Summary: U.S. bank stocks and the equity markets experienced a relief rally, with the S&P 500 rising 2.3% on Tuesday. US CPI data came in broadly in line with expectations but the core measure was slightly hotter than expectations. Interest rate futures repriced and now leaned for a 25 basis point hike at next week’s FOMC meeting. The yield on the U.S. 2-year Treasury notes reversed the dramatic decline and bounced to 4.25%.
U.S. stocks bounced on Wednesday, with Nasdaq 100 rising 2.3% to12200 and S&P500 up 1.7% to 3919. In the near term, the relief rally may be able to take the S&P500 up to the 4020/30 level but the trend remains down. The credit market stabilized somewhat on Tuesday but the development there warrants close monitoring for signs of whether the impact of the regional bank saga can be contained.
The KBW Bank Index finished 3.2% higher after rising as much as 6.6% during the day. The S&P Regional Banks Select Industry Index was up 2.3% but paring much of the 10.2% gain at the open.
Meta (META:xnas) surged 7.3% on the announcement of an additional cut of 10,000 jobs. Apple (AAPL:xnas), advancing 1.3%, announced delays in some bonuses and expanding hiring freeze. United Airlines (UAL:xnas) declined 5.4% after it warned about a Q1 loss.
A rally in U.S. regional banks’ share prices, credit spread compression snapping the widening trend, and a 0.45% M/M increase in the core CPI, slightly above the consensus of 0.4%, saw yields reverse the dramatic fall the day before. The yield on the 2-year notes surged 27bps to 4.25% and that on the 10-years climbed 12bps to 3.69%.
The collision between a Russian jet and a US drone over the Black Sea as well as Putin’s allegation about explosive devices found related to the Nord Stream pipeline explosion generated some bids for Treasures. However, the buying faded towards the close of trading. Interest rate futures repriced and brought the probability now back to indicating a 25bp hike at the FOMC next week before the Fed pauses.
The Hang Seng Index took a major hit on Tuesday, shedding 2.3% as financials and property stocks weighed on the benchmark. The drop was in part due to the spillover effect of the U.S. regional bank saga. HSBC (00005:xhkg) led the decline, plunging 4.7%, while Standard Chartered Bank (02888:xhkg) shed 7.2%. Insurers AIA (01299:xhkg) and Prudential (02378:xhkg) also lost ground, dropping 4.4% and 6.3%, respectively.
Chinese property names fared no better, with Country Garden Services (06098:xhkg) and Longfor (00960) falling over 5%, making them the two top losers within the Hang Seng Index. Meanwhile, Hang Seng TECH Index dropped 2.6%, with EV stocks among the major laggards, falling 2-7%.
However, semiconductor stocks managed to buck the trend, with SMIC (00981:xhkg) surging 7% to become the top gainer within the Hang Seng Index. A-share semiconductor names also saw gains. Despite the drop, the CSI300 outperformed the Hang Seng Index, dropping modestly by 0.6%.
Australian equities on Wednesday followed Wall Street higher, moving up 0.8%. The biggest gainers include lithium company, Liontown Resources (LTR), up 6%, Block (SQ2) up 5% and Pilbara Minerals (PLS) which is Australia’s biggest lithium company up 4%. On the downside, after the gold price fell 0.2% from its fresh high, traders are clipping profits with Evolution Mining (EVN), Northern Star (NST) and Ramelius (RMS) all down about 3% each. However as mentioned in yesterday’s report, we still believe gold could set higher highs ahead. Tomorrow’s unemployment data will be key to watch, to potentially validate the RBA can pause rate hikes ahead.
The US dollar found some support with the US February CPI remaining hot and the concerns around a banking crisis easing with no other bank reported to have failed. This saw the safe-havens giving back some of their recent gains. USDJPY rose back above 134.50 after the CPI release while USDCHF touched 0.9160. BOJ minutes from the January meeting continued to emphasise the need for monetary easing, and ruled out further policy changes. SEK outperformed with hawkish Riksbank rhetoric ahead of Swedish CPI due today. Governor Thedeen reiterated that inflation is still far too high and monetary policy needs to act to bring it back to 2% within a reasonable timeframe, adding that guidance for a 25bps or 50bps hike in April remains valid and data dependent.
The oil price rose 0.5% to $71.81 amid the risk on mood, however, still remains below the key $80 level, with consumption typically easing around this time of year. This is all despite the Organization of Petroleum Exporting Countries (OPEC) report today highlighting a modest surplus next quarter. OPEC said it is pumping about 28.92 million barrels of crude a day, or about 300,000 a day more than it expects to be needed in the second quarter. You’d think if the oil price falls further, OPEC+ could potentially cut output, but we think OPEC+ will likely stick to these production levels, given non-OECD countries like China and India are likely to increase demand. Meanwhile, Estonia, Lithuania and Poland called for cut in the price cap on Russian crude to $51.45. Ahead, we await the IEA report on Wednesday after the body last month forecast oil demand to rise by 2 million barrels a day in 2023.
