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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures followed European equities higher with the technology sector leading the gains with Nasdaq 100 futures rising 3.5%. The VIX Index remains above 32 and financial conditions are tightening rapidly due to the war in Ukraine and the chaotic dynamics in the commodity market, which will continue to add headwinds for US equities. We remain defensive on equities and investors should not put too much weight on big daily moves given the sentiment driven and noisy environment. The big level to watch on the upside in S&P 500 futures is 4,300 which was not hit in yesterday trading session.
Hong Kong’s Hang Seng Index (HSI.I) & China’ CSI300 (000300.I) Hang Seng rallied over 1% and CSI300 surged almost 3%. Financials and technologies led the market higher. Leading insurers and banks rose 1.5% to 6%. Tech names opened strongly in the morning by given up much of the gains in the afternoon. Semiconductors did well, leading names rising 2% to 3%. Electric vehicle producers rebounded from the sharp selloff in recent sessions. NASDAQ listed Chinese EV maker Nio (NIO) started trading today in Hong Kong today with ticker (09866). The Peoples’ Bank of China (PBOC) said that it would remit RMB 1 trillion of its cumulative earnings to the Ministry of Finance (MOF). The amount has been accounted for as part of the RMB2.3 trillion transfer of SOE profits and fiscal stabilization mentioned in Premier Li’s report to the National People’s Congress (NPC) last Saturday.
European equity markets – the STOXX 600 Index rose 4.7% yesterday on no new news related to the war in Ukraine and the prospects for it to end in peace. We see the rebound as mostly driven by buy-the-dip activity hitting levels that were sufficient to set in motion short covering accelerating the pace higher. STOXX 50 futures are up 0.2% in early European trading hours with another trading session expected to be driven by short-term sentiment and headlines. Our green transformation basket rose another 3% yesterday so watch this segment again today in Europe as the continent is dominating the green energy industry.
EUR crosses – the euro rally extended aggressively yesterday as energy prices reversed sharply and risk sentiment improved. Even European gas prices eased sharply yesterday by some 30%, a significant easing of the pressure on Europe’s economy. Today is ECB day, with President Lagarde and company needing to deliver some measure of credibility on their plans to grapple with rising inflation, but the market is unsure what they will deliver (see more in preview below). A full recovery in the euro back to levels prevailing before the Russian invasion of Ukraine (for example around 1.1300 in EURUSD) will at least require that the divergent pressure on Europe’s power and gas prices ease at bare minimum, though détente is more likely the prerequisite.
JPY crosses – yields rose sharply higher again yesterday, a development that will eventually bring the Bank of Japan’s policy of a 0.25% yield cap on 10-year JGB’s into focus as any further rise in global bond yields will mean that if Japanese bonds are not allowed to rise, the pressure would have to be absorbed by the yen. USDJPY traded above 116.00 overnight, not far from the cycle top.
Crude oil (OILUKMAY22 & OILUSAPR22) trades firmer after plunging 12% on Wednesday with Brent already having traded within a record 33-dollar range so far this week. The news flow out of Ukraine and Russia continues to set the agenda and yesterday an improved sentiment spread across markets, not least in oil, after Zelenskiy reiterated willingness to find some compromises to end the war while the UAE called on OPEC+ to boost output. Demand destruction from high prices may already have started, thereby to a small degree offsetting the current and yet to be quantified loss of barrels from Russia, due to self-sanctioning among buyers. The tightness has lifted Low Sulphur Diesel traded on ICE the most, but after hitting a record $1665/t record yesterday it dropped 36% as sentiment improved.
Gold (XAUUSD) & silver (XAGUSD) took a tumble to a three-day low yesterday as risk sentiment improved, thereby deflating some of the recent geopolitical risk premium. However, while other commodities may fall further on a peace deal, as supplies may return, gold’s reason for rallying will not go away. The threat of an inflationary shock to the global economy and a weaker growth outlook, and with that a limited room for rate hikes, remain our main reasons for maintaining a bullish outlook. Ahead of next week’s FOMC meeting, however, the market is likely to trade nervously with some recently established and now under water longs deciding to exit ahead of the first in a series of Fed rate hikes. A 38.2% correction of the rally since late January could see it target $1960
US Treasuries (TLT, IEF). US Treasury yields continue to soar ahead of the US CPI figures tomorrow, while another weak and tailing Treasury auction shows that the market doesn’t want to take a position amid high inflation and a hawkish Fed. Demand for today’s 10-year bond sale was weak with the bid-to-cover dropping to 2.47x, the lowest since December. Indirect demand dropped to 68.2% from 77.6% a month earlier. Today, higher than expected US CPI numbers could provoke a further flattening of the yield curve ahead of the Treasury’s 30-bond sale
European Sovereigns (VGEA, BTP10). The focus is on today’s ECB meeting, which the market expects to be dovish compared to the previous one. The central bank is likely to highlight the need for maximum flexibility while normalizing monetary policies. Yet, news of another E.U. common liability bond to finance defense and energy spending is helping in stabilizing spreads on the Eurozone.
