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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Powell’s comments yesterday that he is willing to go with 50 bps rate hike in May, if necessary, sent the US 10-year yield above the 2.3%, the highest level since May 2019. Despite Powell’s comments and a rapidly flattening yield curve US equities were able to hold on to the gains from last Friday. S&P 500 futures are trading around the 4,444 level in early European trading hours down slightly from yesterday’s close. If US interest rates push higher and commodities extend their recent gains US equities may retreat further with the 4,392 level being the key level to watch on the downside.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Hang Seng Index and Hang Seng TECH Index (HSTECH.I) were up 2% and 3% respectively. Big techs led the charge higher. Alibaba (09988) rallied over 9% following an increase of its share buyback programme to $25 billion from $15 billion. Bilibili (09626), Meituan (03690) and Netease (09999) rose over 4%. Coal mining stocks, China Coal (01898), China Shenhua (01088) and Yankuang energy (01171) were up 4% to 6%. Aluminum producers surged. China Aluminum (02068) rose 14% and China Hongqiao (01378) was up 5%. In A shares, CSI300 was a little changed. Properties, brokerage, bank, coal and metaverse concept stocks were among the best performers.
Stoxx 50 (EU50.I) – European equities are bouncing back from today’s lows with Stoxx 50 futures trading around the 3,800 level despite a bad ZEW reading yesterday indicating that market participants are expecting a sharp decline in economic growth in Europe. In our view, European equities are reflecting the market’s thinking on the probability of a peace deal in Ukraine and to the extent that the probability is declining to either Russian advance or stalling negotiations, European equities could begin declining again.
USDJPY – with the US Federal Reserve seeming growing more hawkish with every appearance of a Fed official and the Bank of Japan last week doubling down on its existing policy mix, which includes a yield-curve-control policy that caps 10-year JGB yields at 0.25%, further upside in global yields transmits to JPY weakness now that those 10-yr JGB’s are bumping up against that yield cap. Indeed, yesterday’s jump in US yields all along the yield curve in the wake of Powell’s fresh hawkish guidance (more below) saw USDJPY jump above 120.00 for the first time since early 2016 – the next major level is the 20-year high above 125.00, but traders should note that the end of the Japanese financial year (March 31) often serves as a very important pivot point for the Japanese yen – it certainly did last year when both US long yields and many JPY crosses peaked for the cycle on that very day.
EURHUF – the Hungarian forint has recovered from cycle lows posted in the wake of Russia’s invasion of Ukraine and as the Hungarian central bank has bought itself some credibility with a series of rate hikes to the deposit rate. Helping all EU peripheral currencies over the last couple of as well are the recovery in risk sentiment and the fiscal bazooka that both the EU and especially Germany will bring to the table this year. Today, the Hungarian central bank is seen hiking the main policy rate in a catch-up move, expected to bring 100 basis points of tightening that will take the rate to 4.4%. EURHUF trades near the pivotal 370 area that was a former major resistance level before broken early this month. Hungary is set for a general election on April 3, with no change of leadership expected but tight enough polling to suggest that nothing is certain.
Crude oil (OILUKMAY22 & OILUSAPR22) trades higher for a fourth day with the war and tightening supply premium rebuilding fast as EU leaders this Thursday will debate a ban on Russian crude imports. With Europe being the biggest consumer of crude and fuel from Russia, a ban would add further fuel to the current supply-shock and send prices sharply higher to the point where demand starts to suffer. A succession of aggressive US rate hikes may over the coming months, however, drive an economic slowdown and with that, lower demand for fuel. Russian oil continues to be offered around a 30-dollar discount to Brent, the clearest sign of a global market in disarray. Having retraced more than 50% of the recent correction, only a $123/b, the 61.8% retracements stand in the way for a push towards $140/b.
Gold (XAUUSD) trades firmer with a renewed surge in crude oil offsetting surging bond yields following Fed Chair Jerome Powell’s aggressive rate hike comment yesterday (see below). Rising commodity prices threaten to add fuel to the fastest CPI rise in four decades and the market is now pricing in another eight 25 basis point hikes during the next 12 months. However, the cost of hiking rates into an economic slowdown was highlighted by the continued flattening of the yield curve with the gap between 2- and 10-year yields spread now sitting just 15 basis points above zero and recession territory. Crude oil is currently the single most important market to watch with rising prices signaling rising geopolitical risks and inflation as well as slowing economic growth, all gold supporting drivers. Key support at $1890/oz with a break above $1957 needed to signal fresh upside potential.
Wheat in Chicago (WHEATMAY22) and Paris (EBMK2) both jumped yesterday, thereby partly reversing some of last week’s declines. Russia’s invasion of Ukraine has upended global supply chains with large importers competing for supplies from alternative sources. Shipments from Ukraine are at a standstill, the spring planting is fast approaching while at this point it is impossible to know how much of the winter-wheat, the bulk of their production, will and can be harvested come July. In the US, farmers are expected to plant the biggest wheat acreage in six years but persistent drought in key growing areas has put production in question.
