Summary: Markets are nervy and choppy after sentiment bravely tried to rally again in the US yesterday, but stocks ended the day largely unchanged. Bank stocks ended the day lower despite US Treasury Secretary softening her rhetoric on the potential for official action “if warranted” to address further turmoil in the banking system. Treasury yields closed the day lower, the US dollar has firmed again, and gold is teasing the 2,000 per ounce level.
S&P 500 futures are stubbornly holding up despite a banking crisis, sticky high inflation, and credit conditions worsening. Lower bond yields have in the short-term been a positive for equities and especially technology stocks, but the equity market will soon enough realize that the lower yields are reflecting a higher probability of a recession. Despite markets seem quiet this morning we would not be surprised to see equities weaker into the weekend, but it all depends on how banking stocks are doing today.
Hang Seng Index shed 0.7% as gains in technology and consumer names more than offset by weakness in banks, property, and pharmaceutical stocks. HSBC (00005:xhkg) and Standard Chartered Bank (02888:xhkg) each declined more than 3%. Lenovo (00992:xhkg) jumped 9%, surging for the second day in a row after the announcement of the computing device maker’s plan to develop a vehicle controller platform based on Nvidia chips. Hang Seng TECH Index rose modestly by 0.3%. In A-shares, profit-taking-related selling emerged in centrally-owned enterprises and defence names. CSI300 slid 0.4%.
The JPY firmed overnight after in-line CPI data and as slumping global yields offer a tailwind for the JPY. USDJPY teased 130.00 at one point and all JPY crosses quite heavy, given that the US dollar is also broadly strong. Several JPY crosses are coming up on important chart support areas, including AUDJPY pushing below the important 87.00 level at times overnight. The US dollar was on a roller coaster ride yesterday: the added coda in Yellen’s testimony before a House subcommittee yesterday was clearly intended to shore up market confidence after the violent reaction in bank stocks and wider sentiment on the testimony on Wednesday (during Fed Chair Powell’s press conference, ironically). This briefly extended the USD weakness yesterday before the market failed to gain further confidence that this turn of phrase would materially alter the situation for the banking system, and banks rolled over, with the USD finding support as a safe haven. NOK firmed on the surprising hawkish Norges Bank guidance and sterling got a minor bump from less dovish guidance from the BoE – more on both of those stories below.
Crude oil’s four-day rally hit a stumbling block on Thursday after the US government warned it may not refill its strategic reserve this year. The Administration has said previously that it would wait until prices fell below USD70/bbl before restocking the reserves. The backwardation at the front end of the Brent curve has risen from flat on Monday back above 40 cents a barrel, highlighting the recent softness primarily being driven by speculative selling of the front month contract. With downside momentum fading, as banking sector support is being repeated by Yellen, the risk of a short squeeze is growing. With that in mind, we focus on the 21-DMA currently at $80.
Gold peeked above $2000 for the second time in a week on Thursday, only to be rejected as the dollar reversed after Yellen’s attempt to shore up market confidence in the banking system. The close at $1889, however, was the highest in a year and it highlights the markets belief that the Fed’s aggressive monetary-tightening cycle is near an end. Weighing against further gains was the rally in stocks which helped reduce some of the recent safe-haven focus. ETF investors continued to buy gold at the strongest pace in a year, but two weeks of buying has so far only offset what was sold during the February correction. Looking ahead the outlook for gold and silver remains supportive as the market continues to worry about the banking sector, but to support a sustained break above $2k the market needs to feel comfortable a peak in rates has been reached and with that in mind we are back to watching incoming inflation data.
Trafigura, the world’s largest private metals trader has forecast copper will surge to a record high this year as the rebound in China will continue to deplete already low stockpiles. During the past four weeks copper stocks at warehouses monitored by the Shanghai exchange has dropped by 28% as demand in the world’s biggest consumer continues to gather momentum. Copper’s +6% rally this past week has seen prices break higher and a further extension through $9127 in London and $4.15 in New York may signal a return to the January highs
The 2-year yield plummeted to as low as 3.75% before bouncing off the low in yield to finish the Thursday session 10bps richer at 3.83%. The market repriced further to cut the odds for a May rate hike and increase the bet on rate cuts in 2023. Yields were off their lows following Treasury Secretary Yellen walked back from her no blanket deposit insurance comment on the previous day and said regulators would take additional steps to protect deposits if necessary.
On the other hand, yields on the 30-year bonds climbed 5bps to 3.70%. The heavy supply of USD14 billion of corporate bond issuance and a USD 15 billion 10-year TIPs auction weighed on the longer end. The Treasury Department announced the auction of USD120 billion 2-year, 5-year, and 7-year Treasury notes in total next week.
Most of the action in US treasuries is at the front-end of the yield curve, as the market brought back forward the anticipation of Fed rate cuts, with the July FOMC meeting now fully priced and more for a 25 basis point cut and December at –81 bps relative to the current Fed Funds rate. The 2-10 yield curve slope is near its least inverted since last November, around –40 basis points this morning. The 2-year yield is at 3.83%, near the lowest close for the cycle, while the intraday low was 3.60% from March 20.
