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Global Market Quick Take: Europe – March 15, 2023

Macro 8 minutes to read
Saxo Be Invested
Saxo Strategy Team

Summary:  Markets continue to stabilize after the traumatic collapse of SV Bank in the US and the lightning official response to prevent contagion, with US equities rallying back to the closing level of last Thursday. Global short yields rebounded sharply as the market prices back in a modest further tightening from the Fed at coming meetings. FX is largely stable with the JPY weakening on the yield rebound and after the damp squib from the BoJ Friday. Gold is struggling to maintain the 1,900 level.


What is our trading focus?

US equities (US500.I and USNAS100.I) bounce back as fears of immediate contagion fade.

Equities rebounded sharply yesterday, particularly the Nasdaq 100 index, which pulled back well above the 200-day moving average near 12,150 yesterday. The S&P 500 is more financials-heavy and has bounced less, though it has erased all of the losses since the close of last Thursday, the day that Silicon Valley Bank first lurched lower and set in the motion the lightning contagion through the US banking sector that prompted a dramatic official response at the weekend and Monday’s wild session. Investors are struggling to understand the follow on implications of what unfolded, both in the immediate- and longer term.

Hang Seng Index bounces on overnight global market rallies and economic activity data supporting the recovery notion in China

Hang Seng Index rallied 1.3%, driven by Chinese property and insurance names. Market sentiment stabilized somewhat after U.S. bank stocks as well as the broad U.S. benchmark indices recouped some ground. The February economic activity data from China supported the recovery case. Headline retail sales grew 3.5% Y/Y in the first two months of 2023. Excluding autos, which suffered from the expiration of government subsidies, retail sales grew 5.0% in January-February from a year ago. Meanwhile, industrial production, growing 2.4% Y/Y, came in slightly below expectation but fixed asset investment, rising 5.5% Y/Y, was better than expected. In A-shares, the CSI300 barely changed from yesterday’s close. Semiconductor, data security, cloud computing, and 6G names retreated while pharmaceutical, terminals, cement, and nuclear stocks gained.

FX: Dollar finds support, SEK boosted by hawkish Riksbank; safe-havens plummet

The US dollar found some support with the US February CPI remaining hot (more below) and as concerns around a banking crisis eased, even if a number of indicators are still showing some level of strain. This saw the safe-havens giving back some of their recent gains. USDJPY rose back above 134.50 after the CPI release while USDCHF touched 0.9160 late yesterday. BOJ minutes from the January meeting continued to emphasise the need for monetary easing, and ruled out further policy changes – no surprise given the March 10 meeting damp squib. SEK outperformed with hawkish Riksbank rhetoric ahead of the Swedish CPI out this morning. Governor Thedeen reiterated that inflation is still far too high and monetary policy needs to act to bring it back to 2% within a reasonable timeframe, adding that guidance for a 25bps or 50bps hike in April remains valid and data dependent.

Crude oil tumbles to low end of range.

The oil price rebounded slightly overnight after tumbling again yesterday. The Organization of Petroleum Exporting Countries (OPEC) today highlighted a modest surplus next quarter. OPEC said it is pumping about 28.92 million barrels of crude a day, or about 300,000 a day more than it expects to be needed in the second quarter. OPEC+ could potentially cut output, but mayt hink OPEC+ will likely stick to these production levels, given non-OECD countries like China and India are likely to increase demand. Meanwhile, Estonia, Lithuania and Poland called for cut in the price cap on Russian crude to $51.45. Ahead, we await the IEA report on Wednesday after the body last month forecast oil demand to rise by 2 million barrels a day in 2023.

Precious metal rally halts in its tracks awaiting further developments.

Gold is poised at the key 1,900 area as traders await further developments, but perhaps looking resilient at the margin, given the relatively tight price action on display around that 1,900 area, while other markets, from US short yields to US equities are seeing a sharp, if partial unwinding of the moves since the trauma in the US banking sector broke out last Thursday. Silver is bottled up ahead of the important 22.00 area. If selling pressure does come in to the precious metals complex, the first focus will likely be on the 1850-60 area.

The epic rally in Treasuries fades, with yields rising sharply all along the curve.

A rally in U.S. regional banks’ share prices, credit spread compression reversing some of the recent widening, and a 0.452% M/M increase in the core CPI in February from 0.412% M/M in January saw yields reverse the dramatic fall the day before. The yield on the 2-year notes surged 27bps to finish the New York session at 4.25% and added additional 5bps at Europe open today to 4.30%. The 10-years climbed 12bps to 3.69% overnight before retreating to 3.67% this European morning. Interest rate futures repriced and brought the probability now back to leaning towards a 25bp hike at the FOMC next week before the Fed pauses.

What is going on?

