Global Market Quick Take: Europe – March 23, 2023

Macro 8 minutes to read
Saxo Be Invested
Saxo Strategy Team

Summary:  The Fed delivered a rate hike as most expected and largely failed to adjust forward projections for policy, but did note that credit conditions are likely to weigh on the economy. The market thoroughly ignored the Fed’s rhetoric and forecasts and continues to look for rate cuts later this year. While Fed Chair Powell spoke at the post-meeting press conference, US Treasury Secretary Yellen unsettled markets by indicating no comprehensive depositor insurance.

What is our trading focus?

US equities (US500.I and USNAS100.I): it is all about deposits, recession, and credit

S&P 500 futures are rallying from yesterday’s lows post the FOMC rate hike despite the Fed’s action will increase the pressure on smaller banks and increase the likelihood of a recession. Today’s focus is how banking stocks will react to the FOMC decision and especially how deposits will develop from here. The rate hike will increase the incentive for depositors to move money from deposits to money market funds adding potentially further funding stress. We remain cautious on equities as the economy will likely move closer to a recession due to yesterday’s rate decision.

European equities (EU50.I): focus is back on banks post FOMC rate hike

STOXX 50 futures have turned around in early trading after being lower on the open as equities initially responded negatively to the FOMC rate decision of hiking the policy rate by 25 bps. The consensus is that higher policy rates at a high speed coupled with many bonds in the held-to-maturity were causing the problems for smaller banks so the reaction in equities today seems odd. We remain cautious on the banking sector and the real estate sector in the coming weeks.

Hong Kong equities advance as Tencent’s solid results and upbeat outlook

Hang Seng Index rallied for the third day in a row, led by Tencent (00700:xhkg) and pear internet names. Tencent surged nearly 7% after reporting stronger-than-expected online adverting revenues. The tech giant’s upbeat outlook of 2023, citing a broad-based recovery in consumer activities in China added to the market optimism. Orient Overseas (00316:xhkg) soared 16% after the container shipping liner beat earnings estimates. Lenovo (00992:xhkg) jumped 11% on its plan to develop new products based on the Nvidia Drive Thor chip. In A-shares, CSI300 advanced nearly 1%, led by semiconductors and financials.

FX: Dollar weakens with EUR and JPY as winners on Powell/Yellen shocks

The Fed hiked rates by 25 bps and inserted new language into the policy statement noting forward concern (more below) and the market thoroughly ignored the “dot plot” that largely maintained the December policy forecasts. The dollar fell, but it was Treasury Secretary Yellen’s statements deny a blanket backstopping of all bank deposits that spooked markets and changed the tone far more than the Fed, with US banks and rates under huge pressure and the USD lower again overnight after a mixed close yesterday, with EURUSD well above 1.0900 this morning and USDJPY slumping below 131.00. Focus shifts to BOE today after re-acceleration in inflation yesterday, although sterling has weakened again sharply, possibly in recognition that the BoE may stick to its forecasts on inflation as Governor Bailey seems a reluctant inflation fighter.

Crude oil dips on Powell/Yellen double blow to sentiment

Crude oil prices trade lower following a three-day bounce that saw both WTI and Brent retrace more than 38.2% of their recent drop. Earlier on Wednesday the market received a boost from a mixed EIA stock report with rising production and rising crude stocks being offset by big draws in fuel products as US total oil and fuel exports reached a record 12.3m b/d. However, risk sentiment received a fresh setback after an expected 25 bps rate hike was followed up by comments from Yellen that the government was not considering “blanket” deposit insurance to stabilize the banking system. Macro-economic developments remain firmly in the driving seat and will continue to dictate the short-term direction, but the combination of a weaker dollar and most of the selling/long liquidation already done the downside risk may be limited.

Gold rallies with bonds on hike less, cut later focus

The Fed’s 25bps rate hike came in-line with market expectations, but the push back on market expectations of about 100bps of rate cuts for this year failed to materialize, and together with a softer dollar and Yellen’s message that the government is unlikely to unilaterally expand deposit insurance, they added fresh upside momentum to gold, climbing to $1983. The fact gold earlier in the week managed to find support already at $1933, the 38.2% retracement of the recent surge, suggests gold remains in a strong uptrend. However, until the FOMC’s and the markets year-end rate expectations get in line - currently apart by almost one percent - golds upside potential towards a fresh record high may take longer to achieve. ETF buying continues with total holdings up another 12 tons this week on top of the 21 tons that was bought last week.

Treasury yields plummeted and may have much more to go

The treasury market ignored Fed forecasts and focused on the Fed’s shift in forward concern on credit conditions, but especially Yellen’s statement on bank deposit guarantees (more below). Yields on the 2-year tumbled more than 25 bps to below 3.9% in early trading and the 10-year yield fell 18 bps to 3.43%.

What is going on?

US risks widespread bank runs from vulnerable banks starting today

With US Treasury Secretary Yellen’s commenting "I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits”, the risk of a stampede-like bank run from smaller regional lenders and even some mid-tier and larger banks has risen sharply, one that the Silicon Valley Bank situation shows can happen with alarming speed, given the ease of digital transfers. JP Morgan analyst estimates that some $1 trillion of deposits have already left the most vulnerable banks, about half of that since the SVB collapse of two weeks ago. Certainly, a situation of sufficient severity will trigger the inevitable official response to ensure that no systemic crisis is allowed to balloon and drive dramatic market dysfunction, but the follow-on impact into the economy could be severe on the disruption of credit flows (as alluded to in the Fed’s monetary policy statement last night, even as it touted the solidity of the system).

