Summary: Sentiment is poor as the Russian assault of Ukraine has taken an increasingly ugly turn and hostilities near a Ukrainian nuclear power plant even added to concerns overnight before the market stabilized slightly. The February US ISM Services survey was far weaker than expected yesterday, suggesting an economy that is decelerating. Today, the US releases its February jobs report, including average hourly earnings as an important gauge of persistent high inflation.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures are only slightly lower this morning, but yesterday’s session was brutal across e-commerce and bubble stocks continuing the flows of investors rotating into commodity and logistics related stocks. S&P 500 futures broke above the 4,400 level yesterday but retreated to end below this psychologically important level. This morning S&P 500 futures are trading around the 4,345 level with the 4,300 level being important on the downside.
Hong Kong’s Hang Seng Index (HSI.I) & China’ CSI300 (000300.I) - Hang Seng fell over 2.5% and China’s CSI300 (000300.I) was down more than 1%. Tech stocks were sold. Hang Seng TECH Index fell 4%. Bilibili (09626) fell 11% even though reporting Q4 results basically in-line with expectations. JD.COM (09618), Alibaba (09988), Meituan (03690), Xiaomei (01810), and Netease (09999) fell between 5% to 7%. Estimates from the China Association of Automobile Manufacturers suggested that February auto sales in China were down 34% MoM and up 13.8% YoY. This, plus the weaker February sales data from individual EV makers earlier, triggered much selling in XPeng (09868), BYD (01211), and Li Auto (02015), falling 8% to 12%. A-share coal miners continued to surge.
European equity markets – European equity markets are down 1.5% on the news that Ukraine’s largest nuclear power plant had been hit by shelling causing a breakout of fire. The fire is under control and several nuclear experts have been saying that the power plant comes with containment systems that Chernobyl did not have. The probability of a disaster is very low. Euro STOXX 50 futures have a gap to yesterday’s close at 3,738 to close to avoid a negative technical setup before the weekend ends.
EURUSD, EURJPY and EURCHF – with the situation in Ukraine worsening and a call between French President Macron and Russia’s Putin seeing Macron later state that “the worst is yet to come” as Russia wants to take all of Ukraine, the euro is under pressure against safe haven currencies, as EURCHF dropped to new cycle lows as now just over a percent above the parity level, EURJPY has challenged below the important 127.50 prior range lows, and EURUSD nearly touched 1.1000. As long as the Russian assault in Ukraine continues and even deepens, the euro could remain under broad pressure, with only peripheral currencies like SEK, HUF, PLN, CZK, etc. Under even more pressure as these are economies highly leveraged to Euro zone growth.
AUDUSD – The Aussie continues to serve as an odd kind of “safe haven” due to Australia’s remarkable portfolio of commodities that are precisely those for which supplies are most at risk in relation to Russia’s assault on Ukraine, particularly LNG and wheat. Overnight, AUDUSD took out the 200-day moving average, which theoretically opens the way for 0.7500+, but the currency has not been tested recently on how it will perform in an ugly market deleveraging event, as global equity markets have traded in choppy, sideways fashion.
Crude oil (OILUSAPR22 & OILUKMAY22) reached a 14-year high on Thursday after with Brent almost touched $120/b before suffering a ten-dollar correction on speculation a nuclear deal with Iran could be reached this weekend. Overnight it rose again as traders reacted to a Russian attack near Europe’s largest nuclear power plant and after Libya’s biggest oil field stopped producing due to protests. Global oil majors including BP Plc, Shell Plc and Exxon Mobil Corp. are exiting Russia while buyers are shunning the nation’s crude as they navigate financial penalties and soaring shipping costs. With supply risks having become real we have entered a very volatile stage with no solution potentially forcing prices to levels that kills demand. A peace deal on the other hand may remove a large chunk of the gains seen during the past ten days.
