Summary: In FX, The US equity market tried to rally yesterday after Friday’s pummeling on hot inflation data, but generally failed to maintain altitude and dropped back close to unchanged on the session as key support remains in place. End of month flows could drive volatility today. In FX, sterling modestly firmer in the wake of post-Brexit settlement between the EU And UK on the Northern Ireland border issue.
US equities bounced back yesterday at point engulfing the entire selloff from last Friday before S&P 500 futures gave up its gains towards the end of the session. This morning the index futures opened higher but have sold off trading around the 3,984 level in early European trading hours. Equities have moved into a short-term hibernation until the market gets more clearer evidence of where the bond market wants to go and whether growth is picking up in China following the reopening of the economy post its zero-Covid policy.
The Hang Seng Index jumped over 1% in early trading before paring all the gains and headed south, losing about 0.3% in the absence of headline drivers. Chinese developers, technology, and solar names led the charge lower. While A-share solar, energy storage, and chemical stocks retreated, the CSI300 was supported by consumer, textile, and pharmaceutical names and managed to advance 0.5%.
The USD softened in early Monday trading in the US yesterday, nearly erasing all of Friday’s gains as yields fell and stocks jumped in a risk-on environment, but the risk rally faded and the USD rebounded slightly. US durable goods data missed estimates, cooling off some of the momentum in short US yields. However, inflation fears continue to spell caution and no reversal in Fed’s tightening expectations was seen. Most of the USD softness came on the back of GBP strength on UK-EU finalizing a deal to smoothen Northern Ireland trade. GBPUSD surged from 1.1923 to 1.2060 and EURGBP slid below 0.88. AUDUSD failed to break below 0.67 handle but remained near recent lows even as metals recovered a notch.
Crude oil futures slipped again on Monday before finding a bid overnight in Asia. Developments that continue to see the price action being confined within a narrowing range. Crude oil may nevertheless be heading for a fourth monthly loss as concerns about tighter monetary policies raises concerns about a hard landing and with that weaker demand for crude and products. While a slower than expected start to the year has triggered price downgrades from banks, the consensus still points to a pickup in demand and prices above $90 later in the year. A view shared by Vitol, the world’s largest independent oil trader who sees oil rise later in the year in response to a 2.2 million barrels a day jump in 2023 demand. In Brent we find ascending trendline support at $80.70 with resistance at $83.60.
A broad recovery in base metals was seen on Monday as the focus turns to this week’s Two Sessions gathering in Beijing where traders will be looking for fresh signals from the government. Copper trades back above $4 after finding support around $3.94, the December high. Also, in focus this week is China’s PMI releases due on Wednesday to assess the pickup in Chinese activity after Covid restrictions have been eased. Aluminum also gained following four weeks of losses amid ongoing supply concerns. Zinc and aluminium smelters in Yunnan have been asked to reduce output due to power rationing. Concerns about Lithium supply are also likely to rise as China investigates illegal mining. Operations in Yichun have been ordered to halt work indefinitely. The move could impact between 8-13% of global supply.
US Treasury yields rose slightly again yesterday to new 15-year highs after Friday’s jump on hot US PCE inflation but then eased back to approximately unchanged. It’s been a tough month for treasuries, with the 2-year yield benchmark surging some 60 basis points this month and the 10-year benchmark yield up over 30 basis points. Today is the last trading day of February and could see month-end rebalancing as we await incoming US data.
The UK and EU reached a deal on Northern Ireland's trading arrangements aimed at ending years of friction caused by Brexit. The deal, known as “Windsor Framework”, aims to considerably cut customs paperwork and checks on goods moving from Great Britain but destined to stay in Northern Ireland. Existing requirements on trade from Northern Ireland to the UK will be removed. GBPUSD surged on the news to 1.20+.
Janet Yellen made an unannounced trip to Ukraine to highlight US support. She met with Zelensky and PM Shmyhal and also announced a disbursement of $1.25 billion in fresh economic aid, the first out of a total $10 billion pledged by the administration. It was also reported that the dignitaries discussed additional sanctions on Russia, including confiscating frozen Russian assets to benefit Ukraine's recovery, despite legal obstacles.
Reuters reported yesterday that Tesla’s German car plant production hits 4,000 cars/wk which is ahead of schedule boosting sentiment. At this point, we do not know how big the cannibilazation is against its Shanghai production plant which has been the main exporter to Europe. On Friday, one of its more prolific investors Ross Gerber pulled his activist board seat bid suggesting shareholders are holding back from their criticism. Overnight one of Tesla’s suppliers, South Korea based L&F, announced that it had won a KRW 3.8trn cathode materials order, again suggesting demand is ramping up for Tesla.
The company reported slightly weaker sales than expected, but forecast Q1 profit of 96-98 cents per share versus analyst consensus of 87 cents and full year profits and especially 2024 profits well above analyst estimates. Zoom is reporting growth in enterprise customers while a shrinking revenue from individual consumers and small businesses.
Occidental reported record quarterly earnings, but missed expectations after costs rose more than expected. The company guided for higher spending ahead, including on its direct air carbon reduction project. For the year ahead, it expects capital expenditure to be as high as $6.2b - vs $5.66b expected. OXY increased its dividend by 38% and announced a new $3 billion share buyback. Its adjusted EPS came in at $1.61, missing the $1.79 Bloomberg consensus. The miss also comes as it received lower than expected realised prices for natural gas - while realised prices for oil were slightly higher than expected. Warren Buffett’s Berkshire Hathaway is the largest shareholder. A conference call to discuss the results for OXY is at 1 pm ET on Tuesday. Occidental shares fell 1% after hours. Occidental is the only major oil company reporting recently that missed market expectations – while Shell, BP and Woodside all beat.
Broader expectations are for the Eurozone flash CPI to ease to 8.2% YoY in February from 8.6% last month amid lower energy prices. However, the core measure is still expected to be firm at 5.3% YoY, underpinned by higher non-energy industrial goods. This continues to suggest that the underlying price pressures remain firm, and another 50bps rate hike from the ECB remains likely in March. The minutes from the last ECB meeting are also out on Thursday, and the path after the next 50bps rate hike remains on watch. Lagarde previously noted that the ECB will not be at peak rates in March and there will most likely be ground left to cover, which suggested that hopes for a pause in May could be disappointed. France and Spain report preliminary Feb. CPI figures today, while Germany reports CPI tomorrow.
Today’s key US earnings to watch is Coupang and First Solar with the former being part of our earnings preview from last Friday and analysts expecting Coupang to announce 7% revenue growth and EBITDA of $197mn up from $-248mn a year ago as the company is under pressure to increase profitability. Coupang reports its Q4 earnings releases after the US market close. First Solar is expected to report its Q4 earnings after the US market close with analysts expecting 10% revenue growth y/y and EBITDA of $48mn down from $262mn a year ago.
0745 – France Feb. Flash CPI
0800 – Spain Feb. Flash CPI
1215 – UK Bank of England Chief Economist Huw Pill to speak
1330 – Canada Dec. GDP
1400 – US Dec. S&P CoreLogic Home Price Index
1500 – US Feb. Consumer Confidence
1500 – US Feb. Richmond Fed Business Conditions
1530 – US Feb. Dallas Fed Services Activity
1930 – US Fed’s Goolsbee (Voter 2023) to speak
2130 – API's Weekly Crude and Fuel Stock Report
0030 – Australia Q4 GDP
0030 – Australia Jan. CPI
0130 – China Feb. Manufacturing/Non-manufacturing PMI
0145 – China Feb. Caixin Manufacturing PMI Quarterly Outlook
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