What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures are trading around the 4,385 level in early European trading with the 4,400 level having been a key resistance level recently. The recent rebound in technology stocks has lifted US equities this week, but with rising commodity prices today extending yesterday’s move we could see both US 10-year yield and lower equities with the 4,341 being the first level to test in S&P 500 futures on the downside.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - recovered from early retracement and continued to move higher the third day in a row, though much more modestly. Hang Seng TECH Index (HSTECH.I) was down a bit more than 1%. China Telecom (00728) rose more than 2% after reporting inline FY2021 results and raising dividend payout ratio to 60% from 40%. CK Hutchison (00001) and CK Asset Holdings (01113) were up 3% after reporting 2021 results.
Stoxx 50 (EU50.I) – Wednesday’s big move higher was faded in yesterday’s session and Stoxx 50 futures are so far unchanged compared to yesterday’s close. We are moving into the weekend and investors might de-risk portfolios and equity exposure, and more importantly commodities are moving higher again led by higher Brent crude. If momentum extends in commodities today, then we expect risk-off to accelerate in European equities throughout the session.
EURUSD – is making a bid at a bullish breakout into the higher range above the 1.1120 low that was broken on the Russian invasion of Ukraine. Today’s close is a tactical focus, with the pair needing to rally and close clear of the 1.1100-50 area to set the focus back up into the range to almost 1.1500. 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. For the near term, developments in the war in Ukraine, especially security concerns for Europe if Russia were to somehow escalate or retaliate against EU countries for sanctions and military aide to Ukraine, are the chief risks.
AUDUSD – the bullish reversal in AUDUSD is effectively complete as the pair rose above 0.7400 overnight, well above the 0.7350 area needed on today’s close to reverse the recent back-slide to the lower range. Supporting the currency are the same factors that supported the original rally to the 0.7350+ area after the breakout of war in Ukraine: the country’s impressive commodity export portfolio that promises a strong current account surplus as far as the eye can see, with the RBA (rather aggressively) assumed to eventually hike rates in line with other central banks, even if they seem reluctant to achieve lift-off, with a focus on wage growth as a key indicator. The key test for new bullish technicals would be any strong backsliding in risk sentiment.
Crude oil (OILUKMAY22 & OILUSMAY22) and not least ICE Low Sulphur Gasoil Diesel (FPJ2) jumped again yesterday after traders concluded it was wrong and unsustainable for prices to return to pre-war levels at this stage, where peace talks are showing no signs of a breakthrough. In addition, the physical market continues to signal tightness, with self-sanctioning by traders driving Russian Urals to a near 30-dollar discount to Brent. Global demand on the other hand has started to soften, not least due to Covid lockdowns in China which Goldmans estimate will reduce Q2-22 demand by 700k b/d. Overall however the potential loss of barrels from Russia during the coming months will underpin prices with a peace deal the main catalyst for renewed weakness.
Gold (XAUUSD) bounced from key support below $1900 this week with Treasury yields and the dollar ´both declining after the FOMC started its long-awaited rate hike cycle. Also supported by renewed crude oil strength after Russia said they saw no major progress in current peace talks with Ukraine. While the stock market bought into Fed Chair Powells optimistic view on growth, the gold market received a subsequent bid on worries that the Fed will struggle to curb inflation without risking a major slowdown. Long liquidation from leveraged funds wrongfooted by the latest 175-dollar slump has now slowed while total holdings in bullion-backed ETFs have seen continued daily increases since the start of the war. Key support at $1890/oz with a break above $1957 needed to signal fresh upside potential
US Treasuries (IEF, TLT). The Federal Reserve will not stop until inflation is under control, that is the message delivered by Powell on Wednesday. Two-year yields continue to trade just below 2%, while the spread between 10-year and 5-year US Treasury yields continues to test support at 0bps. 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). European bond yields are little changed after Russia said that reports of major progress with Ukraine were wrong. Sovereigns from the periphery continue to be at risk as the ECB ends stimulus early. The only element to limit the widening of their spreads is the possibility of a new E.U. bond joint issuance, which we believe will take a long time to be agreed upon by state members.
UK Gilts (IGLT). Gilts rallied yesterday following the BOE’s dovish hike. However, markets show little confidence that the central bank will remain watching as inflationary pressures intensify. Indeed, investors pared back rate hike expectations only by 25bps, indicating that the BOE base rate will still rise to 200bps by the end of the year.
