Financial Financial Financial

Financial Markets Today: Quick Take – March 23, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Equity markets are buoyant as the S&P 500 Index yesterday managed to rally through its 200-day moving average despite recent hawkish Fed comments driving a fresh spike in treasury yields all along the US yield curve, suggesting that the Fed has yet to get ahead of the curve. Oil prices remain firm as Russia shut a major export pipeline that delivers crude to a Caspian port, purportedly for repairs.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - despite the US 10-year yield is relentlessly climbing to 2.4% and financial conditions continue to tighten US equities are extending their recent really with S&P 500 futures trading just above the 4,500 level this morning. The recent move has been driven by technology stocks and it seems the market is confident that the Fed’s tightening cycle will not derail the underlying momentum. If the risk-on sentiment continues today the 100-day moving average in S&P 500 futures at 4,542 is the key resistance level to watch.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) Hang Seng Index rose 1.5%. Chinese tech stocks led the charge higher. Hang Seng TECH Index (HSTECH.I) was up more than 2%. Xiaomi (01810) announced 4Q21 results beating consensus and a HK$10 billion buyback. Xiaomi initially jumped more than 9% but was 4.5% higher at the time of writing. Bilibili (09626) rose more than 15% in the morning before paring some of the gain and still up 9%. Anta Sports (02020) reported slightly better than consensus revenues and earnings, but operating margins declined due to higher marketing expenses. In A shares, CSI300 was up 0.5%. Hydrogen, properties, and pharmaceuticals were among the best performers.

Stoxx 50 (EU50.I) – European equities are following the rest of the market higher with Stoxx 50 futures trading above the 3,850 level this morning with mining stocks expected to be driving the gains today. The key risks to monitor in Europe are developments in Ukraine and to what extent ECB will choose a more aggressive stance on rates as the Fed has clearly chosen to get ahead of the run-away inflation train.

USDJPY the rise in USDJPY continues apace as US treasury yields rose further yesterday. The US 10-year Treasury benchmark has advanced over 50 basis points over the last two weeks, while the 10-year Japanese government bond has only lifted about six basis points and trades below 0.25%, where the Bank of Japan has vowed to keep it capped. This means that any rise in yields will theoretically transmit to the Japanese yen, which has been the case as the pair has roared nearly 5% higher over that time frame. Interesting to see if the BoJ or the Japanese Ministry of Finance finds the movement too disorderly for its taste as any change in stance (policy shift, intervention) could suddenly deflate this rally. As well, exporters may look to hedge forward currency exposure after the end of the financial year next week on March 31.

EURUSD – despite the retreat from important resistance over the last several days, this is a rather strong performance from the euro, as the US dollar has been supported by an enormous run higher in US treasury yields, a move that has been only matched in direction and not at all in magnitude if we look at EU yields. So, from here, watching whether any easing up of the rise in US yields will support a fresh rally as the backdrop is euro-supportive this year, given the new huge fiscal outlays from the EU and Germany this year. The German Bund yield reached the positive 50 basis point milestone for the first time for the cycle yesterday and the first time since late 2018. The price action appears sticky for EURUSD around 1.1000.

Crude oil (OILUKMAY22 & OILUSMAY22) trades higher with focus on Thursday’s meeting in Brussels between EU and NATO leaders which may result in further sanctions being imposed on Moscow. In addition, the API reported a 4.3 million barrel drop in US crude inventories versus expectations for a 4.3 million increase when official EIA data is released this afternoon. On the demand front, the market is keeping a close eye on whether the recent surge in gasoline and not least diesel has started to negatively impact demand. Covid related lockdowns in China are already creating a great deal of uncertainty regarding demand from the world’s top importer. The average true range in Brent has dropped from a March 9 peak at $11.4/b to $8/b, still four times the normal expected daily trading range. 

Gold (XAUUSD) trades lower but above key support in the $1890 area as it continues to put up a fight against surging US bond yields following hawkish comments from Fed chair Powell. Short-term US treasuries are heading for their worst quarterly performance in almost four decades and the prospect of a rapidly tightening monetary policy outlook has seen US 10-year real yields jump by more than 50 basis points since the March 8 safe-haven low. Instead, investors have been moving back into stocks and gold with total holdings in bullion-backed ETFs continuing to rise despite golds recent lackluster performance. Crude oil remains an important driver for gold and silver with price developments impacting inflation and growth as well as the level of geopolitical risks. Recent weakness led by silver (XAGUSD) with the XAUXAG ratio at a one-week high.

Soybeans (ZSK2) trades near a ten-year high on a global shortage of oilseeds, driven by lower production in South Africa due to drought, an expected sharp contraction in sunflower planting in Ukraine, an uncertain outlook for the canola crop in Canada, and not least surging prices of petroleum products lifting demand for plant-based fuels. In Ukraine, the agriculture minister has said the spring crop sowing area may be cut to 7 million hectares from 15 million initially expected. They hope to harvest 4 million hectares of winter wheat from 6.5 million sown.

US Treasuries (TLT, IEF). The selloff in bonds continues as Fed officials back Powell over half-point hikes. Ten-year US Treasury yields continue their rise towards their decennial upper trend line, which they could test for the first time since 2018. Two-year year yields are already testing their descending upper trend line at 2.17%. The yield curve steepened slightly with the 2s10s spread widening to 21bps after dropping to 13bps. The one year forward, two-year Treasury yields soared to 2.78%, starting to attract bids. We still see the potential for the yield curve to continue to flatten, and for 2-year yields to break above 2.5%.