US Treasuries (TLT, IEF). Jerome Powell’s message was once again clear: the Federal Reserve will not stop until inflation is under control. To move the market yesterday were his remarks that the Fed might move more quickly, increasing speculations that the central bank will front-load rate hikes as the economy remains strong. The yield curve shifted higher while flattening. The 5s30s spread narrowed to 18bps, the lowest since 2007. Two-year yields rose to 2.17% and 10-year yields to 2.32%. The 2-year US Treasury forward in one year rose to 2.70% a sign that the markets believe the Fed will hike rates above the terminal rates. We expect the yield curve to continue to bear flatten until there are clear signs of a downturn, which might come in the second half of the year.
What is going on?
Fed Chair Powell says he backs a 50-basis-point rate hike in May, if necessary. As well, Fed Chair Powell indicated that more than one hike of that magnitude is possible: “If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.” Other comments were quite hawkish as well, such as “if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.” Powell also indicated that the price rises in the wake of Russia’s invasion of Ukraine could risk destabilizing longer term inflation expectation. “The risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher, which underscores the need for the committee to move expeditiously as I have described.” In the wake of Powell’s speech and Q&A session, US 2-year yields rose over 20 basis points as the market prices in more than 40 basis points for the May meeting and another 40 basis points for June, with the Fed funds rate now priced to reach 2.25% at the December meeting.
Boeing (BA:xnys) stock was down 3.5% yesterday on the crash of a 737-8 plane in China. All Boeing planes of that make were grounded in China while the crash is investigated. The behaviour of the plane during its crash was considered extremely unusual in that it was in a near vertical drop from cruising altitude of 39k feet to crashing in a mere 2 minutes.
Japan has a historic power crisis. The Japanese government has issued a historic power supply warning in Tokyo, on the back of cold weather and several power plant outages after powerful earthquakes last week. Power reserves fell as low as 0% today in key cities of Tokyo and Tohoku. Tepco (JP: 9501) said it would receive electricity from other regional utilities to overcome the power crunch. Japan's biggest utilities may also be forced to boost output from gas-fired power plants and seek LNG supplies from the spot market. USD/JPY rose to a 6-year high, and Nikkei 225 closed up 1.5% and Topix up 1.3%, following Powell’s hawkish comments from last night implying a 50bps hike is possible in May prompting a surge in 2y rate differentials.
Nike and Anta Sports earnings recap. Nike reported better-than-expected revenue with the Greater China segment being the positive surprise and the operating margin was not impacted as bad as one could have feared; Nike shares rose a couple of percent in the extended trading session. Anta Sports, one of Nike’s biggest competitors in China, has reported Q4 earnings today in Hong Kong and shows a strong ending to the year of 2021. Anta Sports’ revenue rose 39% y/y in 2021 reaching a new record as Chinese consumers are preferring their own sports brand and the government is incentivizing the population to invest in their personal health.
The cost to insure emerging market debt continues to increase as the conflict in Ukraine escalates. The countries most hit are those benefitting from remittances from Russia, and trading partners. Among these are Georgia, Pakistan, Sri Lanka, Egypt, and Turkey.
What are we watching next?
Developments in war in Ukraine. US President Biden warned that Russia may be considering the use of chemical or biological weapons, citing Russian leader Putin’s claim that the US and Ukraine had weapons of mass destruction in Ukraine as a “clear sign that he’s considering using” these types of weapons himself. Biden confirmed that Russia had used a hypersonic weapon in an attack in recent days. His labeling Putin a “war criminal” saw Russia summoning the US ambassador in Moscow for a formal complaint and saying that diplomatic ties with the US are a risk of reaching a “breaking point”. Oil prices have only seen two daily closes above the levels this morning (around 119 for Brent crude), so developments in the war and any signs of further escalation beyond the status quo, given oil is trading at these levels, could move sentiment across markets.
Earnings Watch. Today’s key focus is Xiaomi and Adobe as Anta Sports has already reported (see above). Analysts are expecting a sharp decline in Adobe’s growth rate to just 8.6% in FY22 Q1 (ending 28 February). Xiaomi is expected to report after the Hong Kong close with analysts expecting revenue growth to bounce back in Q4 to 15.6% from 8.2% in Q3, but still seeing its operating margin under pressure.
- Today: Xiaomi, Anta Sports, Foxconn, Wuxi Biologics, Partners Group, Adobe
- Wednesday: Tencent, China Mobile, WuXi AppTec, IHS Markit, Yihai Kerry Arawana, Cintas, General Mills
- Thursday: China Life Insurance, Industrial Bank, Foshan Haitian Flavoruing, China CITIC Bank, NIO
- Friday: China Shenhua Energy, CNOOC, Bank of Communications, Anhui Conch Cement, Longfor Group, People’s Insurance, China Everbright Bank, Meituan
Economic calendar highlights for today (times GMT)
- 0935 and 1210 – ECB's Villeroy to speak
- 1300 – Hungary Central Bank Rate Decision
- 1315 – ECB President Lagarde to speak
- 1435 – US Fed’s Williams (Voter) to speak
- 1515 – UK Bank of England’s Cunliffe
- 1515 – Switzerland SNB’s Jordan to speak
- 1700 – ECB's Lane to speak
- 2100 – US Fed’s Mester (Voter) to speak
- 2130 – API Weekly Report on US oil and fuel inventories
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