Russian government bonds (RSX). The Russian Finance minister said that there is a chance that the interest payment for two eurodollar bonds might not go through. However, yesterday there were reports saying that JP Morgan processed bond payments and sent the money to the payment agent, Citigroup, giving hopes that a default might not occur. Yet, as the war in Ukraine intensifies and sanctions escalate, it's a matter of time before Russia defaults on its debt.
What is going on?
Bank of Japan doubles down on current policy in meeting overnight, with Governor Kuroda saying there is no reason for the BoJ to hike rates. The BoJ maintains a yield-curve-control policy on JGB’s, with a cap on the 10-year yields at 0.25%. Overnight, Japan’s headline rose to a cycle high of 0.9% year-on-year as expected, but underlying, “ex fresh food and energy” CPI was a new cycle low of minus 1.0%.
Shenzhen covid lockdown ended for many parts of city today, which will help to ease concerns that this most important of Chinese export hubs will see further major disruptions after this week saw the most lockdowns at any time during the pandemic.
FedEx shares down 5% in extended trading. The US logistics company reported slightly worse than expected EPS despite slightly stronger revenue growth than expected. Most notably the company’s COO said on the earnings call that the previous goal of double-digit margin in their Ground unit was not feasible any longer underscoring the input cost pressures that companies are facing.
Copper (COPPERUSMAY22) and iron trade (SCOK2) trade higher this week after Beijing promised to bolster capital markets and support the embattled property sector. This following last week’s mayhem which saw LME nickel spike 250% only to be halted for more than a week. Since reopening on Tuesday, LME nickel has traded limit down and given the price action in Shanghai, and even with an expanded 12% limit, it may still take a few more days before trading will resume.
Consortium of drugmaker to make generic version of Pfizer’s Covid-19 drug. The Medicines Patent Pool (MPP) announced 35 drug makers globally had entered into agreement with MPP to manufacture generic versions of Pfizer’s oral Covid-19 treatment for supply in 95 low-and middle-income countries. Five Chinese drug makers are on the list, including listed companies Shanghai Fosun (600196), Zhejiang Huahai (600521), Apeloa (000739), and Zhejiang Jiuzhou (603456).
The Bank of England delivers a dovish surprise. The BoE hiked 25 bps, with one dovish dissenter (Cunliffe, who wanted no hike), taking the policy rate to 0.75%. Despite the BoE anticipating that inflation is set to climb to "around 8%" in Q2 and perhaps even higher later, the bank believes that inflation further out is set to fall back "materially". This sentence in the new statement underlines the strong concerns the MPC is feeling: “Developments since the February Report are likely to accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes". The Bank raised its concerns about the trajectory of employment and economic growth and makes it clear that the drivers of inflation (supply-side) are not something its monetary policy can address. On further tightening, the statement says “some further modest tightening in monetary policy may be appropriate in the coming months". That is a downgrade from “likely to be appropriate” in the early February report. Sterling sold off quite deeply, but had retraced much of its fall against the weak US dollar yesterday, if not the euro.
French presidential election update. French president Emmanuel Macron presented his economic program, if he is elected. He proposed a major reform of inheritance rights and to raise the retirement age to 65 instead of 62. Compared with other European countries, tax on inheritance is very high in France. This is a very sensitive issue for voters. Macron wants to increase the allowance on direct line inheritance from 100,000 euros to 150,000 euros. According to all the latest polls, Macron is way ahead of the crowd in the first round (around 30 % of voting intentions). The far-right leader Marine Le Pen is in second position, around 19-20 %. These are still early days. But it is likely we will see a repeat of the 2017 presidential election.
What are we watching next?
US President Biden to call Chinese leader Xi Jinping today, warning ahead of the call that there will be consequences for China if it chooses to support Russia, with sources cited by Bloomberg suggesting a growing concern within the Biden administration that Xi Jinping may move to support Russia, at least on the impact of sanctions there, but potentially also with military equipment.
Massive options “witching”, or expiry today – this is the day of quarterly expiration of a host of financial derivatives, especially options on equity futures. Hedging related to derivates with some $3.5 trillion in underlying exposure could explain some of the price action in US equity markets this week ahead of today’s options expiry. In addition, options with strike prices near the current S&P level are said by some sources to be the largest in years.
Earnings Watch. Light earnings calendar today with little market impact.
- Today: China Merchants Bank, CITIC Securities, Vonovia, Ping An Insurance, Zijin Mining Group
Economic calendar highlights for today (times GMT)
- 1000 – Euro Zone Jan. Trade Balance
- 1230 – Canada Jan. Retail Sales
- 1400 – US Feb. Existing Home Sales
- 1720 – US Fed’s Barkin (non-voter) to speak
- 1800 – US Fed’s Bowman (voter) to speak
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