Financial Markets Today: Quick Take – February 24, 2023

Macro 6 minutes to read
Saxo Be Invested
Saxo Strategy Team

Summary:  Markets remain nervous as new local lows were probed yesterday in the US equities but were rejected just ahead of the 200-day moving average in the S&P 500. A first Chinese peace proposal for the Russian aggression in Ukraine was dismissed by commentators on the first anniversary of the war. Elsewhere, nomination hearings for Kazuo Ueda, who would replace Kuroda as Bank of Japan governor, saw the JPY slightly weaker.


What is our trading focus?

US equities (US500.I and USNAS100.I): back to wait and see on inflation and rates

US equities were bouncing around in yesterday’s session with S&P 500 futures ending the session above the 4,000 level as the US 10-year yield came down despite initial jobless claims suggesting the US labour market remains extremely tight. There are no major earnings releases in today’s session, so we expect a quiet session going into the weekend. The key upside level to watch is yesterday’s close in the S&P 500 futures at the 4,019 level on the downside it is the 4,000 level.

Hong Kong’s Hang Seng Index (HIG3) and China’s CSI300 (03188:xhkg) declined around 1%

The Hang Seng Index declined 1.2% and the CSI300 slid 0.8% as of writing. Alibaba (09988:xhkg) announced results beating estimates but the shares of the eCommerce giant plunged 4.6% following management comments on the need to increase investments to stay competitive. According to Nikkei Asia, Chinese regulators have told Tencent (0070:xhkg) and Alibaba’s Ant Group not to offer access to ChatGPT services to the public directly or through third party as the regulators are increasingly concerned about uncensored replies given to users.

FX: USD bobs up and down with risk sentiment. JPY lower after Ueda testimony.

The US dollar posted new highs yesterday, as EURUSD probed below 1.0600 for the first time since early January, AUDUSD took a peek below its 200-day moving average and below 0.6800 and GBPUSD tested the waters below 1.2000, but the USD rally seemed a passive coincident development with the swings in risk sentiment, with a late rally in US equities pushing the greenback back lower. In Japan overnight, the JPY was firm early in the Asian session despite slightly softer CPI data, and then weakened slightly later in the session during Kazuo Ueda’s nomination hearings for the Bank of Japan governorship, as he signalled little urgency on tightening BoJ policy.

Crude oil rises despite another US inventory build

Crude oil trades higher for a second day but remains on track for a monthly loss within the established range, in Brent between $80 and $89, and WTI between $82 and $73. The technical driven bounce occurred despite another built in US inventories, but soaring exports of 4.6m b/d and a continued rise in US gasoline demand helped underpin prices. Supply side concerns may also be in focus after Russia announced this week that it will cut exports to the West in March, in addition the previously announced production cuts.

Gold (XAUUSD) slumps to support again

Gold dropped to the lowest level of the year on Thursday amid continued pressure from USD and higher yields which both moved close to their cycle highs earlier in the week before easing a bit on Thursday. The yellow metal has so far managed to find support around $1820 but until macro-economic developments turn more friendly the risk remains of a further weakness towards $1788 followed by the 200DMA at $1,776. Gold has been troubled by a recovering dollar and rising treasury yields after recent US data strength supported the view the Fed will keep rates higher for longer to fight inflation and to cool the economy. US PCE deflator, the Fed’s preferred inflation gauge, will be watched closely today with expectations pointing to a robust print, both in headline and core.

Copper retreats as hawkish Fed weighs on sentiment.

Copper has retreated from the highest close in three weeks, and yesterday’s drop, the biggest one-day slump this year, has taken it back towards key support in the $4 a pound area. Together with other industrial metals, copper is heading for a monthly loss as the market becomes increasingly impatient with the recovery in demand in China. Instead, the attention has been turning to worries that higher US rates for longer may strengthen the dollar and hurt the outlook for growth and demand. However, with supply potentially struggling to keep up with demand, we view the current weakness as temporary and part of the general loss of confidence that has hit markets this month.

Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) drop.

US Treasury yields fell yesterday after probing the cycle highs in the wake of another strong weekly jobless claims number, with the 2-year little changed, but longer yields falling more sharply, as the 10-year closed at 3.87% after posting a cycle-high 3.97% in early US trading.

What is going on?

