Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: US equities rallied once again yesterday after Europe closed mixed, perhaps in part driven by an almost 10-dollar decline in oil prices and as global bond yields traded sideways after their recent steep ascent. With crypto-currencies and meme stocks soaring in recent days, there is the sense that the most speculative of animal spirits are trying to make a new splash despite the pricing of an ever more aggressive Federal Reserve.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures moved beyond the 100-day moving average yesterday and are extending the gains today basically confirming that the market for now is shrugging off the war in Ukraine, higher interest rates, and tight commodity markets. The next big test is the 4,600 level.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Hang Seng Index were up modestly. Chinese Internet stocks rose and Hang Seng TECH Index was up more than 1%. Alibaba, Tencent and Meituan rose 2% to 7%. JD Health rose 16%, after reporting better than expected revenue and earnings. Revenue was 61% higher and non-GAAP net profit rose 104% YoY in 2H21. XPeng reported higher than expected revenue and smaller loess in 4Q21. The company guides 1Q22 EV deliveries of between 33,500 and 34,000 units and a below expectation revenue. Sunac China fell 22% after the Chinse property developer said that it would not be able to report results by March 31 and would suspend trading from 1 April.
Stoxx 50 (EU50.I) – Stoxx 50 futures are up 0.8% this morning extending the rally as risk-on sentiment is strengthening. The GfK consumer confidence figures for April came in this morning a bit worse than expected and went down a lot from March suggesting consumers are not in agreement with the equity market’s enthusiasm. A break above yesterday’s high in Stoxx 50 futures will clear the way for another attempt at the recent highs from 17 March.
USDJPY and JPY crosses – the JPY slide took a significant breather yesterday after a blowout run-up to 125.00+ in USDJPY in the wake of the Bank of Japan announcing a second unlimited auction for 10-year JGB’s at 0.25% to defend the bank’s yield-curve-control policy. The price action settled in the mid-123.00’s this morning as USDJPY and JPY crosses will take their cue from global bond yields from here, which have been the key coincident indicator, with Japanese government bonds unable to rise due to BoJ operations, the yen is seen absorbing the pressure. At the same time, the JPY is trading its weakest in CPI-adjusted terms in modern history and Japanese inflation is muted, thus offering less negative “real” rates than elsewhere, where inflation is hundreds of basis points higher than the policy rate. Worth noting that the 125.86 level from 2015 is a near-20 year high in USDJPY.
GBPUSD and EURGBP – it is clear from recent Bank of England rhetoric that BoE Governor Bailey and company are reluctantly removing policy accommodation to show some degree of credibility after inflation has rocketed to multi-decade highs. The Bank clearly feels that the sources of inflation are largely beyond its control as they are due to supply-side constraints, especially the massive rise in energy prices. Looking forward, the Bank sees what Governor Bailey yesterday called a “historic shock to real incomes”. With the UK government set to tighten the purse strings at a time when the Eurozone is set to launch massive new fiscal outlays, the UK growth outlook looks comparatively moribund beyond the next quarter or two. Watching the 1.3000-area low in GBPUSD and the 200-day moving average in EURGBP just above recent pivot resistance at 0.8450 for whether a more significant sterling slide lies ahead.
Crude oil (OILUKMAY22 & OILUSMAY22) oil prices dropped heavily yesterday, perhaps in part on hopes that Ukraine and Russia can progress in talks set to take place in Turkey today, but also as significant Covid lockdowns in Shanghai, China after record case numbers there, continue to dog the demand outlook. May Brent crude is trading in the middle of the 97-123/barrel range this morning at just above 110. The market will watch upcoming inventory numbers from the US today (API) and tomorrow (DoE) as levels at the key storage hub at Cushing are extremely low.
Gold (XAUUSD) a significant disappointment for gold bulls yesterday as the attempt to break above the local 1,950 area resistance was strong rejected with a move back to around 1,925. The entire breakout rally prompted by the Russian invasion of Ukraine is now threatened if the 1,890-1,900 area doesn’t hold. Strong risk sentiment elsewhere may be an important coincident indicator keeping pressure on gold here if it persists.