Fed raised rates by 25bps but considered a pause

The FOMC lifted the Federal Funds Rate target by 25bps to 4.75-5.00% and the updated economic projections left the terminal rate forecast unchanged at 5.1% while the 2024 rate view was adjusted higher to 4.25% from 4.125% earlier. Chair Powell in his comments later also said that they considered a pause but the consensus was for a rate hike, and that no participants had rate cuts in their base line scenario for this year. The market completely ignored this and redoubled its anticipation of rate cuts during the evening, particulary after US Secretary Treasury Yellen spoke (see below).

The new FOMC statement removed reference to ‘ongoing increases in the target range will be appropriate’, though added that ‘some additional policy firming may be appropriate’. The Fed expressed confidence in the banking system, stating that it was ‘sound’ and ‘resilient’, but added that the “recent developments” were likely to result in tighter credit conditions and will weigh on economic activity, hiring and inflation.

Janet Yellen says Treasury unlikely to unilaterally expand deposit insurance

Treasury Secretary’s comments hit the wires during Fed Chair Powell’s press conference. She said that regulators are unlikely to provide “blanket” deposit insurance to stabilize the US banking system. This brought back concerns on the US banking sector, especially the smaller banks, and risks of more bank runs arise as the US opens on Thursday. The KBW regional bank index slumped 5.7% while the broader KBW bank index was down 4.7%. Economic risks also escalated amid tighter bank lending standards.

Tencent’s small growth improvement excites investors

Tencent shares rally 7% in Hong Kong trading after the company announced Q4 earnings yesterday after the close reporting Q4 revenue of CNY 145bn vs est. CNY 144.5bn driven by stronger than expected gains in online advertising revenue suggesting underlying improvement in the economy. On the conference call management says that advertisers in China are getting optimistic about the economy recovery and this was the piece investors were looking for.

Coinbase gets Wells notice from the SEC

Coinbase, the biggest publicly traded cryptocurrency exchange, says it has got a Wells notice from the SEC which means that the SEC will bring an enforcement action against the exchange. Coinbase says it could relate to its spot market or Coinbase Prime (its institutional offering). Coinbase shares are down 10% in extended trading on this news.

What are we watching next?

Bank of England – hike and guidance expectations justified

The very hot February CPI numbers yesterday relative to consensus expectations have the market pricing very high odds for a 25-bp rate hike from the Bank of England today despite the most guidance suggested the Bank is hoping that it can shift to a pausing its rate hike cycle, and Governor Bailey out in recent weeks suggesting there is no guarantee further rate hikes are needed. Observant economists note that at least one measure of the inflation level of most concern – core Services CPI – is still actually slightly below the BoE’s own forecasts even if it rose sharply in YoY terms in February. Interestingly, sterling is heading into this meeting on its back foot and traders should tread carefully here as the Bailey BoE has been difficult to pin down in terms of likely policy moves.

Last night was likely the last rate hike of the cycle

We suspect that the credit contraction unfolding in the banking system will force the hands of the Fed and we may have seen the last rate hike in this cycle yesterday. U.S. banks, according to the latest survey done by the Fed in January, have already been tightening lending standards sharply before the recent turmoil. Given what has been happening over these two weeks, banks will refrain further from making loans and may cause credit growth to slow or even to contract, especially if deposits are flighty. U.S. Treasury yields, especially in the 2-year to the 5-year segment may fall further. Historically, when the Fed pauses, the short end of the curve performs better than the longer end and the yield curve will steepen.

Earnings to watch

Today’s key earnings reports are Accenture and Darden Restaurant, both are reporting before the market open, with the latter being a good barometer for US discretionary spending. Darden has a strong same-store network of restaurants and has so far lifted menu prices less than inflation, which has kept customers coming. Analysts expect FY23 Q3 (ending 28 Feb) revenue growth at 11% y/y and EBITDA of $435mn, up from $392mn a year ago. Accenture is expected to report FY23 Q2 (ending 28 Feb) revenue growth of 3% y/y, which is a significant slowdown from 25% y/y from a year ago, as corporate consultancy and technology spending slows on cost cutting.

This week’s earnings releases:

  • Thursday: China Mobile, Accenture, General Mills, Darden Restaurants
  • Friday: China Merchants Bank, Meituan, China Petroleum & Chemical

Economic calendar highlights for today (times GMT)

0830 – Swiss National Bank Rate Decision

0900 – Norway Norges Bank Rate Decision

1100 – Turkey Central Bank Rate Decision

1200 – UK Bank of England Rate Decision

1230 – US Weekly Initial Jobless Claims

1400 – US Feb. New Home Sales

1400 – Sweden Riksbank Governor Thedeen to speak

1430 – EIA's Weekly Natural Gas Storage Change

1500 – Eurozone Mar. Consumer Confidence

2330 – Japan Feb. National CPI

0001 – UK Mar. GfK Consumer Confidence


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