Copper (HGK5) a rangebound market for the past year burst higher this week and overnight it almost touched the record high from May last year at $4.888. The king of industrial metals has been trading sideways for months while aluminum has reached a record high and zinc the highest since 2007. Disruptions in supplies from Russia as well as European smelters faced with punitively high energy prices cutting back production, thereby exacerbating acute supply constraints in the region. Russia is one of the world’s largest copper producers, and while the price for months has been held back due worries about Chinese demand, the focus is now turning towards a sanctions-led further tightness in supply.
US Treasuries (TLT, IEF). The yield curve continues to bear-flatten as the market expects a more aggressive Federal Reserve. The 2s10s spread touched 30.5bps, a level not seen since March 2020. Jerome Powell reaffirmed the message of a day earlier that the Fed is starting to hike interest rates at the next meeting. Today the attention goes to the nonfarm payrolls even though it is unlikely that the report will sway the central bank’s focus from inflation. Therefore, the bear flattening of the yield curve will continue.
European Sovereigns (VGEA, BTP10). Disappointing oversubscription rates at the sale of 7-year and 20-year Spanish debt led to a selloff of sovereigns in the periphery. Italian BTPS underperformed with 10-year yields rising by 7bps, widening the BTP-Bund spread to 157bps. Money markets are pricing a slightly more aggressive ECB in 2022. Today’s focus is on the Eurozone retail sales, however, we expect European rates to remain volatile until next week’s ECB’s monetary policy meeting.
US Corporate space (HYG, USIG). The primary bond market resumed its activity without problems. The Move index adjusted slightly lower from levels seen the day before. Yet, the corporate bond space is facing serious headwinds that could provoke a tantrum. We remain concerned that inflation and interest rate hikes might weigh on negatively on credits spreads going forward.
What is going on?
Large Ukrainian nuclear power plant captured by Russian forces – according to Ukraine’s Overnight, the news of Russian shelling and a fire at the large Zaporizhzhia nuclear power plant in southeast Ukraine spooked markets, but the fire was in non-power generating administrative facility and was put out as plant operators scrambled to shut down the power plant and no increase in radiation has yet been detected. Unlike the Chernobyl power plant that released enormous amounts of radiation into the air, the Zaporizhzhia plant has large, robust containment domes.
US Feb. ISM Services Index dropped sharply to 56.5 versus 61.1 expected and 59.9 in January. The employment sub-index fell to 48.5 versus 52.3 in January and was the worst since August of 2020. The steep fall in the survey of the dominant services sector of the US economy suggests a notable deceleration in activity, even if the number remains well above the 50 level, which is the dividing line between contraction and expansion.
Euro Zone Jan. PPI hits 30.6% year-on-year vs. +27.3% expected and 26.3% in Dec.
Hungary’s central bank raised its one-week deposit rate 75 basis points in an attempt to support the Hungarian forint (HUF), which has fallen more than 7% since Russian invaded Ukraine against a very weak euro, at a time when Hungarian inflation levels reached 7.9% in January and are expected north of 8% in February. A national election will take place in Hungary on April 3, with formerly Putin-friendly, now Putin-critical Prime Minister Orban’s Fidesz party running against a united opposition.
What are we watching next?
US February Nonfarm payrolls – and Average Hourly Earnings – up today. Consensus expectations for today’s February NFP change number is +418k, after a surprisingly strong surge in January. Employment is a lagging indicator, but the US job market is tight, and a wage-price spiral could continue to drive persistently high inflation levels in the US. Today’s Feb. Average Hourly Earnings number will also be closely watched and is expected at +0.5% month-on-month and a new local high of +5.8% YoY. The unemployment rate has almost dropped to pre-pandemic levels (low was 3.5% - currently 4.0%, but the participation rate has bounced back strongly in recent months.)
With war in Ukraine, every weekend is a long weekend for traders. Traders may be unwilling to hold risk over the weekend, given the reality of a hot war in Ukraine and that the situation can move in any direction.
Earnings Watch. No important earnings releases today.
Economic calendar highlights for today (times GMT)
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