US Treasuries (TLT, IEF). A weak 2-year US Treasury auction followed by a strong 5-year confirms the continuous yield curve flattening bias. However, an inversion of the yield curve is not yet signaling an imminent recession. Indeed, long-term yields continue to rise rather than fall, while real rates remain in deeply negative territory proving favorable financing conditions. We believe that such conditions give room for the Federal Reserve to be more aggressive in tightening the economy. Today the US Treasury is selling 7-year Notes, which are now offering the highest yield in three years. Therefore, we expect demand to be solid at the auction.
What is going on?
G-7 refuses to pay for Russian natural gas imports with rubles. This was recently demanded by Russian leader Putin, but G-7 representatives unanimously rejected the demand. The key Dutch Natural gas contract rose about 10% yesterday on some residual concern that Russia could reduce exports, although gas continues to flow normally through Ukraine and via the Nord Stream pipeline.
Rio Tinto (RIO) formally moved into lithium. Rio completed its purchase of a lithium project in the tightly held lithium triangle in Argentina for $825 million, following approval from Australia’s Foreign Investment Review Board (FIRB). Rio says, the project strengthens its battery materials business and positions it to meet the double-digit growth in demand for lithium over the next decade, at a time when supply is constrained. Rio Tinto shares fell 1.4% in Australia, but Rio Tinto shares look to have remained in their rebound/ uptrend from March 15.
Key portions of the US yield curve inverting. The 5-30 portion of the yield curve inverted on Friday for the first time since early 2006, while the more closely watched 2-10 part of the curve has flattened aggressively but not yet inverted – currently at +7.5 basis points. Inverting yield curves are seen as harbingers of recession historically, though with an uncertain lag, especially uncertain for this cycle due to the weight of aggressive Fed balance sheet expansion.
Signs of speculative froth as meme-stock GameStop (GME) doubled in a week. GameStop shares have doubled from the levels of just a week ago on no real news, with other notable meme-stocks surging. AMC, for example, also surged yesterday by over 40%. This suggests a strong risk-on tone/short squeeze among the most speculative investors.
Carlsberg and Heineken pull out of Russia. The two largest European brewers announced yesterday that they are closing their activities in Russia. Carlsberg has been hesitant so far but was forced first by Heineken’s decision and later during the day on the news that the Danish government will forbid convertibility from RUB into DKK which effectively makes profits in Russia worth zero in DKK.
What are we watching next?
Ukraine-Russia peace talks today in Turkey today. Watching for developments here as Ukraine has shown success in recent days in retaking cities occupied by Russia. Ukraine is said to seek a minimum goal of improving the humanitarian situation and the talks are even being positioned as “cease-fire” talks. At the same time, there is talk of division amongst NATO allies on whether negotiations with Russian leader Putin are even possible or advisable, especially after US President Biden seemed to call for regime change in Russia by saying that Putin “cannot remain in power”.
US March Consumer Confidence. The US Conference Board Consumer Confidence survey today comes after a string of months in which the confidence reading has held steady in the 110-115 area after the lows of 2020 and early in 2021 below 90 and the 2021 high of 128.90. The University of Michigan Sentiment survey suggests cratering sentiment nearly on par with the darkest months of the pandemic outbreak or even the global financial crisis, but this may be due to financial-conditions and purchasing decision questions in that survey relative to the more general Conference Board survey, which historically has correlated more closely with labor market conditions. In any case, interesting to see if the divergence between the two surveys continues as the March data point comes after the psychological impact of the Russian invasion of Ukraine and the resulting spike in petrol prices.
Earnings Watch. Today’s US focus is on Micron Technology and Lululemon Athletica with the former reporting its FY22 Q2 (ending 28 February) after the market close with analysts expecting revenue growth of 21% y/y and EPS of $1.98 up 128% y/y as the memory chip market continues to improve. Lululemon Athletica is also reporting its FY22 Q4 (ending 31 January) after the close with revenue growth expected at 24% y/y and EPS up 27% y/y. The two Chinese earnings to focus on today are from BYD and Kuaishou Technology with both reporting after the Hong Kong market close.
Economic calendar highlights for today (times GMT)
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