Speaking at a hearing before a House sub-committee, US Treasury Secretary Janet Yellen largely repeated the testimony delivered the day before to a Senate panel, but added the phrase “Certainly, we would be prepared to take additional actions if warranted.” This may have helped touch off a strong risk-on rally, though bank House told US lawmakers yesterday that regulators remain prepared to take further steps to protect the banking system if warranted, a day after her comments in the Senate that not all bank deposits will be backstopped roiled markets. Trading in bank stocks remains volatile with the iShares US regional bank ETF closing at a fresh cycle low on Thursday.
Deutsche Pfandbriefbank AG was the first bank this year to not call its AT1 bond. The result is that the bond’s coupon rate will reset from 5.75% to 8.45% which is a high financing cost but still below many AT1 bond yields around 10-12%. The developments in the AT1 market means that most European banks are incentivized at this point to issue common equity which is diluting for shareholders and also the reason why banking stocks are being reset lower. Deutsche Pfandbriefbank is running a monoline business within commercial real estate.
Short-selling outfit Hindenburg Research, which got considerable attention on its recent report against the Adani network of companies, issued a short report on Block, among other charges, claiming that the company’s Cash App helped facilitate billions in fraudulent unemployment payments during the pandemic, ignoring “both internal and external warnings”. It charges that former employees estimate that 40-75% of the company’s accounts are fake, tied to fraud, or additional accounts tied to single individuals. Block says it it is exploring legal action against Hindenburg Research. Cathie Wood swooped in to buy Block shares for her funds after this news broke yesterday, with three of her ETFs buying a total of 338,000 shares, some $21 million worth, based on yesterday’s closing price.
As expected, the Bank of England announced another rate hike of 25 bps yesterday taking the Base Rate to 4.25% after ECB’s 50 and Fed’s 25, as well as UK inflation re-accelerating in February. The decision to move on rates was via a 7-2 vote split (vs. exp. 6-3) with Dhingra and Tenreyro opting for a hold while there was also one voter on 50bps rate hike. Bigger surprise was that BOE didn’t signal an end of their rate hike cycle, but instead said that more tightening may be required if inflation remains persistent.
Japan’s February CPI was softer than last months as expected given base effect and the impact from Kishida’s subsidies. Headline CPI came in at 3.3% YoY from 4.3% previously, while core was 3.1% YoY from 4.2% YoY previously, both coming in as expected. Core-core measure (ex fresh food and energy) was however still a notch higher at 3.5% YoY from 3.2% previously and 3.4% expected. Together with the drop in global yields, this continues to take the pressure off incoming governor Ueda to quickly remove the massive easing, although sustained price pressure may mean he could still consider some tweaks to make market functioning more efficient.
Initial jobless claims printed 191k in the week of March 18 vs. expectations of 197k and last week’s 192k, still staying comfortably below the 200k mark. Of importance as well is that this week's data corresponds with the BLS survey week suggesting that the job data to be released in early April will potentially remain strong once again. Meanwhile, one of the extensive coincident indicators of the US economy, the Chicago Fed National Activity Index, came in weaker for February at -0.19 from January’s 0.23. This was another signal that the re-acceleration of the US economy seen at the start of the year was short-lived and economic pressures started to build, and there may be more pressures to come from March as the banking sector concerns roiled markets.
The Swiss National Bank hiked 50 basis points yesterday as widely expected hoping to pretend that all systems are normal just after avoiding a systemic melt-down by “aiding” UBS’ takeover of Credit Suisse. The Bank signalled that more tightening “cannot be ruled out”, though SNB is most likely to be a laggard rather than a leader in all monetary policy shifts. Norges Bank hiked 25 basis points as expected to take the Deposit rate to 3.00% and surprised hawkish with guidance for an increase to 3.50% in the summer, though it did cite “considerable uncertainty about future economic developments”. NOK firmed against the Euro.
The pressure on bank stocks continued yesterday even after Yellen tried to soften her rhetoric on the Biden administration’s stance on official action if the turmoil in the banking system continues. Headline risk and the price action in bank stocks will remain in focus, and not just in the US, but also in Europe, where the stress on Tier1 bank debt shows that banks’ profitability outlook is under threat on rising funding costs.
No meaningful earnings releases in the US and Europe today. Earnings from Chinese-based e-commerce giant Meituan (after the market close) is today’s key earnings release with analysts expected revenue growth of 17% y/y in Q4 and EBITDA of CNY 2.72bn vs loss of CNY 3.52nb a year ago.
Next week’s earnings releases:
0815-0900 – Eurozone Mar. Preliminary Manufacturing and Services PMI
0930 – UK Mar. Preliminary Manufacturing and Services PMI
1230 – Canada Jan. Retail Sales
1230 – US Feb. Preliminary Durable Goods Orders
1345 – US Feb. Preliminary Manufacturing and Services PMI
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy