism from China and a series of extensive military exercises around the island. The Taiwanese president’s office has pushed back against China’s warnings with blunt language: “It is the right of the 23mn people of Taiwan to have exchanges with democratic nations, and there is no room for China to comment...”
The weekly update on U.S. winter wheat conditions come in at a dismal 28% good/excellent reading, below both the trade guess of 31% and the end of November's 34%. That is just about the worst early April conditions on record (near 1996) and does not bode well for the eventual yield outcome. Driven by dryness in the US Southern Plains which has seen the Kansas HRW winter contract (Ticker: KEK3) rally by 14% to $8.82 since the March 9 low, in the process increasing its premium over the Chicago benchmark wheat contract (Ticker: ZWK3) to a record $1.84 a bushel. However, increasing levels of snow and cold weather in the northern US spring wheat growing area is threatening a late start to plantings, while dryness in the Canadian farmland is raising concerns about moisture levels - to ensure germination - ahead of the planting of wheat and canola (rapeseed).
The RBNZ is expected to hike 25 basis points to bring the rate to 5.00%, taking its rate back to the highest among G10 currencies. The market has priced another 25 basis points of further tightening beyond tomorrow’s decision, but there could be the risk that the RBNZ feels it has done enough for now and would like to indicate that it may pause its tightening (like the RBA today and Bank of Canada recently) after this decision after decelerating from a 75 basis point hike in November to a 50 basis point hike in February.
The earnings calendar this week is light, so the equity market will focus on inflation, credit, and the economy next week, while waiting for Q1 earnings season starting up in two weeks.
This week’s earnings releases:
Economic calendar highlights for today (times GMT)
0900 – Eurozone Feb. PPI
1200 – New Zealand Mar. CoreLogic House Prices
1230 – Canada Feb. Building Permits
1400 – US Feb. JOLTS Job Openings
1400 – US Feb. Factory Orders
1430 – UK Bank of England Chief Economist Huw Pill to speak
1730-45 – Fed speakers Cook and Collins at conference
2030 – API's Weekly Crude and Fuel Stock Report
2245 – US Fed’s Mester (non-voter) to speak
0200 – New Zealand RBNZ Official Cash Rate decision