Summary: Market sentiment remains very positive despite a nominally more hawkish than expected FOMC meeting that saw the market lifting its expectations for the Fed funds rate late this year and especially next year. The positive sentiment shift in China continued after the recent message of official support for the markets and the economy. The USD has traded slightly softer, gold rebounded strongly from pivotal levels and crude oil hovers near 100 dollars per barrel.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures followed the equity market higher yesterday but is struggling a bit this morning trading around the 4,350 level which was yesterday’s close. The rebound trade yesterday was led by Chinese equities and technology stocks in the US but with the prospect of seven rate hikes this year in the US it is difficult not to imagine that headwinds will persist for technology stocks.
Hong Kong’s Hang Seng Index (HSI.I) & China’ CSI300 (000300.I) - continued to move higher today by over 5% and 2% respectively. Chinese property names surged following Vice Premier Liu He’s supportive comments as well as other Chinese officials coming out today to pledge supports to quality property developers to acquire projects from distressed developers and reiterate that there would be no property tax imposed this year. Following the Fed’s 25 basis point rate hike overnight, Hong Kong Monetary Authority (HKMA) raised base rate by 25 basis point to 0.75%. HKMA has been mopping up liquidity in the banking system since September last year.
European equity markets – positive sentiment is continuing amid another strong session in Hong Kong on the back of China’s vow to support the economy and equity market. Stronger Chinese growth will have a positive impact on the European economy given the size of the trading relationship. Stoxx 50 futures are up 0.3% and now down only by 1.4% from the close the day before Russia’s invasion of Ukraine which suggest the market is betting on a peace deal coming soon. What that will mean for sanctions on Russia is still unclear at this point.
EURUSD – the supermajor was slightly higher in the wake of the FOMC meeting overnight, despite a nominally hawkish FOMC meeting that saw the market raising its forecast for the pace of Fed hikes late this year and especially next year. Perhaps the lack of panic and sense that the Fed will mostly simply do what the market is now pricing in makes. As well, strong risk sentiment of the last couple of sessions has worked against the greenback’s favour. EURUSD needs to rally and close clear of the 1.1100-50 area to suggest a bullish. In the longer term perspective, we are constructive on euro upside on the outlook for a massive new fiscal stimulus from the EU and especially Germany (which raised its additional spending on defense-, energy- and other initiatives this year to some 4% of GDP) that will both deepen EU capital markets and keep far more of the EU surpluses in Europe rather than recycled elsewhere.
AUDUSD – after a bout of Aussie weakness recently on the drawdown in risk sentiment and a reversal in commodity prices linked to the war in Ukraine, the AUD is suddenly firing on all cylinders in the wake of a strong official Chinese message on supporting markets and the economy this week, on a rebound in iron ore prices, and not least on a strong jobs report overnight. The US dollar was slightly weak in the wake of the FOMC meeting last night as well, particularly against commodity- and pro-cyclical currencies. Still, the pair has some more work to do to reverse the recent bearish reversal, perhaps needing a close above 0.7350 and some follow through if it wants to establish a new up-trend. It would also be helpful for the RBA to change its very dovish tune.
Crude oil (OILUKMAY22 & OILUSMAY22) trades steady with Brent holding above trend-line support for a third day, this after concluding an 85-dollar roundtrip during the past few weeks. The price has returned to pre-war levels which may prove premature, with lower supplies from Russia increasingly being felt over the coming weeks, more than offsetting any temporary covid-related slowdown in Chinese demand. The beginning of the US rate hike cycle, however, will add to global growth concerns which despite several months of supply shortfalls should prevent a renewed spike in oil prices. But with the risk premium almost removed the market will be left vulnerable to any deterioration in the Russia-Ukraine situation.
Gold (XAUUSD) bounced from key support below $1900 after the FOMC started its long-awaited rate hike cycle (see below). While the stock market bought into Fed Chair Powells optimistic view on growth, the bullion market received a bid on worries that the Fed will struggle to curb inflation without risking a major slowdown. While long liquidation from leveraged funds who had loaded up on gold futures in recent weeks may have run its course, longer term focused investors have continued to increase their positions in bullion-backed ETFs with an additional 35 tons bought during the recent 175-dollar slump. Key support at $1890/oz with a break above $1957 needed to signal fresh upside potential
Wheat futures in Paris (EBMK2) and not least Chicago (ZWK2) trade lower. Chicago has slumped by 25% from its recent record peak while the loss in Paris has been lower at 15%. With the harvest of already planted winter wheat in Ukraine not starting until July, the current peace talks have raised hopes farmers will be able to harvest what they planted. In the US and Canada, as well as Europe, farmers are likely to respond to higher prices by allocating a bigger acreage to wheat planting this spring. Regarding the US acreage which may reach a six-year high, the USDA will publish its Prospective Planting report on March 31. In the short term, more clarity on global wheat inventories, especially in exporting countries, may come with a report from the International Grains Council today.
US Treasuries (IEF, TLT). The Federal Reserve will not stop until inflation is under control, that is the message delivered by Powell yesterday. Two-year yields rose to test 2%, while the spread between 10-year and 5-year US Treasury yields dropped briefly below 0%. The bond market is telling us that a recession is becoming a bigger probability. Therefore, the yield curve will continue to flatten.