U.S. inflation remains sticky in the medium-term

Headline U.S. consumer price (CPI) index is down -0.4 point to 6.0 % year-over-year in February. This is the lowest level since September 2021. This level is 3.1 points below the peak of June 2022. Core inflation is also decelerating but at a slower pace. Core CPI on a year-on-year basis is down 0.1 point to 5.5% year-over-year in February, but the month-on-month rose slightly more than expected by 0.5% (by virtue of rounding the 0.452% figure). The year-on-year figure is the lowest level since December 2021. Looking into details, services (excluding energy) continue to be one of the main contributors to inflationary pressures, especially shelter (+0.8 %), rent (+0.8 %), hotel (+2,6 %) and airfare (+6.4 %). In our view, goods disinflation is clearly not happening fast enough. The NFIB survey released yesterday also confirms the disinflationary road will be bumpy. A net 38 % of owners reported raising average selling prices, down 4 points from a month earlier. This is the lowest level since April 2021. But a net 25 % of respondents are planning price hikes in the next three months. All of this probably opens the door to front loaded-hikes this year. Today, in the inflation front, we will focus on the first estimate of the U.S. February PPI.

More job cuts at Meta; Apple’s cost cutting efforts

Facebook parent Meta announced a second round of job cuts, saying that it will cut roughly 10,000 jobs over the coming months and also stop hiring for about 5,000 open positions. Mass layoffs in the tech sector continue to suggest the difficult operating environment for companies that boomed during the zero-interest rates years, but is still not reflective of the broader US labor market which remains in an imbalance with the supply remaining short. Meta shares rallied over 7% Apple also announced a delay in bonus payments for some corporate divisions and an expansion of the cost cutting efforts.

What are we watching next?

Watching systemic risk indicators in US for further knock-on effects

The lightning response of US officials to the contagion across the financial sector since the collapse of Silicon Valley Bank late last week has managed to stabilize the market for now, but we will have to watch for knock-on effects in the medium- to longer term, especially if depositors hunt for higher yields on offer in money markets and even US treasuries that banks have so far not really passed on to their customers in savings account, which could trigger a contraction in credit and therefore affect the growth outlook.

More US data up today: Feb. PPI & Retail Sales

After a firm CPI print for February, focus turns to other US data of note this week to further affirm the state of the consumer and the price pressures. PPI and retail sales for February are due today and both are expected to show a modest cooling. Consensus expectations are for February producer prices to rise by +0.3% MoM (prev. +0.7%) and 5.4% YoY (prev. 6.0%), with the core Ex Food and Energy prices expected at +0.4% MoM and +5.2% YoY (prev. 5.4%). February Retail Sales are expected to cool to –0.4% MoM from January’s jump of 3.0% MoM after unseasonably warm weather may have provided a big boost in that month.

UK budget on watch for growth and fiscal picture; firm jobs data supports another BOE hike

The UK Chancellor of the Exchequer Jeremy Hunt will be delivering the spring budget today, which will be an important one to watch especially after the market turmoil in September when Hunt's predecessor Kwasi Kwarteng and former Prime Minister Liz Truss unveiled lavish tax cuts roiling the markets. Expectations are for the Hunt to prioritize keeping public finances steady, announce less near-term borrowing but only a marginally improved medium-term fiscal outlook. Meanwhile, UK jobs data out yesterday was not cool enough for the BOE to pause. Payroll addition for February came in at 98k vs. 65k expected, but last month’s was revised lower to 42k from 102k (which was 10x expected). Unemployment rate remained steady at 3.7% for the three months to January, while wages were a notch softer. Chancellor Hunt will likely highlight the labour supply difficulties in the UK by calling this a “back to work” budget that makes it more attractive for those on benefits to join the labour force.

Earnings to watch

The name to pull out of today’s earnings report in the European session is BMW, which has reported this morning after yesterday saw Volkswagen announcing enormous levels of capital investment, much of it for its future EV programs. The company forecast EBIT margins for 2023 of 8-10% versus consensus estimates of 8.7%. The company says that profit margins for the year will be steady, driven by sales of its high end and EV models. The EV models are forecast to reach 15% of total deliveries this year, from 9% last year. Later, watching former growth darling Adobe, which saw its share prices cratering more than 50% from late 2021 highs by the massive shift in yields and decelerating pace of its growth. As well, the legal status of its acquisition of rival Figma is in focus as the US Department of Justice may move with an antitrust suit against Adobe.

  • Wednesday: Constellation Software, BMW, E.ON, Ping An Insurance, Prudential, Inditex, Adobe
  • Thursday: Verbund, Rheinmetall, KE Holdings, Enel, FedEx, Dollar General
  • Friday: Vonovia

Economic calendar highlights for today (times GMT)

  • 0900 – Poland Feb. CPI
  • 1000 – Eurozone Jan. Industrial Production
  • 1215 – Canada Feb. Housing Starts
  • 1230 – UK Chancellor to present Spring Budget
  • 1230 – US Feb. PPI
  • 1230 – US Feb. Retail Sales
  • 1230 – US Mar. Empire Manufacturing
  • 1400 – US Jan. Business Inventories
  • 1400 – US Mar. NAHB Housing Market Index
  • 1430 – US DoE Weekly Crude Oil & Product Inventories
  • 2145 – New Zealand Q4 GDP
  • 0030 – Australia Feb. Employment Change / Unemployment Rate

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