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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures gave all their gains from post the FOMC rate decision and then more, declining 3.5% from Wednesday’s closing price. Yesterday’s session showed that the 4,100 level is a clear support area with bids coming in, so this is the key level to watch today should risk-off continue, and the 4,171 level is the key level on the upside.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Following sharp reversal of the US markets overnight, Hang Seng Index (HSI.I) fell over 3% and Hang Seng TECH Index (HSTECH.I) was almost 5% lower. Mega-cap Chinese internet stocks fell 4% to 8%. EV-makers were 5% to 10% lower. China’s doubling down on its Dynamic Zero Covid policy in a meeting chaired by President Xi yesterday also increased investors’ concerns about persistent and pervasive lockdowns. CSI300 (000300.I) fell 2.4%.
Stoxx 50 (EU50.I) - it was a significant risk-off session yesterday in equities with Stoxx 50 futures down 2.9% from the open to close price. This morning Stoxx 50 futures are attempting to rebound trading around the 3,650 level (just above yesterday’s close price), but economic activity is worsening in Europe, and we expect equities to remain weak amid rising inflation and interest rates.
The US dollar – the USD charged higher yesterday despite the Powell Fed having surprised on the dovish side of expectations at the Wednesday FOMC meeting. The move higher is a sign of tightening liquidity for global markets as the USD itself, when it is this volatile, is an indicator and driver of financial- and market conditions. The Fed may have a difficult time doing anything about the US dollar this time, relative to early 2016, when the Yellen Fed eased off the tightening message in the forward guidance as it pointed to the spiking US dollar as a strong headwind.
EURGBP and GBPUSD – the Bank of England meeting (wrap below) triggered a steep slide in sterling, with GBPUSD posting new cycle lows and possibly headed for 1.2000 after the US dollar also firmed sharply on the about-face in risk sentiment yesterday. EURGBP ripped higher and cleared local pivot levels, including the 0.8512 high of the year. The next major resistance area there, should the break hold, is up above 0.8800. The UK is in the vanguard of economies that are beset with stagflationary risks, having been impacted on the supply side by the spike in energy prices that began even before the war in Ukraine and due to many Brexit-linked labor supply shortages. The Bank of England said that the UK population is suffering the second largest drop in living standards since 1964.
Cryptocurrencies took a major hit yesterday, following the movement in the equity market, and the whole crypto space market cap is down close to 7 % over the past day. Bitcoin is down 8 %, suffering the worst drop since January 2022.
Gold (XAUUSD) suffered a sharp reversal yesterday as the post-FOMC relief rally in bonds and weaker dollar proved short lived as intensified concerns over inflation triggered a renewed sell off in US bonds with the 10-year yield pushing firmly above 3%. Silver meanwhile dropped back towards key support in the $21.50 to $22 area with the XAUXAG ratio hitting a fresh eight-month high above 83. The fall was cushioned by renewed stock market turmoil but overall, the sentiment remains challenged by the historic and aggressive surge in yields and the dollar which has risen by more than 6.5% against a broad basket of currencies year-to-date. Support at $1850 and $1830.
Crude oil (OILUKJUL22 & OILUSJUN22) is heading for its second weekly gain with the focus switching from the risk of slowing demand due to Chinese lockdowns and rate hikes, and back to supply which continues to tighten. OPEC+ announced another 432k barrels/day increase in oil production for June but with OPEC10 (those with quotas) trailing by 800k barrels/day in April and Russia and Kazakhstan being other laggards, the group is currently not able to deliver the barrels they have targeted. In addition, the EU ban on Russian oil imports and a surprise US announcement about starting to refill its SPR already this autumn also underpinning the price. In Brent, the next level of resistance is the April high around $115 with support at $110.
US Treasuries (TLT, IEF) – US yields jumped higher yesterday, particularly at the long end of the US yield curve, as the 7-year and longer yields posted new highs for the cycle, and the 10-year benchmark yield burst above 3.00%. This shifts the focus to the 2018 high in 10-year yields at 3.25%.
What is going on?
The Bank of England triggers a steep slide in sterling. The BoE delivered the expected 25 basis point hike, with three dissenters wanting a 50 basis point hike, but Governor Bailey speaking out against larger hikes in the press conference. Two dovish members were against even announcing further tightening intentions. The bank also announced dour inflation and growth forecasts that suggest the Bank is only tightening reluctantly as a rear-guard action against inflation, seeing recession risks already in Q4 of this year now and predicting a -0.25% GDP growth for 2023, with the unemployment rate to begin rising from here. The 2022 inflation forecast was raised to 10.25% (from 5.75% previously) but forecast to fall to 3.5% in 2023. The Bank suggested it will only begin “active QT” (selling of bonds held rather than simply not replacing maturing bonds) in August after a further study of how to do so – dovish relative to expectations for a sooner start to QT.
The Standing Committee of the Chinese Communist Party’s Politburo (the Standing Committee) doubled down on the Dynamic Zero-COVID policy in a meeting yesterday. The meeting, which President Xi Jinping chaired, asserts China’s unswerving adherence to the Dynamic Zero Covid policy. The Standing Committee commands party cadres, government officials, and community leaders at all levels to unite their thinking and actions around the center of the Chinese Communist Party (the Party) and not to waver in pandemic control. The Standing Committee pledges to fight against narratives that “distort, question, or dismiss” China’s pandemic control policy. It is worth noting that the remark by the Standing Committee on a prior meeting on March 17 2022 that “more effective measures should be taken to achieve maximum effect in prevention and control with minimum cost, and to reduce the impact on socioeconomic development as much as possible” is missing this time and replaced by “protecting people’s basic livelihood and supplies of daily necessities and their need for medical care”.