EU Sovereigns (VGEA, IS0L, IGLT). Haven demand waned yesterday as Russia and Ukraine progressed with peace talks, letting yields soar across the euro bloc. We might see yields resuming their rise on the back of a hawkish FOMC meeting yesterday. Sovereigns from the periphery will be more at risk as the only element to limit their spread widening relates to speculations of an E.U. bond joint issuance, which we believe will take a long time before being agreed upon. The market today will focus on Lagarde’s speech.
Russian government bonds (RSX). The Russian Finance minister said that there is a chance that the USD interest payment for two eurodollar bonds might not go through. If the payment fails, Russia will make the payment in the ruble, which would constitute a default. We might continue to get sporadic news this week, but a default will only be confirmed at the end of the bonds’ 30-day grace period.
What is going on?
FOMC meeting brings hawkish message on QT, higher projections of Fed funds rate. The FOMC statement and Fed Powell press conference generally surprised on the hawkish side as the Fed indicated a slightly higher trajectory for the Fed funds rate than the market was pricing ahead of the meeting (particularly for 2023, where the market adjustment to the new forecasts was greatest). The Fed hiked 25 basis points as most expected, but one voter – St. Louis Fed President James Bullard – dissented with a vote for a 50-basis point hike. The chief impression is that the Fed now views it likely it will hike 6 more times this year, with one hike of possibly 50 basis points, and that it will hike 100 more basis points to 2.75%. Formerly, the Fed saw its hiking cycle as something that would prove gradual over the 2022-24 time frame, but the new forecast trajectory suggests the Fed now sees a steeper path of hikes this year (largely matching market expectations) that will end sometime in 2023, with the assumption that inflation is coming down to the acceptable range by 2024 (new forecasts for PCE core for 2022-24 are 4.1, 2.6 and 2.3, up from 2.7, 2.3 and 2.1 in the December forecasts). Somewhat surprisingly, the statement indicated that the Fed expects to begin balance sheet at a “coming meeting”, which Fed Chair Powell said could be as soon as the May FOMC meeting in the press conference, where he also indicated that balance sheet reduction would be more rapid than in the prior cycle from late 2017 to 2019.
Ukrainian president Zelenskiy addresses US Congress, asks for more support. In an address to the US Congress, Ukrainian President Volodymyr Zelenskiy appealed to the US for more involvement in Ukraine’s defense against the Russian invasion. In the wake of the speech, US President Biden called Russian leader Putin a war criminal and authorized an additional $800 million in new military support, including air-defense, drones, anti-armor systems and small arms and ammunition. Russia and Ukraine are said to be discussing a peace plan, but there are no signs of change on the ground as the war grinds on.
European car sales hit the lowest level on record in February. Sales dropped by 6.7% driven by continued global supply chain issues involving constraints on semiconductors used in cars and recently certain parts produced in Ukraine are being disrupted due to the war and causing production to be halted in Europe.
Australian ASX 200 Index (ASX200) rallied 1.1% to 7,251, its best close since February 21, but still south of the key 200-day moving average near 7,335. The rally was stoked by the shift in sentiment, especially the anticipated Chinese stimulus measures, as iron ore has rallied and BHP Billiton shares rose 1%. Australian payrolls rose by 77.4k in Feb. (vs. +37k expected) and the January payrolls number was revised 15k higher. Australian unemployment fell to a new post-2008 low of 4.0% in Feb. (4.1% expected, 4.2% in Jan.) as the Participation Rate actually rose above pre-pandemic levels.
What are we watching next?
Bank of England meeting today – with the market expecting the BoE to deliver a 25 basis point rate hike to take the policy rate to 0.75%, which was the policy rate prior to the outbreak of the pandemic. The UK has been beset with inflationary headwinds linked to soaring energy prices and supply constraints in labour, but the BoE is expected to steadily tighten policy this year, although at a slower pace than the US Fed as the year wears on.
Bank of Japan meeting tonight – the Bank of Japan is expected to stand pat on its policy of yield-curve-control (YCC) , under which it has declared a cap of 0.25% on the 10-year Japanese Government bond, a level that has come into view again after yields fell for a time on the Russian invasion of Ukraine. Theoretically, further rises in global yields elsewhere will mean that Japanese yields can’t move in sympathy and that the Japanese yen will continue to absorb the pressure as it has done recently on the renewed rise in yields. Keep in mind that the yen is at record low levels in CPI-based, “real effective” terms and that the end of the financial year in Japan is coming up at the end of this month, a calendar point that has often seen strong swings in the JPY.
Earnings Watch. Today’s earnings focus is FedEx. Analysts expect FedEx revenue growth of 9.2% y/y and unchanged EPS of $4.83 indicating that growth is coming without the option to expand operating margins despite favourable freight rates.
Today: Verbund, Veolia Environment, Enel, Accenture, FedEx, Dollar General
Friday: China Merchants Bank, CITIC Securities, Vonovia, Ping An Insurance, Zijin Mining Group
Economic calendar highlights for today (times GMT)
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