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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - brutal selloff yesterday was felt the most in Nasdaq 100 futures down 4% driven by theme baskets such as bubble stocks, NextGen medicine, green transformation, and e-commerce. Across equity factors we see value and low-volatility stocks outperforming relatively. Nasdaq 100 futures are bouncing back in trading around the 12,390 level with the 12,520 being the first resistance level to watch and today’s low print is the natural support level to watch if risk-off resumes.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Hong Kong equity markets gapped down on overseas market weakness and China slowdown fear. Hang Seng Index slid 2% and Hang Seng TECH Index dropped 3%. Energy and materials stocks slid as well as, following declines in crude oil and industrial metal prices amid intensifying fear of a sharper downturn in the Chinese economy. After opening lower, CSI300 rallied to rise 2%, led by surges in infrastructure names and semiconductors. Infrastructure names were well bid following the Chinese authorities’ latest initiative last Friday to boost the development and modernization of county seats throughout China’s rural areas.
Stoxx 50 (EU50.I) - Stoxx 50 futures joined the risk-off move yesterday declining 3% but are trying to rebound today. This pattern of selloffs followed by 1-2 sessions of rebound could be coming a repeating pattern for quite some time as this pattern is typical of longer sell-offs. Stoxx 50 futures are trading around the 3,540 level with the 3,600 level being a big resistance level and the 3,400 level being the support level. Many forces are still weighing Europe’s economy from the war in Ukraine, a slowing China, and the cost-of-living crisis, and yesterday’s Sentix reading for May on investor confidence showed that sentiment continues to deteriorate m/m.
AUDUSD and USDCAD – the USD strength yesterday was less of a story yesterday than the pronounced weakness in the smaller currencies traditionally most correlated with risk sentiment, like the commodity dollars and emerging market currencies, which fell sharply against the G3 currencies. Importantly, AUDUSD crossed below the technically significant 0.7000 level for the first time since early 2020. This level was major support before and after the pandemic-outbreak turbulence. Similarly, USDCAD has poked above the key range highs above 1.2950 and tested above the psychologically significant 1.3000 level yesterday. Huge range potential to the downside for these currencies if weak global risk sentiment continues, with a massive drop in oil prices yesterday adding perhaps more pressure on CAD here.
USDJPY and JPY pairs – yesterday’s combination of weak risk sentiment, a strong correction lower in global bond yields, and a seven-dollar meltdown in oil prices was the ideal mix for a smart comeback in the Japanese yen, which has been weak in recent months on the rising yields and energy prices due to the Bank of Japan’s insistence on maintaining a 0.25% cap on 10-year Japanese government debt. If this set of circumstances extends, the JPY could suddenly prove the highest beta currency to swings in the market, though so far its comeback has been very muted despite the strong support in the background.
Cryptocurrencies - Bitcoin and Ethereum suffered an ugly meltdown yesterday, with Bitcoin accelerating on hitting new lows for the year and selling off over 4,000 dollars from the day’s highs before reaching lows below 30k overnight and bouncing about 2,000. Ethereum sold off more than 10% from the day highs yesterday but failed to hit new lows for this year and bounced more vigorously than Bitcoin from the lows overnight.
Gold (XAUUSD) continues to find support at $1850 after another round of stock market turmoil helped drive a softening in US Treasury yields. Signs of softening economies as rate hike and inflation bites has reduced the number of US rate hike expectations before next February by one to eight. Gold continues to be bought as a hedge against a policy mistake from the FOMC, I.e., that it hikes to the point it tips the economy over the edge. Lower oil prices act as a small drag given its inflationary and geopolitical significance. Support at $1850 and $1837 while key resistance remains some distance away at $1920. Also focus on silver which after another freefalling day once again managed to find some support ahead of crucial support around $21.50.
Crude oil (OILUKJUL22 & OILUSJUN22) remains rangebound after reversing lower yesterday in response to growing economic growth concerns and after the EU softened its proposed sanctions on Russian crude exports. As central banks tighten the screws and China’s lockdown-related growth slump continues, the market has – for now - turned its attention to the prospect of lower demand helping to offset persistent supply concerns. Despite the recent setback which tends to soften spreads, the prompt time spread remains firmly in backwardation for both WTI and Brent, a sign of continued market tightness. In Brent, either a break above $105.80 or below $103.20 may trigger a two-to-three-dollar extension. Monthly oil market reports from EIA Today will be followed by OPEC and IEA on Thursday.
US Treasuries (TLT, IEF) – US yields from 5-years out to 10-years toyed with the cycle highs from late 2018, which in turn represent the highest yield for these maturities since 2011. A break to new highs would be the first new decade highs for any five-year or longer Treasury yield benchmark since 1981. (The 5-year and 7-year yields actually peaked a hair above the 2018 highs intraday yesterday) As noted below, a series of US treasury auctions is slated for today through Thursday, with these and further developments in risk sentiment to set the tone.
What is going on?
Fed warns of deteriorating liquidity conditions in its annual Financial Stability Report – something that has been in ready evidence in global markets of late, as the US dollar and US treasury yields have seen an aggravated rise. “According to some measures, market liquidity has declined since late 2021 in the markets for recently-issued US cash Treasury securities and for equity index futures.”... and “While the recent deterioration in liquidity has not been as extreme as in some past episodes, the risk of a sudden significant deterioration appears higher than normal. “ The report also fretted risks from commodity market volatility and even stable coins in the cryptocurrency market. All of this before the Fed is set to ramp up balance sheet tightening starting in June 1.