Tokyo inflation unlikely to nudge BOJ. Japan’s Tokyo inflation surged to its highest levels in 30 years at 1.9% y/y - getting in close distance of the 2% target levels. Gains are still mostly driven by energy (up 25% y/y to constitute 1.1% points of the headline print) and base effects. No Wage inflation pressures mean easy Bank of Japan monetary policy is set to continue, but the weaker yen continues to add a layer of risk.
NOK weaker in wake of Norges Bank – the Norwegian central bank kept the policy rate at 0.75% and guided that it will “most likely” hike at the June meeting, saying it is happy with the current forecast of only hiking 25 basis points every quarter until 2024. Although the Norges Bank was the first G10 central bank to hike, its very slow pace of follow-on hikes has underwhelmed and there is no sense of urgency. With risk sentiment back in the ditch the NOK is sharply lower despite high oil prices and EURNOK crossed above 10.00 for the first time since late February.
Risk of technical recession in France. In March, France’s industrial production fell by 0.5 % month-over-month and manufacturing output fell by 0.3%. In addition, the February figures were revised lower to -1.2% / -0.9%, respectively. The impact of the Ukraine war, higher energy and transportation costs and a sharp drop in consumption in the first quarter are some of the main factors pushing industrial production down. Our baseline is that France’s economy will stagnate in the coming quarters, and the risk of a technical recession is rising fast. This will become very challenging for President Macron. Keep in mind that even in the case of a technical recession France’s GDP growth will at least grow by 2.7% over the year due to the significant carryover effect from the end of 2021.
Turkey is experiencing hyperinflation. According to the official figures, April Turkey CPI reached 69.97 % precisely – so just below the 70 % threshold. Core inflation was out at 52 %. PPI is skyrocketing at 122% - this basically means there is much more inflation in the pipeline.
What are we watching next?
Global food prices rose again in April and by how much will be revealed by the UN FAO when they release their monthly food price index today at 8am GMT. The index hit a record high in March with the year-on-year increase being 33.6 percent. Soaring food prices are eating household’s purchasing power in the developed countries. The 15-20 % lowest income quintile is the most vulnerable with food prices reaching records. Even with higher wages, most households are not able to cope with this new situation and face tough trade-offs (choosing between buying pasta or meat, for instance). Expect things to get worse, in the short-term. This will likely lead to a major drop in consumption in the coming quarters.
US Nonfarm Payrolls Change and Average Hourly Earnings today. The ADP private payrolls change number was weak in April, rising only 247k, which would be the weakest level since the pandemic outbreak if not eventually revised higher. Today’s official Nonfarm payrolls change number is expected at +380k. Other data suggest that the US jobs market remains very strong, especially the “quit rate” and job openings numbers, but as the US nears full employment, the payrolls increases may slow and the narrative may shift to whether a wage price spiral is developing, keeping the Average Hourly Earnings data in the spotlight. Today’s April AHE reported expected to show a +0.4% MoM rise and +5.5% YoY after +5.6% in March. Pre-pandemic, the highest reading back to 2007 was 3.7%.
Consumer spending is expected to weaken. E-commerce stocks were a big part of disappointing quarterly reports overnight from Etsy, Wayfair, Shopify, mimicking the weak results from Amazon. Etsy (ETSY) shares fell about 17%, Ebay (EBAY) shares lost about 12% taking e-commerce stocks to 2-yr lows. Ebay dropped its guidance saying consumer confidence has fallen and expects inflation and higher fuel prices to lower disposable income, especially in UK and Germany. As a house, we have a bearish view on stay home economy consumer spending stocks, given rates are rising.
Earnings Watch. Today’s focus in Europe is Adidas which has already reported in pre-market cutting its fiscal year margin guidance on lower-than-expected revenue in China. Adidas Q1 results are better than expected with revenue at €5.3bn vs est. $5.2bn and operating profit of €437mn vs est. €392mn. Today’s earnings focus in North America is Canadian Natural Resources which is an oil and gas exploration and production company that is expected to show revenue growth of 42% y/y in Q1.
- Today: Macquarie Group, Enbridge, Canadian Natural Resources, Adidas, Intesa Sanpaolo, ING Groep, Cigna
Economic calendar highlights for today (times GMT)
- 0730 – Sweden Riksbank Minutes
- 0730 – ECB's Villeroy to speak
- 0800 – UN FAO’s Global Food Price Index
- 0830 – UK Apr. UK Construction PMI
- 1115 – UK Bank of England Chief Economist Pill to speak
- 1230 – US Apr. Nonfarm Payrolls Change
- 1230 – US Apr. Unemployment Rate
- 1230 – US Apr. Average Hourly Earnings
- 1230 – Canada Apr. Net Change in Employment / Unemployment Rate
- 1315 – US Fed’s Williams (voter) to speak
- 1400 – Canada Apr. Ivey PMI
- 1500 – UK Bank of England’s Tenreyro to speak
- 1900 – US Mar. Consumer Credit
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