US GDP revised a notch lower, jobless claims fell

The second estimate of US Q4 GDP was revised lower to 2.7% from the prelim 2.9%. The Core PCE measure, the Fed’s preferred measure of inflation, was revised to 4.3% from 3.9%, suggesting price pressure in Q4 was higher than previously reported. While slower activity and higher inflation are making the Fed’s task more difficult, the labor market remained strong, suggesting that any slowdown in growth will likely be very slow. Weekly initial jobless claims dropped to the lowest in 4 weeks at 192k from the prior 195k.

Worrying signal on the inflation front in the eurozone

Yesterday, inflation was confirmed higher than initially reported in the eurozone in January (headline at 8.6 % year-over-year and core at 5.3 % - this represents a 0.1 percentage point higher). What is even more worrying is that the EZ CPI basket showed the most broad-based price increase on record. 76 % of the basket experienced a month-over-month increase above 0.2 %. This is up from 52 % in December 2022. There is little doubt that the European Central Bank (ECB) will hike interest rates by 50 basis points in March. But we think the ECB is not done anytime soon with the tightening process. The terminal rate is probably closer to 4 % than expected by the market consensus.

Block results beat on the back of Bitcoin revenue rising more than expected

Block rallied over 7% after Q4 net revenue rose more than expected, up 14% to $4.7bn, beating estimates of $4.6bn. It comes as Bitcoin revenue rose to $1.8bn vs est. $1.8bn, while hardware revenue from its Square terminals and Square registers rose slightly more than expected. Block sees FY23 adjusted EBITDA of $1.3bn vs est. $1.3bn.

Japan’s January CPI softer than expected, BOJ gov nominee Ueda’s hearings bring flexibility to dovishness

January inflation print in Japan came in-line with expectations on the headline at 4.3% YoY from the prior 4.0% YoY but was marginally below expectations on the core measures. Ex fresh food and energy was out at 3.2% YoY, above last month’s 3.0% YoY but below the expected 3.3%. Inflation remains above the Bank of Japan’s 2% target, and price pressures are broad-based. BOJ nominee Kazuo Ueda’s parliamentary hearings in the lower house today brought some clarity over his policy direction, suggesting he will stick to easing for now while remaining flexible to tweaks as needed.

What are we watching next?

The week ahead in geopolitics after China peace proposal issues and on macro data
Next week’s macro calendar is not the usually busy one as a new month rolls into view, as the key US labor market data is not up until Friday the 10th of March, although the latest string of strong weekly US jobless claims offer no evidence of a softening labor market. Next Wednesday we’ll get the latest ISM survey data as regional US manufacturing surveys for February thus far suggest little chance of a resurgence in the recessionary ISM Manufacturing survey, with the last three readings in a row below 50 ahead of the survey release next Wednesday. The ISM Services survey, meanwhile, is up on Friday and bears watching after two confusing prior readings – a very weak one in December followed by a resurgent one in January of 55.2. Otherwise, the intense focus on geopolitics will remain as the US considers making public the intelligence it has gathered on China considering supporting Russia’s war effort in Ukraine, as well as how China deals with US warnings against China providing lethal aid to Russia in the conflict. China’s first attempt at wading into the situation as a peace-broker with a cease-fire “position paper” today was dismissed by a US official and is seen as a likely “non-starter with the US and most European countries” according to Neil Thomas, a senior analyst at the Eurasia group.

Earnings to watch

Today’s key earnings release is from BASF which has already reported which is sour reading for investors. The German chemical company is terminating its share buyback programme on top of reporting revenue and EBIT below estimates. In addition, the company is cutting 2,600 jobs in response to the higher energy costs. There is also good news in the Q4 earnings release that might lift the mood of investors, and that is the FY23 revenue outlook of €84-87bn vs es.t €81.8bn.

  • Friday: BASF, Monster Beverage

Economic calendar highlights for today (times GMT)

1330 – US Jan. Personal Income and Spending
1330 – US Jan. PCE Inflation
1500 – US Jan. New Home Sales
1500 – US Feb. Final University of Michigan Sentiment
1515 – US Fed’s Mester (Non-voter) to speak
1600 – US Feb. Kansas City Fed Services Activity
1830 – US Fed’s Collins (Non-voter) to speak
1830 – US Fed’s Waller (Voter) to speak

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