UK Gilts (IGLT). Markets expect the BOE to tighten monetary policy faster on the back of a hawkish Fed. The Gilt yield curve bear-flattens with 10-year Gilt yields soaring 6bps to 1.70%, and 2-year Gilt yields rising 9bps to 1.41%. Gilts are likely to continue to selloff and the yield curve to flatten as the UK CPI rose to 6.2% in February, faster than expected.

What is going on?

Biden threatens more sanctions on Russia and action against China. Risk of secondary sanctions on China is also sending risk waves in Asia even as most countries maintain a neutral stance but are still closely tied to China. Supply chains from Asia to EU may come under further pressure as automakers and tech giants look to avoid rail routes through Russia and shift to sea routes, causing further congestion. Rising Covid cases in China and continued mass testing is also threatening shipping delays.

Two more Fed officials sound hawkish – with yesterday seeing non-voter Mary Daly, widely considered a former dove arguing for removing accommodation and voter Loretta Mester of the Cleveland Fed arguing for a 50-basis point hike and for the Fed funds rate to sit at 2.5% at year end. (Market expectations have risen rapidly of late, but currently sit at around 2.25% through the December FOMC meeting). St. Louis Fed president Bullard has been out recently arguing for a 3.0% policy rate by year end after dissenting on the hawkish side at last week’s FOMC meeting. He will speak twice today.

Adobe outlook spooks investors. Adobe reported earnings last night that were in line with estimates, but the near-term outlook was a bit below consensus confirming the feared slowdown as competition is heating in the lower end of the product range. Adobe grew revenue 9.1% y/y in the last quarter which was the first quarter with less than double-digit growth since 2015.

Yen remains under pressure. A significant hawkish shift in Fed’s stance since its first hike of the cycle last week is weighing on the Japanese Yen (JPY) as noted above in the USDJPY comments. The classic risk-on trade AUD/JPY has spiked in almost vertical fashion recently with AUD supported due to the rise in commodity prices and JPY pressured by yield spreads. In Asia, expect further strength in Indonesia rupiah (IDR) due to the commodity export basket while the Philippine peso (PHP) may come under pressure due to the high oil import bills.

What are we watching next?

Are the Fed and the market engaged in a dangerous game? The US federal reserve continues to trot out one hawkish surprise after another, with the latest a surprisingly hawkish broadside from Fed Chair Powell on Monday, less than a week after the hawkish surprise delivered at the FOMC meeting on March 16. Over the last two weeks, US 2-year and 10-year treasury yields have risen more than 50 basis points over the last two weeks. And yet the market has shrugged off this fresh spike in yields, suggesting that the Fed is still badly behind the curve if its intention is a significant tightening of financial conditions. Some even suggest that the Fed’s rate hikes are unlikely to work very quickly on the economy as consumers have exited the pandemic with strong balance sheets and supply-side disruptions have little to do with the policy rate in any case. Therefore, the Fed may be targeting a “negative wealth effect” to bring down demand and therefore prices by taking down prices for financial assets, from housing to equities.  This might more quickly be achieved through a strong quantitative tightening if the Fed dares to go there. Either way, the market and the Fed may be locked into a dangerous battle, with the Fed prepared to continue turning the screws until something “breaks”.

Earnings Watch. Today’s key focus is Tencent and General Mills with the former being the most important earnings for the Chinese equity market. Recent earnings from China have been mixed and technology regulation continues to cause headwinds for technology companies with Tencent’s revenue growth dropping to the lowest in more than 15 years in the last quarter. Analysts are expecting revenue growth of just 8.7% y/y and EPS growth of -18% y/y. General Mills is expected to deliver 0.6% revenue growth in FY22 Q3 (ending 28 February) with operating margins expected to decline as input costs are soaring.

  • Today: Tencent, China Mobile, WuXi AppTec, IHS Markit, Yihai Kerry Arawana, Cintas, General Mills
  • Thursday: China Life Insurance, Industrial Bank, Foshan Haitian Flavoruing, China CITIC Bank, NIO
  • Friday: China Shenhua Energy, Bank of Communications, Anhui Conch Cement, Longfor Group, People’s Insurance, China Everbright Bank, Meituan

Economic calendar highlights for today (times GMT)

  • 0800 – South Africa Feb. CPI
  • 0815 – Sweden Riksbank’s Breman to speak on inflation
  • 1200 – UK Bank of England Governor Bailey to speak at BIS meeting
  • 1200 – ECB's Nagel to speak
  • 1200 – US Fed Chair Powell to speak on BIS Panel (+Q&A)
  • 1230 – UK Chancellor Sunak Spring Statement
  • 1400 – US Feb. New Home Sales
  • 1430 – EIA’s Weekly Crude and Fuel Stock Report
  • 1900 – US Fed’s Bullard (Voter) to speak
  • 2350 – Japan Bank of Japan meeting minutes (of Jan. Meeting)
  • 0105 – US Fed’s Bullard (Voter) to speak
  • 0130 – Japan Bank of Japan’s Kataoka to speak 

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