Gold prices steadied around $1900 after a strong run higher in the last few days as a sharp drop in yields underpinned and concerns from the SVB collapse also boosted the safe-haven appeal of gold. However hot CPI release in the US yesterday may mean that the market has been aggressive to downshift the Fed expectations, and 2-year yields were back up by 27bps yesterday. If the support level at 1900 breaks, 1890 and 1872 supports will be eyed.
Headline inflation as represented by the US consumer price index (CPI) showed prices are cooling, with CPI falling to 0.4% MoM in February (at par with expectations), with yearly CPI sliding to 6.0% YoY (from 0.5% MoM and 6.4% YoY prev). This YoY print is the lowest CPI print since September 2021, and 3.1% pts under the June 2022 peak. The inflation measures the Fed looks at, Core inflation, actually rose MoM up 0.1% pts to 0.5% in February, hotter than expected, but the yearly change fell 0.1% pts to 5.5% YoY, in line with Bloomberg consensus. Services inflation (excluding energy) continues to be one of the major contributors to inflationary pressures, with airfare costs surging 6.4% MoM, Hotel costs up 2.6%, shelter expenses rising 0.8% and rents up 0.8%. Saxo’s view is that goods disinflation is not happening quick enough.
Compounding on this, the National Federation of Independent Business (NFIB) Small Business Optimism survey, showed the disinflationary road ahead will be bumpy, with 38% of small US businesses raising average selling prices, and 25% of respondents planning to make price hikes in the next three months.
China is scheduled to release retail sales, industrial production and fixed asset investment this Wednesday. Investors will focus on the retail sales data for a gauge of the strength of the recovery of consumption after the economy reopened. Consensus estimates expects retail sales to bounce strongly to a growth of year-on-year growth of 3.5% in the first two months of the year, after declining 0.2% in January. Industrial production is expected to come in at +2.6% Y/Y year-to-date.
After a firm CPI print for February, focus turns to other US data of note this week to further affirm the state of the consumer and the price pressures. PPI and retail sales for February are due today and both are expected to show a modest cooling but still remain higher than trend. Consensus expectations are for February producer prices to rise by +0.3% MoM (prev. +0.7%) or 5.4% YoY (prev. 6.0%). Retail sales are expected to cool from January’s jump of 3.0% MoM on warmer weather and expected to come in cooler at -0.4% MoM.
The UK Chancellor of the Exchequer Jeremy Hunt will be delivering the spring budget today, which will be a key watch especially after the market turmoil in September when Hunt's predecessor Kwasi Kwarteng and former Prime Minister Liz Truss unveiled lavish tax cuts roiling the markets. Expectations are for the Hunt to prioritize keeping public finances steady, announce less near-term borrowing but only a marginally improved medium-term fiscal outlook. Lower energy prices will also likely boost the short-term growth outlook, helping recession fears recede, although longer-term growth may remain marred with low labor force participation and weak productivity growth.
Meanwhile, UK jobs data out yesterday was not cool enough for the BOE to pause. Payroll addition for February came in at 98k vs. 65k expected, but last month’s was revised lower to 42k from 102k (which was 10x expected). Unemployment rate remained steady at 3.7% for the three months to January, while wages were a notch softer.
Chinese President Xi Jinping is said to be making moves to broker peace between Ukraine and Russia. According to reports from newswires, President Xi is planning to fly to Moscow to meet with President Putin, before following up with a phone call to Ukrainian President Zelenskiy. In addition, it has been reported that President Xi and US President Biden are also scheduled to have a phone call. The move could signal China's increasing willingness to play a more active role in mediating international conflicts, which could have implications for its relationships with other major powers.
The fallout of Silicon Valley Bank, Signature Bank and Silvergate has seriously impacted not only the ecosystem of digital assets, but likely future lending to Silicon Valley. And yet we see cryptocurrency equities rally, such as Coinbase, after Bitcoin briefly rose over $26,000. We previously highlighted that the spill of three higher-risk-lending-banks, who were key to Silicon Valley, could restrict capital going forward and this could flow to private equity firms. Moreover, the Fed is considering making changes to midsize banks issuing capital, all to strengthen banks’ ability to withstand a recession. It's been reported that firms between $100 billion to $250 billion in assets, will face tougher restrictions. We await further details of the Fed’s probe.
Facebook parent Meta announced a second round of job cuts, saying that it will cut roughly 10,000 jobs over the coming months and also stop hiring for about 5,000 open positions. Mass layoffs in the tech sector continue to suggest the difficult operating environment for companies that boomed during the zero-interest rates years, but is still not reflective of the broader US labor market which remains in an imbalance with the supply remaining short. Meta shares rallied over 7% Apple also announced a delay in bonus payments for some corporate divisions and an expansion of the cost cutting efforts.
For what to watch in markets this week – read or watch our Saxo Spotlight.
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2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