Bubble stocks, Tesla, and crypto risk cluster under pressure. In early 2021, we talked a lot about the bubble stocks, Tesla, and crypto risk cluster because these assets share the same underlying holder, primarily young men and moved together on risk-off. The high correlation has been less obvious during this sell-off because Tesla has managed to stay afloat, but already last week on our daily podcast we highlighted Tesla as a key indicator for risk sentiment in the market. Yesterday’s session saw a full and brutal correlated selloff with our bubble stocks and crypto baskets down 10% and 16%, and Tesla down 9%. Large growth investors such as Ark Invest with considerable concentration risk in these assets are a natural risk amplifier in these selloffs.
Palantir Q2 outlook disappoints. Palantir posted Q1 results yesterday meeting estimates but a worse than expected revenue outlook for Q2 spooked investors sending the shares down 21% to a new all-time low.
The industrial metal sector has suffered more than others during the recent correction in commodities. From a peak on March 7, the Bloomberg Industrial Metal Spot index has since slumped by 24%, thereby surrendering most of its 2022 gains. Copper and aluminum prices have been dragged lower by a combination of central tightening to slow economic growth and not least the Chinese authorities remaining committed to zero covid policies and following the dismal export numbers from China reported yesterday. While near-term pressures are set to stay, a reopening from lockdowns and subsequent focus on China’s infrastructure boost could end up being the tipping point in these industrial metals.
The Eurozone Sentix investor confidence index falls further in May. It was out at minus 22.6 against minus 18 in April and minus 20.8 expected. This is the lowest level since June 2020. The current conditions index worsens too, at minus 10.5. But the most worrying thing is the crash in the expectations index at minus 34 (the lowest level since end of 2008). This is not only about the consequences of Ukraine war. Investors consider that the global economy is facing a perfect storm and that the risk of global recession is increasing fast mostly because the two biggest export economies in the world (Germany and China) are seeing their new export orders in the manufacturing sector fall sharply.
EM sell-off in the cards? Dollar dominance and higher US yields mean emerging currencies may be poised for a selloff as well. The Indian rupee (INR) slid to record lows of 77.53/USD on Monday despite the Reserve Bank of India raising rates last week ahead of the Fed. The RBI has huge forex reserves of $600bn, and this may be used to defend the rupee. But EM currencies broadly remain at risk of selloff given the lower room to hike rates in step with the Fed which means capital outflows.
Australian business confidence slips and Australia’s 10-year bond yield climbs to 3.5% (an 8-year high), offering almost a better yield than the ASX200’s average dividend yield of 4.6%. In Australia today, business confidence data released showed confidence dropped from a 5-month high in April but remained above the long-run average driven by economic reopening trade. The NAB Business Confidence Index showed sales and profit levels measured rose, but cost pressures continued to climb after hitting record growth rates in March. There’s a clear divergence here, but we think it’s only a matter of time before business profits and sales data collected fall, as we’ve seen in the ASX200 earnings season, with earnings growth falling and expected to continue to fall. Tomorrow’s Australian consumer confidence data is on watch, tipped to show consumer sentiment falling for the sixth month running.
What are we watching next?
US Treasury auctions today through Thursday. The rise in treasury yields into yesterday’s peak reached right to the highs of 2018 before falling back sharply. As it was a day of very poor risk sentiment, is this a sign that US treasuries are finally attracting a bid as a liquidity safe haven? One key measure of demand in the market is up later today with a US 3-year T-note auction, with the more important bellwether 10-year T-note auction up tomorrow and a 30-year T-bond auction Thursday. The longer yields are particularly important for equity market valuations.
Is Tesla halting Shanghai production or not? There has been a lot of chatter over the past 48 hours about whether Tesla is halting production at its Shanghai plant due to lockdowns and supply issues, but Tesla has said publicly that these rumours are false, and production has not been halted. Given how important Tesla is for risk sentiment this is an important development to track.
Earnings Watch. In Europe this morning Bayer has reported better than expected Q1 EBITDA while Munich Re is booking €700mn loss related to the war in Ukraine. In the US session, the key earnings to watch are Electronic Arts and Unity Software with both related to demand for gaming and mobile entertainment usage. Coinbase is also reporting Q1 earnings and given the latest decline in cryptocurrencies there will be extra focus on the crypto exchange’s outlook.
- Today: Suncor Energy, Bayer, Munich Reinsurance, Sony, Nintendo, Mitsubishi, Endesa, Alcon, Occidental Petroleum, Electronic Arts, Coinbase Global, Trade Desk, Unity Software, Roblox
- Wednesday: Genmab, E.ON, Siemens Energy, Continental, Toyota, SoftBank, Takeda Pharmaceuticals, Delhaize, Mowi, Swedish Match, Walt Disney, Coupang
- Thursday: Verbund, KBC Group, Brookfield, Fortum, Siemens, Allianz, Merck, Hapag-Lloyd, RWE, Atlantia, Snam, NTT, SoftBank Group, Aegon, Naturgy Energy, Motorola Solutions
- Friday: Deutsche Telekom, KDDI, Honda Motor, Alibaba
Economic calendar highlights for today (times GMT)
- 0900 – Germany May ZEW Survey
- 1000 – US Apr. NFIB Small Business Optimism survey
- 1140 – US Fed’s Williams (voter) to speak
- 1315 – US Fed’s Barkin (non-voter) to speak
- 1400 – ECB's Nagel to speak
- 1540 – ECB's Villeroy to speak
- 1600 – EIA’s Short-term Energy Outlook
- 1700 – US Fed’s Waller (voter) and Kashkari (non-voter) to speak
- 1720 – ECB’s Guindos to speak
- 1900 – US Fed’s Mester (voter) to speak
- 0030 – Australia May Westpac Consumer Confidence
- 0130 – China Apr. PPI and CPI
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