US Corporate space (LQD, HYG, USIG). One of the world’s biggest high-grade ETF signals stress as yesterday it closed below the net asset value of the ETF. The Move index is at the highest level since March 2020 and the corporate bond space is facing serious headwinds that could provoke a tantrum. We remain concerned that inflation and interest rate hikes might continue to weigh on negatively on credits spreads going forward.
What is going on?
Ukraine says it is ready for neutrality but won’t give up territory. The Ukrainian leadership seems to have explicitly abandoned hopes for NATO membership and an aide of President Zelenskiy said yesterday that Ukraine is ready for a diplomatic solution that could include Ukrainian neutrality, provided it could receive “security guarantees”, but said that their most important pre-condition is a cease-fire and Russian withdrawal.
Wheat futures in Chicago (ZWK2) and Paris (EBMK2) joined the relief sell-off yesterday. Chicago traded limit down after the US Department of Agriculture lifted world stockpiles by 3.3 million tons to 281.5 million, thanks to a record harvest in Australia, and robust exports out of India. Both helping to cushion ongoing worries about the availability of supply from the Black Sea region. Traders are watching for signs of how long the war in Ukraine will last and the impact on planting, harvesting and shipments of grain and sunflower oil. The USDA lowered its estimates for exports from Russia and Ukraine by a combined 7 million tons to 52 million, a number the market recently had priced in to be somewhat higher.
China to increase coal production. China’s National Development and Reform Commission (NDRC) pledged to coordinate efforts to increase the country’s daily coal production to over 12 million tons. President Xi told the NPC delegates from Inner Mongolia that China’s coal-based energy structure was not something to be fundamentally changed in near term. He remarked that green transformation was a process and China could not throw away the tools for making a living before having secured a new tool.
EU Summit today and tomorrow at Versailles (France). Initially, talks should have been about green transition and the post-Covid economic recovery. Instead, the focus will be on the Ukraine war and its consequences in terms of defense spending and retaliatory measures. New economic sanctions against Russia could be unveiled on that occasion. Expect the EU to release a formal plan to reduce its energy dependence from Russia. Russia now supplies over 40 % of the EU’s total gas needs, for instance. The aim is to reduce demand for Russian gas by two thirds before the end of the year. Pressure will increase on Germany to comply with this.
CrowdStrike blasts estimates on outlook. The company reported Q4 revenue of $431mn vs est. $411mn and adj. EPS of $0.30 vs est. 0.20 and the outlook came out much better than expected highlighting the strong pricing power in cyber security but also the massive increase in investments. CrowdStrike shares were up 14% in extended trading adding to its 8% gain in the primary session.
Amazon splits stock 20-for-1 and initiates buybacks. The world’s largest e-commerce retailer announced yesterday after the market close that it is splitting its shares with a 20-for-1 ratio and buying back $10bn worth of shares. In extended trading Amazon saw its shares trade 7% higher.
Cryptocurrency-related companies jumped yesterday as a response to President Joe Biden’s long-awaited executive order on digital assets (Coinbase +10%, Riot Blockchain +12%, Baakt Holdings +20%). It requires US federal agencies to create a regulatory framework for digital assets, as well as stating that the “rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier”, although also mentioning the related risks.
What are we watching next?
ECB monetary policy meeting today. The eurozone monetary policy roadmap was clear a few weeks ago. But things have changed. The Ukraine war is a new headache for the ECB. The eurozone economy is confronted with a huge stagflation risk – stagnant growth and very high inflation. Uncertainty is so high that the ECB will probably refrain from making any firm monetary policy commitments this afternoon. The ECB will also release the new staff macroeconomic projections. Don’t pay too much attention to this. It is too early to assess exactly the negative impact on growth and inflation from the Ukraine war.
February U.S. CPI is out today. The economist consensus expects a new increase to 7.9 % year-on-year. This is the first estimate. Given the strong increase we observe in energy costs and transportation costs, mostly related to the Ukraine war, we forecast that inflation could reach double-digits in the U.S. this year. This is not such a bold call anymore. Strong inflationary pressures open the door to a first interest rate hike by the U.S. Federal Reserve next week. Expect a dovish hike (25 basis points).
Earnings Watch. Today’s focus is on JD Logistics, Oracle and JD.com which JD.com and JD Logistics providing fresh insights into consumer markets and logistics issues in China.
- Today: Hapag-Lloyd, JD Logistics, Oracle, JD.com, DocuSign
- Friday: EssilorLuxottica, AIA Group
Economic calendar highlights for today (times GMT)
- 0800 – Hungary Rate Announcement
- 1245 – ECB Meeting
- 1300 – Poland National Bank of Poland releases meeting minutes
- 1330 – ECB President Lagarde Press Conference
- 1330 – US Feb. CPI
- 1330 – US Weekly Initial Jobless Claims
- 1530 – US Weekly Natural Gas Storage Change
- 1800 – US 30-year T-Bond Auction
- 2215 – Australia RBA Governor Lowe speaking on panel
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