Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: The squeeze higher in equities in the US finished with a punchy flourish on Friday, as dire sentiment readings finally gave market contrarians something to celebrate. Sentiment stayed buoyant to start this week on hopes China is set to ease Covid restrictions, although this in turn may be driving global oil prices higher after Brent closed last week just shy of the highest weekly close of the cycle. Any new rise in oil prices could quickly dominate market focus from here and drive fresh inflation fears.
Nasdaq 100 futures are extending the rally that started on Wednesday last week interrupting the seven-week long decline in technology stocks. Nasdaq 100 futures are trading around 12,865 this morning in early European trading hours and the 13,000 level is likely a short-term key point to test for the market. We see little to stop this short-term sentiment rally as some short positions are likely being squared adding to the upward pressure. Overall, nothing has changed except maybe except for pressures in commodities, in particularly energy, that have gotten worse.
Both indices trades higher with Covid cases falling in Shanghai and Beijing, and after the Shanghai municipal government announced an economic support package of 50 measures. Starting from June 1, factories in Shanghai are allowed to resume production without having to apply for pre-approval from the authorities. Domestic consumption stocks gained on the prospect of reopening. Restaurant stock Jiumaojiu (09922) jumped over 10% and beverage counter China Resources Beer (00291) gained 8%. Chinese internet stocks followed through on last week’s post result rallies and continued to surge 2% and 10% on Monday. Meituan (03690) surged 7% ahead of reporting Q1 results on June 2.
The most traded USD pair has worked higher and is now threatening the next layer of resistance, which perhaps starts with the 38.2% Fibonacci retracement of the move from the February and 2022 highs near 1.1500 to the low at 1.0787. Above there, the old range low just above 1.0800 is another focus ahead of 1.0872, the 61.8% Fibo of the local wave. The EURUSD bear trend is so well entrenched that a trend reversal requires significantly higher levels towards 1.1500, although a quick move to 1.1200 (a major cycle low back in late 2021) and near the 200-day moving average, would significantly weaken the structural picture.
The AUDUSD pair an interesting one to watch for the status of the USD trend against more pro-cyclical currencies, as already the rise back above the 0.7000 has placed a question mark next to the status of the USD rally, as this was a major level on the way down. But the really important resistance in the local context is the 0.7260 area, which is a local pivot high from early May and near the 200-day moving average. The sentiment from news flow from China will weigh heavily from here, as will the impact of that news flow on key Australian commodity exports like iron ore, with general risk sentiment also an important driver.
Crude oil trades higher after closing at an 11-week high on Friday on continued signs of tight fuel inventories ahead of an expected busy summer driving season, and with China slowing easing anti-virus lockdown curbs the added demand is likely to continue to force prices higher until demand starts to ease. With refinery capacity coming back online after maintenance demand for crude oil from refineries, the ultimate buyer of crude, is likely to rise at a time where global supply and supply chains has been severely disrupted by sanctions against Russia. Having broken above resistance-turned-support at $115, Brent may now take aim at $124. OPEC+ meets on Thursday to rubberstamp another illusive 430k barrels per day production increase. The group has fallen well behind its own target with several countries, led by Russia, struggling to reach their quotas.
Gold trades higher with a softer dollar and lower bond yields, as well as rising fuel prices supporting a fresh attempt to challenge key support at $1868/70, the 38.2% retracement of the April to May 211-dollar correction. Silver (XAGUSD) meanwhile trades near a three-week high relative to gold supported by recovering industrial metals on hopes China’s easing of anti-virus curbs will drive a recovery in demand. The recent recovery in gold was supported by investors hedging themselves against a central bank policy mistake with aggressive monetary-policy tightening driving concerns over a potential US recession. Despite these latest tailwinds, the recovery has yet to show enough strength to challenge those looking for lower gold prices, hence a continued focus on economic data, the dollar and yield developments.
Brent crude oil closed last week just shy of the $120/barrel level (see above) and also just shy of the highest weekly close for the front month contract since the outbreak of war in Ukraine. As the $120 area was often a resistance area during the high oil price period during 2011-14 (although at that time, the US dollar was far weaker), any further significant advance from here will likely dominate market attention and work against further strong improvements in risk sentiment as high energy prices cloud the growth outlook and would erode corporate profit margins.
Both venture capital firms were around during the dot-com bubble run-up and burst, and they have both put out perspective and action plans for the companies they have invested in. Those presentations talk about a much dimmer outlook and investors are shifting focus from revenue growth and revenue multiples to that of free cash flow here and now. Cost-cutting and focus on profitable unit metrics are now paramount to survive the coming years.
This is a major national holiday, so all US markets are closed today.
This week’s earnings releases are weak in terms of impact expect from earnings from Salesforce, Lululemon and Meituan. Analysts are expecting Salesforce to report FY23 Q1 revenue (ending 30 April) growth of 24% y/y on top of a significant operating margin expansion expected to boost free cash flow generation substantially.
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